Trimble Inc (TRMB) — Q2 2019 Earnings Call Transcript

Thank you, Sarah. Good afternoon, everyone, and thanks for joining us on the call. I'm 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. In addition, we will also be posting our prepared remarks on our Investor Relations website at investor.trimble.com shortly after the completion of this call. Turning to slide 2 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 3 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. I would also like to briefly mention that during the month of September, we will be attending the J.P. Morgan All Stars Conference on September 18 in London. Please turn to slide 4, and I will turn the call over to Steve.

Good afternoon. Last November, we reported strong third quarter 2018 results, but noted a number of issues worth monitoring, which were broadly characterized as discrete, geopolitical, and trade. In the last nine months, these effects have intensified and were material in our most recent quarter. They are mostly unique effects that are neither classically cyclical nor secular. Although leading to some disappointment in the short term, they do not impact our long-term strategic or business models. Offsetting the negatives is our continuing strong progress on the fundamentals including the conversion of the business model into higher recurring revenue levels, strong cash flows, ongoing innovation, and our success with recent acquisitions. In addition, our core revenue performance in the Buildings and Infrastructure and Transportation segments remains good. Let me recite the three factors which are creating the strained results. The first is broadly geopolitical. U.S. trade policy continues to create significant uncertainty for U.S. farmers and is resulting in reluctance to invest. This hesitancy is impacting our resources in utility segment revenue performance, although we are maintaining margins. A China-U.S. trade agreement, which looked probable a few months ago, is now more uncertain and would create clarity for U.S. farmers, providing us with immediate upside potential. This uncertainty in agriculture is being compounded by distortions in worldwide commodity inventories and regional droughts. Other politically-driven decisions have resulted in a number of puts and takes. Outside the U.S. we have encountered abrupt political decisions or declared political intent; one example being the cancellation of the Mexico City Airport and another being the declared skepticism around the HS2 rail project in the U.K. by the new government. Obviously, Brexit is the most traumatic event in the political realm. Brexit uncertainty combined with slowing international trade is causing hesitation to make new investments in European plant and infrastructure, which impacts us. Against this backdrop of uncertainty, there have been some countervailing positive political developments. For example, the U.S. multi-year budget deal will significantly improve our ability to pursue projects that require federal funding. In addition, although the U.S. infrastructure bill, which was a stretched possibility at the trailing dollar level last quarter, is no longer a real possibility. However, America's Transportation Infrastructure Act of 2019, which was introduced in the Senate earlier this week, increases spending by 27% over FAST Act levels. Although the legislation may not be enacted this year, it is a sign of an improving bipartisan consensus around infrastructure. The additional positive effect for us beyond the possibility of increased spending levels is that the proposed legislation contains specific funding to promote digital construction. Beyond the federal efforts, we are also seeing increased dynamism from states in funding infrastructure renewal with growing enthusiasm for digital construction. So far in 2019, five states have raised gas taxes to help fund increased infrastructure spending. The second factor is China. This takes the form of declining growth and an intensification of Chinese government policies that create explicit preferences for Chinese companies over non-Chinese companies. As a result, our first half Chinese revenue was down approximately 40% year-over-year. Given that our Chinese revenue is now only 2% of total company revenue, this short-term downside is limited. Current conditions are nonetheless unfortunate because they make it unclear when China may return to its role as a source of long-term growth. The third factor impacting us is OEM demand, which was an aggregate trade on the second quarter. Our more traditional OEM markets and timing subsystems and embedded components are being impacted by lower Chinese demand and an inventory overhang in a major customer. In addition, demand from our agricultural OEM partners is being impacted by lower demand in the U.S., which is in the short term also being impacted by high inventory in the channel. On the positive side, we continue to establish or extend significant new OEM partnerships in construction and agriculture driven by the need to integrate the machine into the workflow of the connected construction site and the Connected Farm. The present more negative environment will require us to sharpen our execution, which will emphasize a commitment to the financial model, a commitment to our long-term strategy, and a commitment to exiting the period with an improved competitive position. Over the last 20 years, Trimble management has faced similar periods of ambiguity and consistently emphasized these same principles with a resulting acceleration of performance coming out of slow periods. The balance required to do this is consistent with our 3-4-3 philosophy, which places equal weight on short-term and long-term results. Our commitment to maintain and extend our financial model includes a combination of prioritized efforts to capture incremental revenue, optimize the business portfolio, and control costs. For example, by redirecting efforts to upsell our substantial installed user base, we can potentially generate additional revenue without losing our linkage to new equipment sales. Portfolio evaluation is a constant activity within the company, but the current uncertainty will place special emphasis on underperforming product lines that are not core to our strategy. Cost control is implicit in our culture, and we will methodically look to take structural costs out. For example, we have recently consolidated our autonomy in-cloud activities both to speed outcomes and to ensure cost-effectiveness. In pursuing improved cost-effectiveness, we will not compromise our three-year core innovation roadmap, which remains compelling. Beyond our overall focus on transforming workflows in construction, agriculture, and transportation through technology, we are intensifying our efforts in focused areas such as autonomy, mixed reality, and the cloud. Although we have a role to play in on-road autonomy by providing precise position, our bigger play is in off-road autonomy. Although selected sensor development will be part of our contribution, our primary focus will be on the higher-value objective of integrating autonomous machines and tools into the management of the construction or farm site. I'll let Rob speak to the details. The second quarter and most probably the third quarter represent a pause in our secular progression with a modest rebound expected in the fourth quarter. Nothing has changed structurally or strategically, and we remain on course in achieving our objectives.

Thanks, Steve. Let's start on slide five with a review of the second quarter results. Starting with the topline, second quarter total revenue was $856 million, up 8% year-over-year. Breaking that down, currency translation subtracted 2%, acquisitions added 7%, and organic growth was 3%. ARR, or annualized recurring revenue, grew to $1.1 billion in the quarter, up 28% year-over-year and up organically in the low teens. Gross margin in the second quarter was 56.9%, down 40 basis points, which was driven by revenue mix in the quarter. Adjusted EBITDA margin was 23.1% in the second quarter, up 10 basis points year-over-year. Operating income dollars increased 7% to $175 million, with operating margins up 20.4%. Net income was up 3% on a year-over-year basis, and earnings per share of $0.53 was up 4% year-over-year, driven by revenue growth while being offset by higher interest expense and the increase in our non-GAAP tax rate from 19% to 20%. For context, on a trailing 12-month, or TTM basis, revenue was up almost 12%, EBITDA margins have expanded by 170 basis points, and EPS has increased over 13%. Cash flow from operations was $178 million in the quarter, up 22% year-to-date. Free cash flow, which represents cash flow from operations minus capital expenditures, was $154 million in the quarter, up 24% year-to-date. Cash flow growth has been driven by EBITDA growth and favorable working capital dynamics as our business continues to move towards higher levels of software and recurring revenue content as well as lower M&A expenses and lower tax payments. Moving to the balance sheet, deferred revenue was $452 million, up 27% year-over-year. This correlates to the increased recurring revenue mix in the business. Net working capital inclusive of deferred revenue stands at less than 2% of revenue on a trailing 12-month basis. Next, a few comments on debt and liquidity. We closed the quarter to gross debt level of just over $1.74 billion and net debt of $1.54 billion, representing 2.08 times net debt-to-adjusted EBITDA on a TTM basis. We paid down over $150 million of debt in the quarter and have reduced our gross debt by approximately $415 million since we closed the Viewpoint acquisition in the third quarter of 2018. Our S&P credit rating was recently updated to reflect the stable outlook, which we were pleased to see. With our strong cash flow and full availability over $1.25 billion revolving credit facility, we remain well positioned to weather any debt, economic disruptions, and continue our disciplined capital allocation strategy. Looking at slide 6 from an overall financial performance perspective, the two standout metrics from the quarter include the $1.1 billion in ARR, which continues to demonstrate strong and consistent growth, and the 24% growth in our free cash flow year-to-date. Moving to slide 7, we have revenue details at the reporting segment level. Overall revenue was in line with expectations, albeit towards the lower end of the guidance range. Like many other companies, we experienced a significant late-quarter slowing trend across some of our businesses and markets. Of note, we continue to see softness in the OEM portion of our Geospatial business, particularly in China. We also experienced continued softness in the North American agriculture market, which continues to be adversely impacted by the trade situation with China, as well as impacts from droughts in Brazil and Australia. In terms of where we performed better than or according to expectations, I'd like to highlight Buildings and Infrastructure, as well as Transportation. In Buildings and Infrastructure, we performed well in the aftermarket in both our civil and building construction businesses. Our SketchUp transition continues to proceed as planned, and our Viewpoint and e-Builder acquisitions continue to be in line with expectations. In Transportation, we had broad-based growth across the portfolio. Turning to slide 8, we experienced growth of 17% in North America, driven by construction and transportation growth in the U.S. In Europe, we experienced growth of 6%, driven by construction, transportation, and agriculture. In the Asia Pacific region, we saw a headwind of negative 16%, driven primarily by difficult conditions in China, while other major regional markets were mixed on a year-to-date basis. For context, on a TTM basis, revenues in the Asia Pacific region excluding China are up 7% year-over-year. Lastly, in other regions, we were flat year-over-year. Please now turn to slide 9 for a review of our revenue mix by type, which is presented on a TTM basis. Software services and recurring revenues continue to grow, up 27% with organic rates in the low teens, and now represents 55% of total Trimble revenue. Within that, recurring revenue, which includes both subscription as well as maintenance and support revenues, grew 31% year-over-year and now represents 32% of total Trimble revenue. Software and services grew 22% year-over-year and hardware contracted by 3%, reflecting in large part the recent headwinds in our OEM-related businesses, particularly in China. Finally, I'd like to reiterate that we now disclose additional revenue details on the summary tables provided on our Investor Relations website. These revenue details correspond to the numbers on the slide. Moving to slide 10 for operating income by segment. Of note, Geospatial margins were primarily impacted by the weakness in our OEM components business in China, whose effects were partially offset by operating and expense reduction within Geospatial during the quarter. In Transportation, margins were negatively impacted by spend associated with increased customer support to engage our customers through the software conversion to ELD compliance. The standout positive performer in the quarter was Buildings and Infrastructure. Let's close this guidance and move to slide 11. First to comment on how our management of the business translates into our financial model, strategically, we developed endgame visions and strategies. Tactically, Steve reviewed our 3-4-3 operating philosophy, where we simultaneously assess and balance the model across the timeframe of three months, four quarters, and three years. At our 2018 Investor Day, we've put forward a model that will produce 23% to 24% EBITDA margins by 2021. We reiterate our commitment to being well within this range in 2021. Working backwards from 2021, current EBITDA margins on a TTM basis are 22.8%. Three comments; first, we will continue to migrate the business model towards subscription. Second, we will continue to invest in R&D initiatives such as Autonomy and Cloud. Third, we will manage our cost structure as well as underperforming parts of the portfolio to position ourselves to meet our long-term commitments. With that in mind, third quarter and 2019 annual guidance has been reduced to reflect the trends we saw at the end of the second quarter, which we expect to impact demand through the second half of the year. With the prevailing uncertainty, we believe the prudent path forward is to de-risk the revenue model and to plan accordingly around that. For the third quarter, we expect revenue of $789 million to $819 million and EPS of $0.45 to $0.49 per share. The third quarter revenue range implies total company growth of minus 2% to plus 2%, with flat organic growth at the midpoint, plus about a point of growth from acquisitions, and a negative point of growth from FX due to the continued strengthening of the U.S. dollar. For the full year, we expect revenue of $3.255 billion to $3.315 billion, which represents total growth for the year of 4% to 6% and organic growth of 2% to 4%, and EPS of $1.91 to $1.99 per share. This implies a fourth quarter where we expect organic growth to modestly rebound. Our assertion is that the second half of the year is more indicative of the environment than a discrete quarter, as we see a pause in the third quarter that will naturally draw down inventory. Further, our fiscal year this year is 53 weeks, which includes an extra week in the fourth quarter. For the same reason, we would expect operating margins to be strongest in the fourth quarter, given that the fourth quarter normally has the highest proportion of software-related revenues, and the extra week will bring in an extra week of recurring revenue with healthy margins. Projecting a cautious tone for the third quarter and the second half of the year, we anticipate the following three discrete aspects. One, the combination of drought in Brazil and Australia coupled with trade impacts in the U.S. make for a challenging environment in the Agriculture business. Two, we expect our OEM-centric businesses, which represent a minority of our revenue, to continue to face headwinds and uncertain macros. Third, our transportation customers who are migrating to full ELD software functionality have in aggregate back-loaded their ELD conversions, meaning our support costs will run higher the next two to three quarters. We will not let our customers down and are committed to their successful migrations. On the other hand, we are optimistic in a few specific areas as well. One, we expect continued growth in ARR, providing us further visibility and predictability into our business. Two, from a cash flow perspective, the strong first half of the year has reinforced our expectation that cash flow from operations and free cash flow will comfortably exceed net income during 2019, and that cash flow from operations will exceed net income. Three, we expect that cost-containment measures that we have begun in the third quarter will begin to materialize in the fourth quarter and into 2020. Let's now take your questions.

Hi, good afternoon.

Hi, Ann.

Hey.

Hi. Maybe you could comment on the outlook for the buildings business in the back half. The organic growth seemed to slow significantly there. And we considered that Viewpoint is going into that business and considered organic. We would have expected a boost in organic revenue for Building and Infrastructure in the back half. So maybe if you could just talk about the fundamentals in the Buildings and Infrastructure sector, please?

Sure. In the first quarter, we saw double-digit organic growth in Buildings and Infrastructure, which had a couple of contributing factors. The inclusion of e-Builder in our organic growth for the first quarter was a result of two months in 2018 and three months in 2019. Therefore, the 11% organic growth we reported in Buildings and Infrastructure for the first quarter, after adjusting for the e-Builder impact, was between 8% and 9%. If we take that as a baseline going into Q2, the decrease isn’t as significant as it might appear. Looking forward to the second half of the year, we expect it to align with our expectations. There might be a slight decrease, but there’s really no fundamental shift in our outlook for Buildings and Infrastructure. I anticipate that the fourth quarter will show higher numbers in this sector, regardless of Viewpoint’s impact, partly due to the additional week, and we typically see a good amount of business through Viewpoint in the fourth quarter. All these factors combined help to mitigate what may seem like a discrepancy when comparing Q1 to Q2.

Okay. And could you remind us what the organic growth looks like today for Viewpoint?

So the Viewpoint organic growth is in the low single digits. As a reminder, with the Viewpoint business going through the model conversion from perpetual to subscription, that's the impact where we continue to see the bookings grow stronger well in excess of the recognized revenue growth and ARR, which I think is really the metric to look at in the Viewpoint business as up double digits, as is the e-Builder business. So in aggregate, the ARR growth year-over-year is above 15% in those businesses.

Okay. I appreciate it. So I'll get back in line. Thanks.

Thanks, Ann.

Thanks.

Yes. Hi, good afternoon and good evening. I'm wondering if we could talk about the SketchUp transition. Can you talk about the date that had your user growth look like for that business? Last time we connected, it was really strong in the first quarter. Did that momentum continue into Q2? And how does the success in that SketchUp transition move up the timelines for additional SaaS transitions for other parts of the portfolio?

Thanks, Jerry. So, the second quarter was a positive repeat of the first quarter. And the first quarter was the official launch and we saw unit growth in excess of 50% year-over-year. That's not my intention to let say I'm on a long baseline go through unit growth year-over-year unit growth. But I can tell you in Q2, it also was another repeat of the 50% unit growth year-over-year. So what that tells us is two things. One, the team did an excellent job in the launch. And the second is that it's expanding the addressable market, which of course is one of many reasons why it's an attractive conversion to make. In terms of how that impacts our view on other aspects of the portfolio, it's certainly a positive indicator to us from a strategic standpoint that it's a good thing relative to that addressable market expansion. We had a launch in the second quarter in our Transportation business. And the enterprise or we call it transportation management system part of the business began a subscription offering. And that's an offering that would be about getting us into, I would say into the medium-sized truck market whereas today our sweet spot would be more in let's call it the large fleet. And then in our mechanical electrical plumbing business, it's also within Buildings and Infrastructure the beginnings of subscription offerings happened as well in the second quarter. Those two aren't needle-moving at this point, and so I wouldn't comment on how they are moving Trimble numbers yet like the way that we have been around SketchUp. But again, the short answer on SketchUp was a very successful second quarter.

Okay. Thank you. And then as we look at the performance of your subscription business, specifically, can you talk about what organic growth would have looked like in the quarter since we still have a couple of the acquisition moving pieces? And then within that organic subscription growth can you just slip us through some of the better performing and standouts on the lower side as well please?

The ARR increased by 28% year-over-year. When we break it down, the organic growth was in the low teens year-over-year, indicating a robust performance in this part of the portfolio. Over 70% of that ARR is derived from Buildings and Infrastructure and Transportation. These are the key areas to focus on. Within Buildings and Infrastructure, SketchUp stands out as a highlight. In response to Ann's first question, the ARR growth in e-Builder and Viewpoint combined, along with the growth we experienced in SketchUp, significantly boosted the Buildings and Infrastructure segment's ARR. In the Transportation sector, our routing, mapping, navigation, and optimization business, along with the telematics fleet mobility business, also contributed to recurring revenue, which grew organically year-over-year. This is an important aspect of the portfolio that we should emphasize during this call.

And any pause in the pipeline or activity levels heading into Q3 given some end market soft spots that you mentioned that impacted quoting activity or backlogs in your subscription businesses at all?

In the subscription businesses, I wouldn't say there have been noticeable changes. The main drivers will be similar to the parts of the business I previously mentioned. For instance, the unit growth in SketchUp is a very positive indicator for us, and we view e-Builder and Viewpoint as fundamentally untapped markets. If the quoting activity around those continues to increase, it's promising. Overall, Jerry, on that side of the business, yes, it is different from what we've experienced with some of the other OEM or hardware aspects.

Thank you.

Hi everyone. Thanks for taking my questions. The first one is just if I think about the guidance change, so maybe that's one for you Rob, you guys called out accelerated model transition and how successful it has been. At the same time, it's been providing headwinds right because the better the model transitions, the worse the short-term numbers. So, how do we think about the model transition impact that it has had on H2 guidance potentially? Because you didn't mention it was one of the factors, but could that be one of the factors for the downgrade of the guidance or is it now having an impact itself?

It's having a small impact. I don't think it's significant enough to fundamentally change the guidance. As a reference point, we believe that the transitions we've discussed this year will have about a one-point negative impact on operating margins overall for the business and would affect operating leverage by five to eight points. This is approximately in the range we expect. Mathematically, with the hardware business contracting slightly and assuming full growth in subscriptions, that would have a bit more of an impact.

Okay. That's helpful. As a follow-up, if my calculations are correct, you're suggesting a similar type of year-on-year growth for Q4. In organic terms, you're expecting growth similar to Q3, even though the comparison looks a bit easier in Q4. Is there a sense of pessimism built into your Q4 expectations, especially since you lack visibility? What is the reasoning behind the possibility of Q4 being weaker than Q3?

If we compare Q3 to Q4, we expect about 2.5% of our revenue, roughly $20 million, to come from the 14th week in Q4. When we exclude that, looking at midpoints, we anticipate an actual increase in organic growth in the fourth quarter, around 1.5% on average, with some variation possible. This indicates an improvement over the third quarter, even after accounting for the additional week in Q4, though it's a modest uptick. At this level, I would highlight the importance of our guidance, which involves reducing risk and ensuring we have a solid cost structure, as maintaining our model is a key focus of our operational strategy.

Okay. That's helpful. Thank you. Thanks for answering my questions.

Thanks, Gal.

Hi. This is Stefan calling in for James. Similar to the previous question, how much do you think macro factors are influencing the lowered guidance compared to issues like the shift from subscription to perpetual or any potential project delays?

I think we were trying to describe the situation carefully, recognizing that there is a macro environment at play. However, what we observe is more a series of specific episodes rather than a broad macro conclusion. Europe appears to be in better shape overall, while China is our main concern due to its slowing economy. Additionally, there seems to be a rise in economic nationalism impacting that region. So while it may look like a macro effect, it’s really a mix of macro factors and specific circumstances. Europe, particularly the German economy, is closely linked to international trade, with China being a major partner. This connection is currently under pressure, and there seems to be a cautious approach to investment in Germany, compounded by the effects of Brexit. Thus, we're not strictly looking at broad macroeconomic trends. Many macroeconomists still hold a relatively optimistic outlook, but we need to consider a collection of specific situations, including those in China, Europe, and U.S. agriculture. We’re pointing to these unique instances rather than labeling it as a macroeconomic event. I’ll hand it over to Rob to discuss the model effects further, but I want to emphasize that our market share remains strong. Overall, our outlook for the construction and transportation sectors is positive, despite facing short-term challenges brought on by these specific events. At some point, we’ll move past these issues and return to what we might call a new normal, and I would expect to see a rebound in our results. We prefer not to categorize this as purely macro and instead highlight the events and specific issues currently affecting us.

If I were to break it down into a pie of 100, I would allocate 50, 25, and 25. Of that, 50% would go to OEMs as Steve mentioned, particularly focusing on the overlap between China and our Geospatial business. This pertains more to embedded components rather than new machinery sales, specifically in the Chinese market. I would assign 25 to the agricultural market, influenced by tariffs in North America and drought conditions in Brazil and Australia. I would designate around 20 to various other segments of the business, and maybe five for the subscription transition, as Gal asked about. This gives a broad overview of how we perceive that change.

Okay. That's helpful. Thank you. And just a quick follow-up. Are you considering these unique macroeconomic circumstances for the next few quarters, or how are you approaching that?

I would respond by saying that we've planned for the unique aspects throughout the rest of the year. Looking ahead to 2020, it’s challenging given the uncertainties in the market. We are focusing on the underlying fundamentals of our business, the return on investment we provide, our go-to-market strategy, and the new products we will launch in the fourth quarter. Additionally, 2020 marks important events in the construction industry, including CONEXPO and Trimble Dimensions user conference, which usually generate significant activity. Therefore, as we consider next year, we have modest expectations but also a strong conviction and confidence.

Thanks so much. Can you talk a little bit about where the R&D money is going in the Transportation sector? How we should think about the ramp-up in software revenue and margin expansion in that part of the business over the next several quarters?

Hi, Colin. If we look at the Transportation segment, it’s clear that from an operating income perspective, it needs to align more closely with the company average margins. When we dive deeper into our operating expenses, a significant portion of that is allocated to research and development. Strategically, we believe we have a distinctive advantage in connecting capacity with demand. We have valuable insights into North America due to our on-highway and back-office technologies, making it a natural fit to optimize the supply chain. We discussed developing a connected supply chain that enables us to view shippers and assist in matching them with carriers, what we refer to as a digital freight cloud. Our R&D efforts are focused on this initiative as well as preparing the back-office aspects of Transportation for a subscription service, which is a crucial area for investment. As I mentioned in one of the Q&As, we began selling this in the second quarter, although modestly, but we believe it will expand our market opportunities. Additionally, we have been working on integrating ELD with our international markets, and we're now operating in Brazil, India, and Europe. We see potential to enhance velocity and efficiency by consolidating some of our platforms across these markets, and we're investing in initiatives to drive these efficiencies. Overall, as we approach next year, it's a segment that needs to show improvements in bottom-line margins.

That's helpful. Regarding your comments about off-road autonomy applications and the interest in that area, you have a long history in machine control and off-road applications. How do you plan to engage in this space, and how do you see the opportunity for Trimble evolving?

First of all, regarding off-road autonomy, our perspective might differ slightly from conventional thinking. While we can make machines operate autonomously, as demonstrated at Dimensions last November in Las Vegas with several autonomous machines, we believe our primary value lies not just in the machines themselves. Many manufacturers are working towards autonomy, and a significant number will likely partner with Trimble to achieve this. However, the broader opportunity and real value lie in integrating autonomous vehicles into the workflow. Having an autonomous excavator or compactor perform a single task is beneficial, but what happens next? After it completes its task, where does it go, what does it do, and how does it fit into the schedule? Therefore, the larger opportunity, consistent with our work with Viewpoint and other software solutions, is about effective site management. We aim to ensure that machines not only operate independently but also communicate with scheduling and cost collection functions. The integration of autonomous machines into the overall site solution is where we find significant value. The market is increasingly confirming that merely operating a machine autonomously is insufficient; it must also integrate into the site operations. Thus, we see our ultimate role as fitting autonomy into a cohesive site plan.

That’s very helpful. Thanks so much guys.

Yes. Thanks for taking the question. I wanted to understand the OEM decline a bit better and how that plays into the second half guidance outlook. I know it sounds like, at least with respect to China that's a Geospatial-concentrated impact, but we were talking about that coming out of the first quarter. So I'm curious how it degraded from there, or if it's spread to other parts of the business, or if it's impacting the survey business as well, which was flat after growing in the first quarter and if it has any ramifications for any of the other segments more so. Because it didn't sound like in the Buildings and Infrastructure, you're planning for the second half that it was taking you markedly off-track there. So, just, if you could clarify that where the incremental impact is coming, relative to what we were thinking coming out of the first quarter.

Sure, Rob. I can provide you with a quantitative perspective on that, and Steve can add some historical context. We discussed OEMs, Geospatial, and China, which relates to some of the older Trimble businesses, focusing more on selling components rather than comprehensive solutions. When I compare Q1 to Q2 and look at our expectations for the year, I wouldn't say it has significantly degraded, but it also hasn't rebounded as we anticipated. This aspect of the business didn't perform as we had hoped. It's important to clarify what we mean by OEMs in Geospatial and our historical businesses because they are quite different from the broader narrative about Trimble. I'll anchor you on that, and Steve can provide additional context if necessary.

Sure. I generally categorize OEMs into two groups. The first group includes those that are more opportunistic and not core to Trimble's larger strategy, such as embedded systems at the circuit board level or IP sales to OEMs. This also includes the timing business, which falls into the opportunistic category, as well as our InTech division that sells board-level products globally. While these areas are valuable for revenue and profitability, they do not represent a central strategy. The second group is strategic OEMs, particularly in construction and agriculture, where we aim to establish basic software capabilities in factories to facilitate aftermarket sales and integrate machines into work sites. Agricultural OEMs, notably affected by U.S. trade policies, are showing a strong growth trajectory. However, we are facing significant challenges with opportunistic OEMs, particularly in China, which is affecting our geospatial segment. This does not directly involve survey instruments, and we have not yet recovered from the revenue levels seen in the first quarter. While there has been a short-term revenue decline, it does not impact our strategic outlook.

Okay. Understood. Just as a follow-up. You had also spoken earlier about redirecting some of your focus – sales focus, I guess, back into the installed base, maybe areas more healthy, and just curious what you're doing there and where you think that might be most impactful near-term?

Well, I think – I think the two obvious areas are agriculture because – and construction, but let's maybe put the emphasis in agriculture as the farmers do not buy new tractors, okay? And I think by a matter of arithmetic the average age of the equipment out in the field in agriculture is getting longer. They're getting older. Therefore, the technology on those tractors is getting older. And so I think there is a significant opportunity to go back and say – as opposed to making an expenditure – a significant expenditure on the tractor make an expenditure at 10% or 15%, or whatever of the tractor, which gets to be a little bit more discretionary even during times of uncertainty and significantly improve your performance. I think that is available to us. Again, the numbers of tractors out there with Trimble technology on it are numbered in the hundreds of thousands. So I think that it's a matter of kind of redirecting. It's always easier to sell into a shiny new piece of equipment. So I think we have to redouble our efforts as a company, but then also get our third-party channel engaged on this. But I think the installed base is a potential source of additional revenue for us. We just have to redirect ourselves a bit to get it.

Again, thanks for taking the question.

Thanks.

Hi, good afternoon. Could you discuss a bit more about the increased funding support for digital construction? I'd like to know more about the trends you're seeing from constituents demanding technology-assisted programs and whether construction companies are beginning to consider investing in these trends.

I see your question has two parts. Our specific focus has been on public funding from federal and state governments. For the past two to three years, we have actively advocated for this in Washington and at the state Department of Transportation levels. I believe this effort is starting to gain traction, as the appeal of digital construction is clear both in Congress and among the administration. We are starting to see tangible outcomes, especially with the new legislation from the Environment and Public Works Committee in the Senate, which includes specific language about digital construction. The intent is to encourage state DOTs to implement these ideas, and while some states are more advanced than others, there is a growing enthusiasm for this initiative. The speed at which this leads to concrete results is less certain, but I anticipate it will be gradually progressive, starting now. Regarding the other part of your question, it’s a continuous process. We are witnessing a noticeable shift in dialogue with contractors, who increasingly desire technology. If progress slows down, it will soon become essential for competitiveness. While this isn't akin to a consumer product with a sudden spike in adoption, the advancements we are making now are consistent and we are gaining real momentum in a way we haven't seen before.

Yes. I would echo that. I mean, the dialogue on digital construction is really ramping up. We're seeing a lot of contractors who've expressed interest. And what they find exciting now is that a lot of the risk transfer is being relieved and they're able to respond to bids, foreseeing a broader cycle of engagement. The messaging is clear, we’ll see how it plays out in real dollars, but our view is that this is a sector that's gaining momentum in the future. Finally, regarding potential cost-containment initiatives, could you maybe give us a little bit of sense of where those might fall within the business units? I would categorize the cost containment initiatives into three main areas: discretionary, structural, and cost of goods sold. Starting with cost of goods sold, on the purchasing side, we've recently consolidated some cloud spending. For discretionary costs, we focus on aspects we can control, such as travel. In terms of structural costs, we're looking at headcount and real estate; we are consolidating our real estate footprint and assessing our list of offices. We also evaluate headcount from the standpoint of operational expenses, considering the velocity and productivity associated with our staffing. This includes a mix of attrition, hiring, and location strategy, which we optimize. Regarding our software business, we don't apply a uniform approach across all areas. For instance, our recurring revenue business has grown by 20% annually, with organic growth in the low teens. Two-thirds of our engineers are in software roles, and we will continue to invest in this area, including our people and development efforts, as well as the backend systems that support our growth. We wouldn't want to compromise long-term progress for short-term gains. Instead, we will manage our initiatives thoughtfully across the business. As we examine the entire portfolio, we will consider areas—geographies, product lines, or divisions—that are underperforming or where our patience may be limited. If the market becomes tighter, we know where to focus our attention. This approach allows us to strategically identify the best opportunities in our portfolio on a business-by-business basis.

Thank you.

You bet.

Thanks. Rob, you mentioned the R&D work on the transport side of kind of matching up shippers and carriers and we've talked about that in the past. And obviously, the big revenue industry with some inefficiency they can be wrung out. Do you have any desire to share a time frame on when that might become a more interesting opportunity for you guys?

I believe the focus will shift to the second half of 2020 when we can start to see more noticeable revenue progress. We have our users conference in Transportation scheduled for September in Houston, which is in North America and is the largest transportation technology user conference. This event will provide an opportunity to discuss our integrated offerings across the portfolio and how they are beginning to contribute to a wider ecosystem. Although this expansion into a broader ecosystem has not significantly impacted revenue so far, we are confident that this strategic direction is the right one for the business. I understand we've been discussing this topic for a while, so it's a valid question to ask when we can expect to see the benefits of these efforts.

No, that's helpful. And then I mean just for pure clarity. Obviously, across the economy maybe the industrial economy there's been excess inventory that's getting wrung out and maybe you guys have a little bit of extra issue going on in China. But just in terms of the sentiment in Buildings and Infrastructure in what people are buying on the software side, whether it's through conversion or license or whatever, are you sensing any shifts there or is that still steady as she goes? I heard the comments obviously on Q1 having the step-down to 8%. Am I understanding that? I'm just looking for the sentiment among your customers on the software side.

In general, the sentiment regarding the software side is positive. This is where we have $1.1 billion of annual recurring revenue. We have examined certain businesses, such as Viewpoint and e-Builder, which have net retention ratios exceeding 105%, indicating strong performance. Additionally, our bookings pipeline and contracted backlog in the software sector, which is a documented figure, exceeds $1.1 billion. This provides us with significant visibility into that segment of the business.

Perfect. Okay. Thank you.