Trimble Inc (TRMB) — Q1 2018 Earnings Call Transcript

Thanks, Terri. Good afternoon everyone and thanks for joining us on the call. I am here today with Steve Berglund, our CEO and Rob Painter, our CFO. I would like to point out that our earnings release and the slide presentation supplementing today's call are available on our website at www.trimble.com as well as within the webcast, and we will be referring to the presentation today. Turning to slide two of the presentation, I would like to remind you that the forward-looking statements made in today's call and the subsequent question-and-answer period are subject to risks and uncertainties. Trimble's actual results may differ materially from those currently anticipated due to a number of factors detailed in the company's Form 10-K and 10-Q or other documents filed with the Securities and Exchange Commission. The non-GAAP measures that we discuss in today's call are fully reconciled to GAAP measures in the tables from our press release. With that, please turn to slide three for an agenda of the call today. First, Steve will start with an overview of the quarter. After that, Rob will take us through the remainder of the slides, including an in-depth review of the quarter, our guidance, and then we will go to Q&A. With that, please turn to slide four and I will turn the call over to Steve.

Good afternoon. The narrative for the first quarter is consistent in most ways with that of the fourth quarter and is notable for its strength across both businesses and regions. Reported revenue growth was over 20%, with organic revenue growth continuing to track in double digits. Reported non-GAAP operating margins improved by more than a point versus the first quarter of last year, and the improvement was even stronger after allowing for acquisition effects. We continue to operate with the most positive outlook we have had in over 10 years. Every segment and every significant region is growing and all are anticipated to continue to grow during 2018. We are also experiencing renewed higher growth in segments in which recent growth has been relatively modest, such as geospatial. We do remain observant of potential negative macro effects and volatility, most particularly in the realm of U.S. trade policy. While we are taking advantage of simultaneous vertical and regional market upswings, we continue to focus on and invest in the major multiyear secular trends that are specific to our markets. Our singular focus is on achieving leadership in the digitization of targeted mature industries and providing transformative benefits to those markets. We believe we have, in a number of cases, achieved a first-mover market position and are now at an opportune point at which the market is going through or about to go through an inflection point. In construction, we are leveraging two strong and unique Trimble attributes, our ability to connect the physical and digital worlds and our now reinforced ability to integrate data across the entire construction workflow. We believe our role in facilitating this integration in the industry is monetizable and provides us with a strong competitive position. In agriculture, we are leveraging our existing position as a provider of technology on more than 125 million acres. Our goal is to be a central participant in the worldwide adoption of data-driven variable rate applications. In transportation, our role is leading both evolutionary changes such as the adoption of video or electronic data logs and transformative changes such as providing the visibility necessary to create step function changes in the industry utilization rates. These transformative changes are taking place now and the contest for long-term market leadership is underway. We have evolved our view of the attributes that are necessary to maintain our leadership status during the market transition. The actual combination of the attributes will vary by market and by segment within those markets, and there is a need to adapt strategy to specific circumstances. A few of the more universal attributes include a commitment to an open information architecture, holistic and complete solutions, not simply a cobbled together collection of point solutions, and an ability to project worldwide. The e-Builder and Viewpoint acquisitions clearly represent our intention to shift the terms of competition and accelerate change in the construction market. Although these acquisitions are aggressive, they do not reflect a radical departure in strategy. In fact, the strategy we are executing today is a much evolved linear descendant of the version we deployed in 2000 when we acquired Spectra Precision. What has changed are the advances across a broad range of technologies that have enabled concepts that would have been merely fanciful in 2000. While stepping up strategically, we remain confident in our ability to continue to generate ongoing improvements in the financial model. At the Viewpoint acquisition announcement, we identified our reasons for optimism on future financial performance, specifically that Trimble's core organic models produce both revenue growth and significant improvement in margins. The data suggest that both Viewpoint and e-Builder standalones are poised for accelerated growth. The combination of Trimble assets with Viewpoint and e-Builder are highly complementary, which opens up a significant opportunity for an exploitable immediate expansion in the addressable market. Both Viewpoint and e-Builder bring mature management groups into the mix, strong traditions of cost discipline and accountability for the bottom line, and the expectation of deleveraging the balance sheet in the next 12 to 24 months. Finally, our program to revisit smaller, less strategic product lines is continuing to ensure our investment profile remains appropriate and to ensure that all businesses meet operating earnings thresholds. As a point of reference, the Trimble portfolio is generally more resilient than it was at the beginning of 2015 when we encountered the decline in agricultural, commodity and oil prices, with less reliance on agriculture profitability and reflecting ongoing aggressive management of underperforming businesses. Trimble presents some challenges to instant understanding, particularly with the number of moving parts at the moment. Well, Rob will describe plans for an Investors Day on May 30. We look forward to that event as an opportunity to present a comprehensive and compelling case for Trimble's future leadership and growth. Let me now turn the call over to Rob.

Thanks, Steve and good afternoon everyone. I have four main topics today. First, a quick note on our implementation of the ASC 606 standard. Second, the numbers, a review of our first quarter actuals and our second quarter guidance. All P&L metrics today will be non-GAAP numbers. Third, I will provide some additional commentary on the e-Builder and Viewpoint acquisitions and finally a preview of our upcoming Investor Day. Starting with ASC 606. We retroactively restated our results for 2016 as a total year and 2017 by quarter, which we believe provides the best set of comparative data for our investors. We believe the changes were not material on a total company basis, but naturally there were some puts and takes. All year-over-year comparisons are now against restated 2017 numbers. Page five in the presentation provides color on the context of the change and page six shows that the impact of 2017 results showed a reduction in total year revenue by 0.003%, operating income dollars by 2% and non-GAAP EPS by $0.03. The detailed restated results are in the press release, as well as on our Investor website. As for 2018 and the impact on our first quarter results under ASC 606 as compared to ASC 605, the impact was not material. Let's start on slide seven with a review of the first quarter results. Topline and bottom-line results came in ahead of plan, meeting or significantly exceeding expectations in all reporting segments. First quarter total revenue was $742 million, up 22% year-over-year. Within that, currency translation added about 4% and acquisitions added about 6%. Organic growth was approximately 12%. First quarter gross margins were 56.9%, up 40 basis points year-over-year, reflecting the underlying revenue mix. Operating income dollars increased 30% to $139 million, with operating margin percentage increasing 120 basis points to 18.8%. On an organic basis, operating margins expanded year-over-year and were just under 20%. Our non-GAAP tax rate declined from 23% to 19% year-over-year, reflecting U.S. tax reform. We expect to see ongoing IRS guidance and accounting interpretations of the U.S. tax reform, which may impact our ongoing non-GAAP and GAAP tax rates in future quarters. Our net income was up about 35% and non-GAAP earnings per share in the first quarter were $0.44, up $0.11 or 33% year-over-year. Turning to slide eight, we finished the quarter with $274 million of cash and our gross debt level at the end of the first quarter was $1.12 billion, with net debt of about $850 million. We repatriated about $350 million of cash in the first quarter. Going forward, we anticipate the continued repatriation of cash in order to support our deleveraging plan. On this slide, I would also note that deferred revenue increased 19% to $360 million. Operating cash flow for the quarter was $83 million, which was down year-over-year and requires a bit of context. Operating cash flow for the quarter was impacted by incentive compensation payouts for 2017 performance that had been accrued in prior quarters and discrete M&A effects related to the e-Builder transaction. Excluding these effects, operating cash flow would have been over $120 million, which would represent approximately 1.1 times non-GAAP net income. In the second quarter, we expect strong operating cash flow in excess of non-GAAP net income. Turning now to review the reporting segments. Let's start with transportation on slide nine. Revenue was up 19% year-over-year, with currency translation adding about 2% and acquisitions adding about 2%. We continue to experience particular strength in our mobility business which offers fleet management solutions. While we have experienced tailwinds from the first wave of ELD regulations that went into effect in December of last year, we are more encouraged by competitive wins on significant customers that are providing demonstrable evidence of success of our competitive offering well beyond that of ELD compliance. It's worth noting that we have been in this business for almost 15 years and that we have established our leadership position by offering best-in-class solutions for fleets to manage their productivity, utilization and safety. The slide also provides a few other highlights including record bookings growth and field service management and addressable market expansion in our ALK business. Next, turning to resources and utilities on slide 10. Segment revenue was up 32% year-over-year, with currency translation adding about 5% and the acquisitions providing a positive effect of about 23%. In agriculture, the business continued to grow, especially in markets outside the U.S. Our new GFX-750 guidance system is ahead of projected sales through the first quarter and has been well received by our distribution channel. Operating margins contracted 290 basis points on a year-over-year basis to 32.5%, impacted primarily by the Müller and our NM Group acquisition. As we have previously articulated, we expect our acquisitions in this reporting segment to be modestly diluted at the segment level, and we will work them to be accretive at the company level. To put this into context, this is our highest margin reporting segment, so this margin dynamic is perfectly natural. Percents are down and the dollars are up. Speaking of dollars, on the Müller acquisition, which we closed in July of last year, Müller's OEM business has been running ahead of our forecast and we are talking about the trajectory of our combined business. Strategically speaking, Müller will better position Trimble with OEMs and in the Europe market overall, and Trimble will better position Müller in the aftermarket and in the North American market. Slide 10 also highlights a few other areas of success in this segment with significant customer wins in the forestry and utilities divisions, as well as continued success with our correction services business, specifically the press release announcement of General Motors to provide correction services to their Super Cruise hands-free highway driving system. Moving to the geospatial segment on slide 11. Revenue was up about 17% year-over-year, with currency translation adding about 3%. Organic revenue was up in the segment for the fifth quarter in a row and significantly exceeded our expectations in the quarter. Our serving business continues to benefit from new product introductions and the health of end-market applications such as construction and oil and gas. In April, we held a global dealer conference with several hundred partners for a review of the geospatial strategy and new surveying solutions coming to market for the upcoming northern hemisphere buying season. Sentiment in our channel is positive and strong. We also continued to experience strong sales of our inertial-based technologies from our Applanix division to automotive companies for development of their autonomous technology programs. Operating margins in this segment were 21.4%, up 280 basis points year-over-year. Slide 11 also highlights a few other areas of success in the segment, such as new product launches for building monitoring and infrastructure monitoring. Turning now to the buildings and infrastructure reporting segment on slide 12. Segment revenue was up more than 20% year-over-year, with currency translation adding about 5% and 5% from acquisitions in the quarter. The impact of growth in operating leverage enabled us to expand operating margins 240 basis points to 19.4%. Slide 12 also highlights a few other areas of success in our civil and building construction businesses such as the continued rollout of the Earthworks platform where innovation is driving demand in dozers and excavators. In our SketchUp business, which is migrating to a SaaS business model, our initial SketchUp free offering reached the milestone of having over one million monthly active users, just six months after launch. While we are on the buildings and infrastructure segment, let's talk a bit more about e-Builder and Viewpoint. In the last call, we discussed that e-Builder reported approximately $53 million of revenue in 2017 with over 20% year-over-year revenue growth and over 65% SaaS revenue. We also commented that because of purchase accounting effects from deferred revenue write-downs and incremental debt interest expense, we would expect $0.02 to $0.03 of EPS dilution in 2018. To put the purchase accounting effects in context, when we acquired e-Builder they had approximately $28 million in deferred revenue, which was required to be written down to approximately $12 million. The write-down means that there is a negative impact to revenue and operating income of $16 million, which occurs mostly during the first year of the acquisition, which in combination with the estimated interest expense translates to the $0.02 to $0.03 negative EPS impact. This write-down has zero impact on cash flows. Excluding purchase accounting effects, e-Builder exceeded our top and bottom line deal model expectations in the first quarter. Our first-quarter E-Builder operating income margin excluding the deferred revenue write-down was over 20%. The business also achieved double-digit growth in both recurring revenue and bookings. Let's move to commentary on Viewpoint. When we announced Viewpoint, we said we would soon be moving to a non-GAAP revenue measurement to adjust for these skewed purchase accounting effects. We believe this reporting convention will make this accounting dynamic a lot easier for our investors to understand and will provide a better representation of revenue and profitability of technology companies that we acquire. Since we announced our acquisition two weeks ago, we have received a great deal of positive feedback. We included two slides from our acquisition call, and this material is on pages 13 and 14. When our existing construction business and Viewpoint are combined, Trimble will have a construction technology business that exceeds $1 billion in run rate revenue, with the majority of that revenue being software-related. I would like to take an opportunity to clarify two topics that have come up since the announcements. First, some reinforcement on what we said about the financial profile of the acquisition. In 2019, we said we expect more than $200 million in revenue, operating cash flow greater than $50 million and operating margins greater than 20%. Including estimated interest expense, we said that the acquisition would be accretive to operating cash flow in 2019 and slightly dilutive to EPS in 2019, before becoming accretive to EPS in 2020. At this point, we anticipate four to six quarters maximum of EPS dilution which, to be clear, is driven by the incremental interest expense associated with the acquisition. The underlying business will be producing strong operating income and cash flow yields above that. We believe we have the underlying business model and underlying booking growth to grow into EPS accretion and we hope to over deliver against those expectations. To put some data behind this, bookings at Viewpoint have been accelerating, with first-quarter 2018 SaaS bookings up over 125% year-over-year and the momentum has continued into the beginning of the second quarter. The acceleration of model conversion from perpetual to subscription also continues, with two-thirds of new bookings year-to-date representing subscription bookings. The second topic has to do with our approach to integrating workflows across our portfolios. To quote Steve, a set of holistic and complete solutions not simply a cobbling together of point solutions. To give you an example, let's talk about Trimble Connect, for which I would like to ask you to turn to slide 15. Connect is our cloud interoperability backbone. We have over one million authenticated users on Trimble Connect. In Trimble Connect alone, we have over 60 solutions and workflows currently integrated with the Connect platform. Now take e-Builder and Viewpoint, and we see a path to connect owner workflows all the way through the general contractor and onto the self-performing contractors and their field workflows. With Viewpoint, we see an ability to connect contractors to owners, as well as to connect Trimble workflows into the contracts' costs and resources that Viewpoint manages today. Our unique differentiation here happens at the intersection of the digital and physical worlds where we are connecting constructible model workflows to Connect stakeholders across the construction lifecycle. We will have more to come on this at Investor Day. Next, slide 16 with revenue mix by geography. The rest of the world shows down. That was from the Middle East and South Africa. Brazil, for example, was up over 25% year-over-year. North America, Europe, and Asia-Pacific were all up nicely. Moving to slide 17. Software services and recurring revenue streams grew over $160 million on a trailing 12-month basis and represent about 47% of company revenue. Recurring revenue grew about $90 million and represents 28% of revenue over the trailing 12 months. Let's now move to second quarter guidance and go to slide 18. We expect our second-quarter revenue to be between $755 million and $785 million and non-GAAP EPS to be between $0.42 and $0.46 per share. Please note that our guidance does not incorporate the new planned non-GAAP revenue measurement. Three comments on second quarter guidance. First, with respect to top-line growth, the midpoint of the range implies more than 16% year-over-year revenue growth, of which approximately $40 million or 6% is from acquisitions and between 2% and 3% from currency translation. Second, in terms of profitability, the midpoint of our guidance assumes a second-quarter non-GAAP operating margin between 18% and 19%. To break that down, we expect organic operating margins to be above 19%, offset by margin dilution from recent acquisitions. Third, below the operating margin line, we expect equity income at approximately $9 million. Furthermore, it is also important to get the modeling correct on interest expense, which will step up in the second quarter as a result of our increased leverage, which will step up again in the second half of the year after we close the Viewpoint transaction. We expect second-quarter interest expense of approximately $13 million. Lastly, a few comments on our second half of 2018 outlook. After our fourth-quarter call, we said our expectations for fiscal year 2018 were for low to mid-teens annual revenue growth for the year, with a high single-digit organic growth rate and greater than 25% operating leverage. With the acquisition of Viewpoint, assuming the deal closes at the start of the third quarter, that will add a little under $50 million of non-GAAP revenue in each of the third and fourth quarters. Including Viewpoint, revenue growth in the second half of the year is expected to be in the high teens. We also expect total year operating margins to improve more than a point. Please note that including the Viewpoint acquisition, total interest expense is expected to be approximately $24 million to $25 million per quarter in the third and fourth quarters. Before we go to Q&A, let's discuss our Investor Day, which we will be hosting at our Westminster, Colorado campus on May 30. For those of you who cannot attend the event in person, it will be webcast on our Investor Relations website. Slide 19 has more details. We aim to hit a number of themes to address our continued financial performance, including our long-term growth outlook, our ongoing transition to software and subscription, and our margin expansion outlook. We will also be at the upcoming JPMorgan Technology, Media and Communications Conference in Boston in May and the NASDAQ Investor Program and Berenberg Conference in London in June. With that, let's now take your questions.

Hi. Good afternoon everyone.

Hi Jerry.

I am wondering if you could talk about the business model for providing positioning services to automotive applications? How should we think about revenue per unit? Presumably, it's a service revenue, but maybe you could frame for us the opportunities ahead and what the competitive landscape looks like?

So the correction services business is within the resources and utilities segment. And I think we have previously referenced that as the crown jewel of the business at Trimble. The role of correction services today, if you look at the customer base, it primarily services the agriculture market. Secondarily, it serves the construction market. And then the third is this emergence of an automotive market. In the context of agriculture or construction, centimeters matter. In order to achieve centimeters, ubiquitously and at a fast convergence time, you actually have to subscribe to what we call these correction services, and there's essentially a menu of options available for the accuracy and conversion time. Taken into the context of automotive, the context really is one of that of sensor fusion, and it's the role, I would say, of absolute position because that is what the correction services are providing, is absolute positioning. Now it is providing that by augmenting into the satellites with some known ground-based points, which improves the geometry plus the mathematics to correct for errors in the atmosphere to improve the accuracy of the position that's given. It is a subscription. So it's a SaaS-like business that technically is a subscription business. And from a monetization standpoint and an automotive context, but really actually in all contexts, it's a monthly subscription. And in terms of sizing, let's say, the opportunity, certainly today the automotive slice is a very small slice of that business, and it remains to be seen, but we have a level of optimism about the role of absolute position and how that will augment in the sense of sensor fusion with imagery and a relative position that you can get today.

Good. So thank you for the color. And then in resources and utilities, your organic growth looks like it slowed this quarter compared to the run rate exiting 2017. Can you just talk about the moving pieces in terms of how organic growth played out in the quarter by region or by product line just to give us some more context on the drivers this quarter?

Sure. So the agriculture business is the largest aspect of the resources and utilities segment. The growth we have been seeing continues to be faster outside the U.S. than in the U.S. So that's the 30% plus I referenced in Brazil, predominantly driven by the agriculture business, continue to see growth in Europe and as well as Asia-Pacific in the agriculture business. The U.S. market was up slightly. It continues the pattern that we have seen of late. Within the segment, we also have that correction services business, and that was up high single digits in the quarter. So it really came in pretty much exactly as we expected, Jerry.

Hi. Good morning or good afternoon. It's Ann Duignan.

Hi Ann.

Maybe I am just new to the story, having this ticker covered yesterday. So forgive me if this is a question that doesn't need to be asked on the call. But when you talk about operating margins up driven by volume, gross margin expansion, and operating leverage, can you expand a little bit more on the gross margin expansion and the operating leverage piece? Because in my mind, those would also be driven by volume. So what's different between volume, gross margin expansion, and operating leverage?

The gross margin is reflective of the revenue mix. So you can think of it as product mix. At a total company level, it can be a little hard to dissect a gross margin, because of the different dynamics within the reporting segments. So if you look at the revenue breakdown, almost half software, half hardware. There are different dynamics at play. But the overall gross margins were up reflecting the underlying businesses, which is irrespective of the revenue growth or largely irrespective of the revenue growth. And then the operating leverage specifically refers to, in this case, the sum of that gross margin improvement as well as cost management. And when we look at the operating leverage, we look at both total operating leverage that we are delivering as well as the operating leverage on the organic revenue from the business, because the dynamic that we see play out within operating leverage is the acquisitions. As they come in, they tend to be dilutive to the operating leverage. Therefore, the operating leverage at the total company level is lower. The organic operating leverage met our expectations of above 30%.

Okay. So by segment, gross margin expansion is more as a mix comment, and operating leverage is organic operating leverage?

Yes.

Okay. That's helpful to understand that. And then just a couple of follow-up questions on Viewpoint. Bain Capital paid $230 million for a majority stake in that asset in 2014. Can you help us understand what was the majority stake? I mean how much of Viewpoint did it own? And then post the acquisition, your leverage, what's your goal in terms of how much of your debt will be fixed versus variable?

I will take the first part of the question. After being acquired, Viewpoint had the majority of it owned by Bain Capital. There had been a long-time owner, founder-owner, and then Bain Capital came in made an investment, and then took over the rest of the investment in 2014. And then after that, they also did a couple of acquisitions. So to the extent you are trying to look at a purchase price, you will end up with an incomplete analysis if you are trying to compare that to the Trimble purchase price, because quite a bit happened between 2014 and 2018. Ann, repeat the second question please?

Just your mix of debt post-Viewpoint, how much would you expect to have fixed versus variable?

Well, I would say, at this point, we have the syndication or the bridge commitments from the financial institutions and that mix will sort itself out here, I would say, soon enough as we go to capital markets to take out the bridge and put in the permanent financing.

Do you have a targeted as CFO of how far you will be comfortable with being variable in this environment of rising interest rates?

Well, we would look for it, honestly when you look for a mix of different tranches of debt in terms of maturity times and rates, but it's a bit premature for me to nail down before we actually go out to the debt markets.

Hi. Good afternoon. Rob, could you talk for a minute or two on the buildings and infrastructure piece of the business? The core growth was just under 11%. I am curious could you maybe give a little color on BIM business versus civil construction business? And if there is any discernible trend difference between the two businesses going forward?

Actually, I would say there is not a particularly discernible difference. They both performed well in the first quarter. I think the civil business is a little bit ahead of the BIM business. The dynamics are quite different. So there are a few different dynamics in both of those. What's common, of course, is the digitization of the markets or digitization of construction. The civil engineering business today is more hardware-centric and the BIM business is more software-centric. We are working with civil contractors primarily and engineers in the civil engineering business and a mix of designers, engineers, contractors, especially contractors and owners in the BIM business. So some different stakeholders, but the macro theme of digitization is the same, and really the macro theme at a secular level applies to both of businesses. I would say also the other dynamic that's pretty similar is the new product introduction and the impact on the respective businesses. For instance, the Earthworks platform in the civil engineering business continues to be a real catalyst of growth as it enables us to do many things, but one of which is to reach the excavator market, which was previously largely an untapped market. And so that's one of the drivers in the civil engineering business.

Okay. And then just as a quick follow-up. When I look at the resource and utility business, maybe just a question around, have you seen anything domestically? Have you seen any buying patterns change? Or just shift relative to the dialogue that's going on in the protection side or the trade side? And then just the discussion can sometimes shut down spending in the ag economy. And I am just curious, have you seen anything there? Because I am a little bit surprised you addressed the slight growth in North America as on plan, and I might have thought maybe that would have been a little bit stronger here?

Well, Richard, I think the net answer for us kind of operating in the realm that we operate in, no, I don't think we have seen any real impact on us in terms of the trade policy to-ing and fro-ing. I would say, though, that you historically, taking the long view on the agriculture market, there is definitely a headline factor that is involved in farmer buying patterns that you cannot headline. So I would say is, in general, at this point in time, people are waiting to see what might happen. But I would say at this point in time and probably for until something real does happen, people are not taking anticipatory sorts of actions. So I think steady as she goes in that sense. What we are seeing in our demand levels, I think, is the real market without a whole lot of speculative factors going into it.

Okay. Does that business, does the resource and utility business for the full year, is that maybe best thought of as a high single-digit growth? Can it possibly get to 10% or mid-single? I am just curious because the starting spot seems a little bit lower than maybe I would have thought for the full year. Just curious how you view that segment?

I would view the segment in the mid to high single, Rick. I think we see enough, while the majority of the business is outside the U.S. today, the U.S. market itself, I think, is not poised for double digits with commodity prices where they are. So in corn at the moment, even while we are seeing some replacement cycles of machines, I think it's not enough to catalyze double digits.

Thanks so much. As you guys see the growth of your asset management offerings, especially in a couple of big segments like buildings and infrastructure and then on the utility side, how are you seeing that really change your customer relationships as well as your product development roadmaps? I would love to just kind of understand what that cycle starts to look like?

So to make sure I understood you, Colin, you are saying, given the nature of how the business is evolving, how our relationship is changing with customers along the way?

Yes. And integrating that with some comments around your product roadmaps and development process.

Okay. Well, from a customer segmentation standpoint, we could really apply this to almost any one of our businesses, but take it at a company level. If you do a segmentation of small, medium, large, enterprise type accounts, we can map our various businesses and on this case, I am taking it by customer size. The more you go up into enterprise-level customers, so this could be the largest of contractors around the world or the largest of transportation companies or the largest projects happening around the world. They tend to have a different, I will say, purchasing dynamic or relationship dynamic where they especially want to make sure they are working with Trimble and they have more single points of contact or at least fewer points of contact. And so that's one area where we see those relationships changing. Another one, and it kind of correlates to that upper end of the pyramid, is professional services. So we do have some professional services capabilities at the company. In the construction world, they tend to get deployed on these largest of projects who are really trying to figure out how to integrate all the various technologies that are available on, in this case, a construction site. That in itself is a very different way of engaging with a customer as trusted advisors to how to optimize their processes and their use of technology in order to improve project delivery. And then backing into how all of the above, I would say, intersects with the product roadmaps. As you would imagine, we have customer councils, advisory councils, and really in almost all of our businesses. So it provides us an opportunity to stay close to the customers and to have a good set of advisors in that respect. And then all that meets technology. Of course, when you are in more of a software world or you are in a SaaS world, your ability to innovate can be measured in hours. So you know where you are working on a mentality of the fast fail or a minimum viable product, that's one of the especially nice things to have in a software-rich business model. The pace at which you can test the development that you are doing and see what's working. So I hope that gives you a little color, Colin.

Yes. That's helpful. I will take a couple of follow-ups offline. And then the other quick question is around CapEx spending. That's up pretty significantly year-over-year. How should we think about that as we go through the balance of the year?

Well, from a total company perspective, we would love to be below 2% of revenue on CapEx, and that's consistent with I usually talk about when I am talking about the company model. And then one of the biggest specific areas of spend within that CapEx is, we are building a new building, a campus that we own in Colorado, and I talked about that one, I don't know if it was one or two calls ago. That's where we are using 50 different Trimble technologies to help us build that building better, faster, safer, cheaper.

Hi. Good afternoon. I just wanted to start with maybe the Viewpoint and e-Builder acquisitions. You have talked about scale being an increasing differentiator in this space. Can you maybe give us a little bit more color into how to think about those market dynamics going forward?

Well, let me take a crack and maybe Rob can embellish. But I think there are maybe two considerations. One is scope and the other is scale. I think scope, as I would use it, would be kind of the breadth of offering in terms of kind of what I have been referring to as the holistic solution. The other is a matter of scale, which is relative to size and kind of the ability to project. I think both are becoming increasingly relevant. So for example, scope. I think our view would be, the small to medium-sized general contractors really do prefer a one-stop shop sort of solution. Therefore, scope in the sense of bringing kind of a full product range to bear and kind of being that one-stop is going to appeal to that particular segment. Whereas in terms of large general contractors or perhaps owners, large owners, there they have a relative degree of sophistication and kind of the one-stop shop is less preeminent there. But at the same time, the ability to deliver at scale becomes more important; just to have the capability of providing a solution in large projects becomes important. So I would say the two considerations are both scope, breadth, as well as scale, which is relative ability to project yourself into a situation. Scale is increasingly meaning things like professional services. Rob mentioned professional services, but it's the ability to be an effective hand-holder in a project context and really be able to deliver the goods in a changing environment. So I think that both are becoming more important, depending on the market context. But yes, I think both the Viewpoint and e-Builder certainly provide additional scope in terms of being more persuasive, in terms of the capabilities across the continuum. I think that in terms of credibility with large contractors or large owners is, Rob mentioned that Trimble now has or is about to have $1 billion in relative revenue a year in construction technology, which would certainly make us credible from the ability to deliver. So yes, hopefully, that's on point to your question, but that's the way I would see it.

Yes. And just maybe taking a look at the geospatial division. This looked like it was a very strong quarter and maybe a continuation on the organic side. How should we think about that on a go-forward basis? Is this sustainable? Is this mainly driven by the SX10 product success? Can you just maybe give us some color in terms of how to think about that?

Yes. On a longer-term basis, I tend to characterize the geospatial segment as within the four segments as being the lower growth business. So I would tend to characterize the other three reporting segments as mid to high single digits and the geospatial business somewhere in the mid, and clearly we are above the mid at the moment in really these last three quarters or so. If I break it down on what is and what could catalyze that to be greater than the mid single digits, I tend to characterize it as follows. One would be the new product introductions and the answer is yes to the SX10. It continues to be a very effective product for us. This combination of the scanner and a total station is new, new territory and we haven't seen anyone be able to match that product. So it's getting a lot of positive press and a lot of positive use in the market. We would expect to see continued demand for that product. Now that's far from the only thing we do in geospatial. The other new product I would mention is the line of total stations or mechanical total stations, which we believe will position us well in the emerging markets better than we had been positioned before with that same product line. We are able to get new feature and functionality at a lower cost and price point and that's the essence of it. So we think that technology expands a market that we can reach. More to come in that group. So new product introduction. It's a market that's driven largely by replacement cycles. So it's acceleration or velocity in our own technology that will drive and catalyze growth in the segment. The other parts that have been strongly growing here for really the last couple of years is that of the Applanix business, which is largely based on a set of inertial technologies. What's really been driving that has been the autonomous car programs. That would seem to be a market that has legs to it. The slope of it, the first quarter surprised us actually just how strong that came in. We would expect that to level out a bit here in Q2 and smooth out over, call it, a trailing 12 type basis. I think it would fit the profile that in an economy that's healthy with construction and with oil and gas close to about $70 the other day, that would lead us to think that there is some positive momentum to come in that business.

Hi guys. Thanks for taking my questions. I just had a quick question on, at the group level, what are your expectations for growth this year from software and from hardware? If you could just split those out for me?

So I would make a good advertisement for our Investor Day coming up in a few weeks. At the Investor Day, we will go into more detail at the product level. What I would give you a high level is that if we sort of put on the rearview mirror over the last couple years, we have been seeing the software outgrow the hardware by a pretty good clip. I think 1.5:1 over the last two, two-and-a-half years. What we saw in the last, I would say, three quarters or so is that the hardware was actually growing about as fast or actually as fast as the software part of the portfolio. That's reflected a strength in end markets such as the civil construction market and the ag market outside the U.S. So actually a really good dynamic to have as far as percentages go, because of course, it's the dollars you take to the bank. So on a longer-term basis, as you might imagine, we would expect the software growth to outpace the hardware. When we come to the Investor Day, we will break it down with some specificity by the business segments as well.

Okay. Thanks. That's helpful. And then also on the transportation segment, what, in rough percentages again, of that is attributable to the ELD mandate? And then also on that, what kind of penetration are you seeing with ELDs amongst those who have to switch over? And how much longer do you expect that tailwind to last?

Well, there's no question that ELD has been a tailwind for growth in the transportation business going on a couple of years now. If I were to size part of the business that's our mobility part of the business which does or largely deliver the ELD solutions and that's actually it's less than, well call that about, looking at my numbers real quick, yes, that's about half of the reporting segment that's within the PeopleNet business. But then even within the PeopleNet business, it's just a slice of the PeopleNet business. So let's call it, 20%, 25% of the business, I could say over the couple of years could probably trace something to the ELD mandate in terms of driving growth. We are certainly seeing that in the hardware growth that's come out of that business in that they sell the hardware front and then it turns into subscription thereafter. The cumulative subscriber base is growing in that business. The commentary or narrative we have had is a very consistent narrative we have around this business is that this was never a cliff event where the ELD first phase of it went into effect in December of last year. I think that was the question I got asked more than anything. In the second half of last year is what happens after that? I think the worry being that there would be a cliff. We talked about a slope down in demand, but not a cliff because for a number of reasons. One, there is a whole series of other technologies we provide in the space. And by the way, ELD could just be bare minimum compliance while our real differentiation happens at management of an entire fleet and optimization of a fleet and video intelligence solutions, and we have end markets that we serve that are outside of the Class 8 vehicles, but also in markets such as energy or in food service. So, a number of other market adjacencies, number of other technologies that we have. And then again as you come out of that compliance, for us it's also an opportunity to upsell customers into a more complete solution. All the while, while that's happening, we have been experiencing or achieving significant wins, competitive wins for the full stack service solutions. So continue to be optimistic about the business, feel very good about our competitive position in that business. As it relates to the penetration, one thing to keep in mind is this ELD mandate has two phases. The second phase goes into full effect in December of 2019. So that's why we never saw a cliff. We would see a slope of the new unit demand. I would say, most fleets at this point of the larger fleets are reasonably penetrated with the technology, and many of them are converting the first wave now into what’s called AOBRD compliant devices over the full ELD compliant devices.

Okay. Thanks. And then just one quick follow-up. On the ELD subs, what kind of churn are you seeing?

Well, we don't disclose churn in this business. It's an inherently more complicated number or answer than what a simple number can provide. The first part of the mandate just went into effect. So there is very little churn that we would see on just ELD. Otherwise that would not be what we expect this soon after the first part of the mandate went into effect.

It's Yuuji Anderson, on for James. Thanks for taking my question. I also have a follow-up on transportation. You mentioned that all-in, can you speak a little bit to the mix you are seeing there between hardware and software? Now that we are one quarter past the first phase of the mandate, is it fair to say that we should see substantially more software mix this year? And if so, does that kind of set up for faster operating margin expansion throughout the year?

Well, it's certainly been our narrative that as we move into a higher mix of software that we should expect commensurate operating margin expansion in the segment. There are two segments that I would say particularly outperformed in the first quarter. One of them was transportation. And really I think that Q1, I would probably prove with an exclamation point that this wasn't all about ELD because it was a very strong quarter of demand in that business, which meant that it came with a lot of hardware in the quarter. So by the pure percentages of the math, I would expect that that might actually temper the percentages but improve the dollars for the overall year. So having said that, we do expect a positive trend in the transportation business as we enter, it's really in the second half of the year more so than the first half of the year. So as it's the second half of the year is where I would expect to see the margin expansion, some of which is natural, by the way, in the fourth quarter. You could look at the last couple of years and see that that's a dynamic that happens in the fourth quarter. But a step up in that, I will just characterize overall second half of the year combined that third and fourth quarter, and you would see that playing out.

Okay. Got it. Thanks so much for that. And then just quickly on Europe. So it was up 38% year-over-year. I assume a lot of that had to do with Müller. But I was curious to hear a little bit more in terms of what you are seeing there between the various end markets?

So I would say, yes. Müller is based in Germany and the majority of their business is in Europe today. So that from an overall growth perspective, that was the main driver. To speak more specifically, let's say, out of or I guess I should add, in addition to Müller, we continue to see even if that Müller side of things, Germany has been good, the U.K. actually was a good quarter for us, Italy, France, Austria, Netherlands, Nordics were strong. So pretty broad-based, Yuuji.

Thank you, Terri, and thank you everyone for attending today's call. We look forward to speaking to you next quarter.