Trimble Inc (TRMB) — Q2 2023 Earnings Call Transcript

Welcome, everyone. Before I get started, our presentation is available on our website, and we ask that you refer to the safe harbor at the back. Our financial commentary today will reflect non-GAAP performance metrics, including organic growth comparisons which will relate to the corresponding period of last year, unless otherwise noted. Let's begin on slide 2 with our key messages. Annualized recurring revenue is our key top line metric at Trimble. Our team, led by our construction software group, achieved 14% organic growth in the quarter, beating our internal expectations by 100 basis points. We now stand at a record $1.88 billion of ARR, which compares to $1.2 billion when we began our Connect and Scale journey in 2020. ARR has doubled since 2018 and tripled since 2015. We are on track to achieve $2 billion of ARR by the end of the year, a remarkable figure made possible by the Trimble team who continues to work incredibly hard to execute on our customer-driven systems, process and business model transformation. We delivered EBITDA margin of 25.3%, also slightly ahead of our expectations, which was driven by strong gross margin of 64.2%. For perspective, gross margin was 56.8% in 2015 and 58% in 2018. EPS at $0.64 and year-to-date free cash flow conversion rate to net income of nearly 100% demonstrates the power and potential of our asset-light business model. Our revenue beat in the quarter is attributable to delivering a large federal government order in the geospatial business in the second quarter instead of the third quarter. For the year, we are holding our revenue guidance and raising EPS. Moving to slide 3. Let's look at the progression of our Connect and Scale strategy through the lens of our reporting segments, beginning with Buildings & Infrastructure. The market backdrop remains generally favorable. In North America, we see strength in infrastructure and non-residential construction. Customer backlogs remain healthy and technology helps to address the skilled worker shortage. By the numbers, ACV bookings accelerated on a sequential basis, and we achieved a record level of bookings in the quarter. ARR grew over 20%. Our Trimble Construction One offering is achieving higher win rates, larger deal sizes, and shorter sales cycles. Further, it is helping to grow both new logo and cross-sell bookings. We are confident in our ability to maintain momentum as our most recent release of digital systems upgrades provides significantly enhanced visibility to drive cross-sell and upsell. Strategically, we are pivoting more of our hardware offerings to adopt aspects of the subscription business model. In building construction layout, our RI layout instrument is only available as a subscription. In civil construction, we have shifted more value to the software in the systems offering, thereby positioning us to reduce the upfront cost of a system and monetize over the life of the customer. In geospatial, the market backdrop is largely the same as buildings and infrastructure, yet serving a more highly penetrated customer base. By the numbers, revenue was well ahead of our internal expectations in the quarter. We continue to see strong demand from US state departments of transportation, and in the quarter, our team delivered the aforementioned federal government order. Strategically speaking, we saw ARR growth in our Trimble Catalyst product line. Catalyst offers precision positioning-as-a-service through a subscription offering. We passed the milestone this quarter with over 10,000 cumulative units shipped. We also expanded our product line in the reality capture space with the launch of our X9 scanner. We see reality capture as an important product category as it creates a key linkage between the physical and digital worlds, which we can uniquely serve. In Resources and Utilities, farmer sentiment has been trending negative despite market fundamentals such as commodity prices, which largely continue to be healthy. Our strategic focus in agriculture continues to be building out our aftermarket channel to gain dealer and customer intimacy, thereby providing farmers choice in their technology platforms. While revenue was down as expected, ARR grew at a double-digit rate. Our Positioning Services business continues to win customers in both on-road and off-road capacities, demonstrating our ability to innovate in the space of positioning technologies after 45 years in the business. We also took strategic steps to further ongoing ARR growth. In Forestry, we launched a cloud-based log inventory and management system that enables us to move down market, thereby expanding the addressable market. In Utilities, the team delivered two of the largest software bookings in the history of the business. In Transportation, the market backdrop remains challenging with the soft freight market pressuring carriers to streamline their operations for cost savings to increase asset utilization and to increase the productivity of their non-driver workforce. Against this backdrop, the overall business both increased operating income margin for six consecutive quarters and grew organic ARR for the seventh consecutive quarter. In Europe, in our Transporeon business, we see early indications that the spot market might have bottomed out. Despite a difficult economic backdrop in Europe, churn is effectively zero, competitive win rates increased, and the business is demonstrating an ability to manage the cost structure in line with the revenue environment. We have early examples of success with bringing the organizations together and making some product roadmap decisions to streamline product development work. Moving to Slide 4. Connect and Scale is a platform strategy, which in turn is fundamentally a vertical industry data strategy. No surprise then that we have been deploying artificial intelligence across Trimble for some time now, both for internal benefits and customer-facing applications. For example, a trial program with over 200 engineers using AI-assisted programming demonstrated upwards of 25% improvement in productivity. We have also extended AI into our sales process, where we are applying AI to the cost scripts of our sales representatives to coach them and then further identify cross-sell opportunities. On the customer-facing front, we are improving our best-in-class positioning accuracy in harsh environments using AI-based error modeling and machine learning on many years of atmospheric data. We are deploying AI and video intelligence solutions in transportation to detect driver fatigue and distraction and for selective spraying applications in agriculture. In our construction software business, we are automating invoices by converting PDF data into usable accounts payable data. We've already processed over 350,000 invoices worth over $1 billion, compelling use cases and we are just beginning. Let me now turn the call over to David, to take us through the numbers.

Turning now to slide 5; second quarter revenue of $994 million grew three percent organically. Revenue was above our expectations coming into the quarter, driven by the earlier-than-expected shipment of the large order of Geospatial equipment to the Federal Government that Rob mentioned earlier. Excluding that, revenues for the quarter were in line with our projections. Our total company revenue growth versus the prior year was driven by recurring software, both organic and from the addition of Transporeon. Gross margins were strong again in the second quarter, with non-GAAP gross margins of 64.2% tying the record levels of the first quarter. Our gross margins in the second quarter reflect favorable price/cost dynamics, strong growth of recurring software revenues, and a higher margin mix within our product offerings. EBITDA margin of 25.3% in the second quarter was up 110 basis points year-over-year, benefiting from our strong gross margin performance. Operating and EBITDA margins continue to grow versus the prior year, even as we lap strong year-ago revenues and as we continue to invest in our digital transformation. Cash flow in the second quarter improved on a year-over-year basis even taking into account Transporeon deal-related expenses. Our improved cash flow performance was the result of lower purchases of inventory, lower tax payments, and higher profitability. Our capital allocation priority remains debt repayment. And we made progress through the quarter on reducing our leverage. Turning now to slide 6 for some additional color on our revenue performance. Product revenue, which includes both hardware and perpetual software, was down 5% organically in the second quarter and was aided by the federal order, which we had previously expected to ship in the third quarter. The year-over-year decline in product revenue this quarter reflects a difficult comparison with the second quarter of 2022, when our supply chain was freeing up and we were working through high hardware backlog. As expected, dealers reduced their inventories in the quarter. We expect some modest amount of additional dealer inventory reduction over the balance of this year. Our subscription and services revenue, which includes SaaS, term licenses, maintenance and support, recurring transactions and professional services, was up 13% on an organic basis, largely driven by strong bookings and net retention performance across our Buildings and Infrastructure software businesses. From a geographic perspective, revenues in North America, Asia Pacific, and the Rest of World were up organically, by 3%, 11%, and 18% respectively. Rest of World revenue growth was driven by strong demand for precision agriculture products from customers in Brazil. Revenues in Europe declined organically by 4%, as adverse macroeconomic factors impacted many of our businesses. Turning now to results by segment on slide 7, our software portfolio in the Buildings and Infrastructure reporting segment, continued to perform well, with organic ARR growth of over 20%. Bookings of recurring software offerings in the segment grew at a mid-20s percentage rate, despite the challenges of transitioning the North American software businesses onto our new digital infrastructure during the quarter. These large system implementations are never easy, but our teams powered through the transition while still keeping our growth momentum going. With this latest release of our digital transformation, we now have over one-third of our Buildings and Infrastructure ARR, transacting through a connected system, which will facilitate the acceleration of our Connect and Scale strategy. Segment revenues of products for civil construction customers were down at a mid-single-digit rate in the quarter, reflecting strong shipment momentum a year ago. In the Geospatial reporting segment, we experienced organic revenue growth driven by the $18 million shipment to the federal government mentioned earlier. Excluding this one shipment, segment revenues in the quarter were down at a mid-single-digit organic rate, an improvement from the performance in the first quarter. This segment is most impacted by the downturn in residential home construction in North America and Europe. We expect to return to organic growth on an ongoing basis in the fourth quarter. In the Resources and Utilities segment, revenues were down year-on-year and fell modestly short of our expectations, driven by our agriculture business. While our sales to ag OEM customers grew versus prior year in the second quarter, revenue from our aftermarket channel was down. Three drivers help contextualize the aftermarket revenue decline. One, we are lapping a tough comp versus 2022 when our revenues surged as our supply chain freed up well ahead of the OEM supply chain. Second, the changes we announced a quarter ago in our aftermarket distribution network have, as expected, impacted our short-term revenue trends as we and our dealers refine our plans going forward. And third, we are seeing the impact from a softening of farmer sentiment, especially in Europe. We continue to see strong demand trends from ag customers in Brazil, and our positioning services business grew globally at a double-digit rate as we accelerated our cross-sell efforts. In the Transportation segment, we delivered 6% organic revenue growth, driven by our North American Enterprise and Maps businesses. Our Mobility businesses in Europe and Brazil also grew revenue and ARR at a double-digit rate. As Rob mentioned earlier, operating margins improved sequentially once again. Our Trimble transportation team has made good progress in turning this business around. And while there's more work ahead of us, we are pleased with the progress. I'll note here that segment results now include the Transporeon business. Transporeon performance was largely in line with our expectations for the quarter, notwithstanding a tough macro environment in the European transportation industry. Moving now to Slide 8. We ended the second quarter with ARR of $1.88 billion, up 14% organically. Remaining performance obligations, or RPO, our backlog, stood at $1.6 billion at the end of the quarter. RPO related to recurring offerings grew by over $100 million year-over-year as a result of our strong bookings performance. Product RPO came down as expected year-over-year, reflecting our improved lead times. With this high level of RPO, we have significant visibility into our revenue in the coming quarters. On a 12-month rolling basis, our software services and recurring revenue of $2.3 billion represents a record 64% of our revenues, up 800 basis points from year-ago levels. We completed the acquisition of Transporeon in the second quarter and reduced net debt by $150 million from the closing of the acquisition through quarter-end. We plan to continue to delever, and as anticipated, expect to finish the year with net debt less than 3x EBITDA. Turning now to our guidance on Slide 9. The midpoint of our guidance for full year revenue remains the same as we issued last quarter. Our revenue guidance range has narrowed to $3.845 billion to $3.925 billion, which represents organic revenue growth in the second half of the year in the mid- to high single digits. We continue to expect ARR to grow at a mid-teens rate for the year. Our expectation for gross and operating margins has increased from prior guidance by 50 basis points, reflecting the strong performance in the second quarter and a highly focused effort on margins and cost control. The end result is an increase in the midpoint of our earnings per share guidance range by $0.03. We now expect full-year EPS in the range of $2.57 to $2.73. From a segment perspective, our expectation for full-year growth in the Buildings and Infrastructure segment has improved following strong performance in the second quarter. Our forecast in Resources and Utilities is down modestly from the outlook of a quarter ago, reflecting weakening macroeconomic conditions in the agriculture sector. The outlook for Transportation and Geospatial is unchanged from last quarter. For the third quarter of 2023, we expect organic revenue growth in the range of 0% to 5%, which corresponds with a revenue range of $945 million to $985 million. We expect gross margins of 100 to 150 basis points lower than the second quarter, reflecting a less favorable business mix. We expect third-quarter operating margins will be similar to second-quarter levels. We project EPS in the range of $0.56 to $0.64. From a segment perspective, we expect Geospatial revenues to be down organically at a mid-to-high single-digit rate as we won't have the positive impact of the large federal order this coming quarter. Resources and Utilities revenue is expected to be down at a mid-single digit organically. Revenue in Buildings and Infrastructure and Transportation are expected to continue to grow organically in the third quarter at rates comparable to or better than we experienced in the second quarter. Back to you, Rob.

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

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

Sure. Hi, Kristen. First, I want to highlight that our business with the original equipment manufacturers was up, which is a positive aspect. However, the factors I mentioned that led to a decline in our aftermarket business year-on-year are part of the broader economic trends. We're experiencing a downturn in sentiment across various regions, particularly in Europe, where it's more noticeable. We've also announced changes to our distribution network, prompting us and our dealers to reconsider our strategies, which has clearly had a negative impact this quarter. Additionally, we are comparing ourselves to last year's strong performance when we saw significant shipments as we navigated our supply chain challenges. Our supply chain has improved much more swiftly than that of the OEMs, who face a more complex situation with their parts. It’s difficult to directly attribute the decline in aftermarket revenue to those three factors as they are intertwined. Nevertheless, I believe the long-term outlook remains positive, just as it was before, and we consider these three factors to be mostly temporary.

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

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

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

Yes, this has been an exceptionally successful business for us over the past couple of decades. To achieve 2-centimeter and less accuracy on a farm, for surveys, or for construction equipment, as well as for ADAS systems and on-road vehicles, corrections are necessary due to atmospheric errors; additional ground-based geometry is needed to enhance satellite data. We have been a market and technology leader in this area for a long time and continue to innovate. From a market share perspective, it's clear we lead in ag technology, civil construction equipment, machine control, and surveying, where we maintain a dominant market share. The connection to Trimble equipment reflects our market leadership and extends beyond just Trimble equipment, as we operate in mixed fleets. The on-road sector has become a new and accessible market for us in recent years as automotive companies pursue autonomy. This has led to increased demand for ADAS as one of the first applications. For accurate lane detection, the type of corrections we offer are essential. This emerging market represents an expanded opportunity for us. While it's challenging to precisely size the addressable market, I estimate it's approaching a $1 billion opportunity when including the on-road business.

Thank you so much.

Yes. Hi, good morning everyone.

Hi, Jerry.

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

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

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

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

Super. Thank you.

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

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

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

Yes. We completed the next phase of our digital transformation during Q2. We integrated our North American construction enterprise software businesses onto a unified digital platform. As I highlighted earlier, implementing such significant process and system changes is always challenging and can cause disruptions. One of the accomplishments I'm most proud of is that our team achieved nearly mid-20s-plus bookings growth in the businesses directly affected by the digital transformation, with almost 30% growth despite the changes in the tools they utilize to track and sell. So that is a huge milestone. We're now in a position, only just now, to take advantage of the benefits that the common platform provides to us and further enhancements to that are going to roll out even in this quarter. So we're getting to the point where cross-sell and the Connect and Scale vision are enabled and not hindered by the diversity of systems. Now we have common technology. We have visibility into our pipeline. Salespeople can see what customer business is across the Trimble portfolio in ways that they couldn't systematically before. So we're just getting going. We're just beginning to realize the potential of this new process and tool for that business, and we will continue over the next year or two to roll out the same approach to the rest of our business.

Great. Thank you.

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

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

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

Certainly, let's split the two and then the slide that goes along with the prepared remarks that we made intentionally put one distinction of the internal facing example separate from the customer-facing examples. So if we take the productivity opportunity internally, I think the place we'll see it show up first is within the R&D on the developer side with the copilot trial that we ran in the second quarter that showed some productivity benefits. I believe this will be how business operates moving forward. I anticipate that we will gradually see improvements as we achieve greater scalability with our existing resources. In other words, if this proves successful, it will lead to operational leverage on our future revenue growth. This means increased scalability and enhanced internal effectiveness and efficiency, which I think will eventually result in operating leverage and contribute to our revenue growth. On the customer-facing side, I think it's going to be very interesting to see how this monetizes over time. Right now, I would say there's an aspect where we make the solutions we sell better. Trimble is a premium price provider in the market. I think this is part of earning that premium is continuing to innovate and develop and have the best solutions. There's another aspect of capabilities, which we believe will come through when you're buying a bundle such as TC1 when you're buying that platform offering or that cloud offering, such that if you have, I'll say, an incremental set of analytics capabilities, we want to deliver them when you're buying something like TC1, so you can uniquely access them by virtue of that business model. I suspect that that's how we'll see this monetize. I think standalone analytics, I have a question if those will actually be able to monetize independently and on their own. I really think it comes through making our solutions better.

Great. Thank you.

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

Hi, Tami. Good morning, it's Rob. Let's take that in slices within B&I. Within B&I, we have the civil construction business, machine control, as you would know it, and then the construction software. Within the civil construction business, we really don't have TC1 today, but that is absolutely where we're going. It's connecting the machine control offering with the software. We do that informally today, and that’s the path we'll be going. So I'd say we're not fundamentally doing it in the civil space today. So there would be no customers that we're hitting there. Within the construction software business that we have, this is for sure where we're taking the business and where we're having success. I have one caveat within that, which is our SketchUp product in our architecture and design business because SketchUp has millions of users from makers to architects. And so it's a different market segment. I don’t think that the millions of users of SketchUp are going to be relevant for TC1. Within the subset of the construction software, we would have an ambition to have well more than half of our customer base on the Trimble Construction One agreement. We've got many thousands of customers on the frame agreements today. The team does an excellent job even if a customer is not purchasing a full bundled opportunity by putting them on the frame agreement, giving them the option to access more of our solutions more easily. I hope that provides some insight into how we view the TC1 opportunity within B&I. Currently, our focus is at the contractor level with the TC1 offering, and we also consider the architecture and engineering experience for TC1, as well as a civil contractor experience for TC1. So I have a series of expansions through tailoring experiences to the customer segments that we serve and then also rolling this out on a global basis. Overall, we're still in the early innings, and that's good news in terms of the continued growth opportunity.

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

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

Got it. Thank you so much.

Yes. Good morning. I wanted to inquire about the B&I and geospatial areas collectively. Can you break down what you're observing between infrastructure and trends in non-residential construction? Additionally, regarding residential construction, do you believe there has been a stabilization?

Hi, Rob. Good morning. If we look at the segments within the market, clearly, infrastructure is the strong point, both, I'd say, North America, but also globally. There are also mega projects happening around the world, and those are positives for us. On the non-residential side, if I exclude infrastructure non-res, we continue to see pockets of strength. If I think here in North America, I think about renewable energy projects, we think about some onshoring of manufacturing, data centers, which correlates to AI; we believe those are areas where we're seeing strength. In residential, the situation is somewhat mixed. There is still a considerable amount of new homebuilding occurring, particularly in the US. We observe fluctuating trends, and it's definitely been a net decrease in residential, but we hope for some stabilization. I wouldn't say it has stabilized yet in North America. However, the economy suggests we might be heading towards a soft landing, which would be a positive development. In contrast, residential has faced more challenges in Europe, which is significantly tougher than in the US, and it's important to highlight that.

That's helpful. As a follow-up, David, I know we just discussed gross margin. However, you mentioned that there will be a decline in the third quarter. Should we anticipate that it will improve in the fourth quarter when the mix becomes more favorable again?

Yes, Rob, it's primarily driven by the mix, both from Q1 to Q2 and then from Q2 for the remainder of the year. We anticipate a decline in Q3, followed by a slight increase in Q4 due to a higher software mix in the business.

Very good. Thank you.

Sure.

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

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

Got it. No, that's great to hear. And then, a quick follow-up for me, as you mentioned the closing of a large federal government order in geospatial, any details on how large that deal is? I just want to get more color on how much revenue got pulled forward from Q3 into Q2? Thank you.

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

Thank you.

You're welcome.