Q4 2019 Earnings Call
Ladies and gentlemen, thank for standby and welcome to assemble fourth quarter and full year 2019 default at design all participants are in listen only mode. After the speakers presentation. There will be a question and answer session to ask a question doing this session you will need to press the star one on your telephone keep.
If you require any further assistance. Please press the star to me. Please be advised that today's call is being recorded.
No I Kinda conference over to Mr., Michael Labor Director of Investor Relations. Please go ahead Sir.
Thanks, Good afternoon, everyone and thanks for joining us on the call I'm here today, with Rob Peter or CEO, and David Burns our CFO.
I would like to point out that our earnings release in the slide presentation, supplementing todays call or available on our website at www Dot Trimble dot com as well as within the webcast and we'll be referring to the presentation today.
In addition, we will also be posting our prepared remarks or Investor relations website at Investor Dot Trimble Dot com shortly after the completion of this call.
Turning to slide two of the presentation I would like to remind you. The forward looking statements made in today's call and the subsequent question and answer period are subject to risks and uncertainties.
Actual results may differ materially from those currently anticipated due to a number of factors detailed and 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 discussed in today's call are fully reconciled to GAAP measures in the tables from our press release.
First rubble start with an overview of the quarter end the year.
After that David will take us through the remainder of the slides, including an in depth or be with a quarter and the year our guidance and then we will go to acuity.
I would also like to briefly mentioned that we will be attending the Morgan Stanley Technology Media and Telecom conference on March 2nd in San Francisco.
With that please turn to slide three and I will turn the call over to Rob.
Good afternoon, everyone.
Focus of my comments today will be on Trimbles direction going forward.
For baseline context, our fourth quarter revenue came in well ahead of expectations as Tdps.
More importantly error was 1.13 billion up 6% and free cash flow was 516 million on a trailing 12 month basis up 23%.
Revenue and EPS were at record levels for 2019.
This represents my first call as CEO, Steve Bergen has now our executive Chairman and Berea Alcon CEO of Ericsson has joined our board of directors.
In addition, David Barnes is in place as our new CFO, David is off to a strong start and is focused on helping us both transformer business models and put in place the enabling mechanisms to efficiently and effectively scale on a global basis.
As I take over as CEO I had the benefit of having been with the company for 14 years, both operating and executive leadership roles.
I continue to believe with great conviction in the strength of the trouble business model.
I'm also mindful that is important to refine strategy when macro or competitive dynamic shift in meaningful ways.
From an investor land, our objective is to allocate capital and resources with an owner operator mindset.
It looks like one executing a compelling strategy that drives unique customer value, thereby creating and sustaining competitive advantage to pursuing business models, they create lifetime customer value and three putting shareholder capital and management bandwidth to work in the highest return areas that is ultimately measured by free.
Cash flow.
What has stayed the same since we put our business model forward at Investor Day in May of 2018 is threefold.
One our end markets are fundamentally attractive at a secular level. They are large global markets that are undergoing digital transformation.
To our solutions deliver substantial return on investment as measured by productivity quality safety transparency and environmental sustainability.
Sorry, our differentiation, which happens at the intersection of the physical and digital worlds that is our technology stack enables hardware software and services that allow us to connect work from the office to the field and back.
Overall, we believe strongly that our business will create compelling returns over a cycle.
What played out different than we anticipated a couple of years ago was the emergence of trade disputes as was the influx of private capital into some of our end markets.
The positive side, what played out better has been the acceleration of software and air or as a percent of our overall revenue mix as well as our product innovation achievements.
As I come into the CEO role my aim is to make the right long term decisions that unlock sustainable shareholder value.
In our last call. We said, we would take a fresh look at the portfolio strategy structure and systems, while respecting 41 years of what got US here on that note I think we're off to a strong incredible start.
We have launched a new strategy that we referred to as connect and scale 2025, we will connect the industry Lifecycles we serve.
We will accelerate or move towards subscription business models, both in software and hardware.
We will connect our solutions into bundled offerings and we will begin to enable the data strategy that we believe we are uniquely positioned to fulfill.
Our strategy challenges us to reinvent ourselves whether that be through a business model transitions are making disciplined strategic bets on further shaping industry transformation.
Our markets are dynamic and changing fast and we will lead.
We will also allocate capital in our underlying systems to help us efficiently and effectively scale.
As proof points that we are in motion on the strategy for examples.
First we said we would take a fresh look at the portfolio.
In the last four months, we exited three businesses well financially immaterial to trimble, they do increase our focus.
Second we said we would take a fresh look at the organizational structure I.
I moved from having 10 business operational direct reports to five we did this by bringing together the assets within our construction Geo spatial resources and transportation franchises.
The structure enables our industry lifecycle strategy breaks down organizational silos and helps us approach or markets more holistically, one leader one unified direction.
We also stood up a fifth franchise business for autonomy, where we brought together a number of efforts across trimble under one umbrella.
Third innovation.
In the fourth quarter, we launched a number of notable solutions.
Including some of the following that are also shown on slide seven.
We started shipping the XR 10, which is a mixed reality device purpose built for integration into an industry standard hard hat for use in construction environments.
The XR 10 enables users to overlay Constructible building information models and other digital project data onto the physical context to the job site truly connecting the physical and digital worlds.
Geospatial, we began shipping our X seven threed laser scanner, which opens up a category and surveying and construction that was previously missing.
We also launched our new our 12, GNSS receiver, which allow surveyors working in challenging GNSS environments to reduce both the time in the field and increase accuracy up to 30%.
We seek or two and agriculture launched and its spots Breeze weeds and provides growers up to 90% savings in input costs, when targeting and treating herbicide resistant weeds.
And our construction software business, we won a number of new logos that included a solutions bundle with viewpoint, one and tactless structures. In this case, we are integrating prefabrication and shop planning through tekla with purchasing and project costing through viewpoint.
As a fourth example to highlight or willingness to reinvent ourselves.
By putting the spotlight on her recent acquisitions on slides five and six.
Starting with Cubic's, which we closed on January 14th.
Cubic's provides a platform that we believe accelerates the reinvention of our transportation strategy and business model.
The fundamental problems underlying the transportation industry include tight operating ratios driver turnover import resource utilization.
The cubic's investment thesis is threefold.
One to extend the cubic's cloud based community of shippers carriers and intermediaries to include Trimbles carrier customers, representing approximately 1.3 million assets, enabling dynamic and optimal planning execution and freight matching.
Two.
Expand the addressable market by more than $2.5 billion.
And three significantly accelerate our delivery of a multi tenant carrier transportation management system and the cloud.
Overall, the strategic thesis is compelling.
In the short term the acquisition will be dilutive to transportation reporting segment margins in company earnings per share.
Points in 2020 of our execution will be increasing the size of the shipper community connecting carrier capacity accelerating transaction volume through the platform and accelerating or Nexgen carrier SAS platform.
We also announced three acquisitions in the fourth quarter.
And our utilities business, we acquired city works, whose core strength as an enterprise asset management software platform for utilities and local governments, which include mobile aiotv and infrastructure lifecycle solutions.
The combination will provide comprehensive digital platform with real time asset intelligence workflows and analytics for transforming the way governments and utilities prioritize infrastructure maintenance and construction investments.
In addition, we announced the acquisition of two virtual reference station networks that at over 1.1 million square kilometers to Trimbles correction services coverage in Canada in New Zealand.
Our subscription based Vrs correction services are accessible to customers around the world, who rely on high accuracy corrections to increase productivity and reduce operational costs.
The correction services are ideal for professionals, and agriculture, geospatial and construction as well as emerging high accuracy applications, such as on road positioning for passenger vehicles.
The common thread of these acquisitions is that there are all software businesses that connect industry Lifecycles.
Our leadership team is committed to the new direction over connect and scale 2025 strategy.
Over the next couple of quarters for team will Cascade, the scrap strategy deeply into the businesses by applying the Trimble operating system framework, which caused us to continually focused on all three dimensions of strategy people and execution. These build on each other to create a high performing organization.
Natural question that emerges as what this implies for a long term financial model. Our aim is to hold an analyst day to update the view on the long term model in the second half of the year and then in the fourth quarter use our dimensions user conference as a solutions demonstration and education venue.
What we can share now is that we will look towards metrics that reflect the transition of our business to an increasingly subscription based digital model.
You will see some of these metrics on slide four such as a our and cash flow.
A recognized revenue and EPS remain important it increasingly incomplete measures of progression.
Last a couple of comments on company performance and the transportation reporting segment. The results are not to our standard we have work to do and we have a plan.
And our mobility business meeting the demands of the E.L.D. mandate proved harder than originally expected we elected to write software for both are older heart hardware technology as well as our newer hardware platforms.
Supporting multiple platforms is proven to be a larger than anticipated R&D and customer migration support effort. This resulted in higher expenses and customer churn, which has negatively impacting margins and they are we've got a plan to get the performance back on track and it begins with delivering upon our customer commitments.
We brought in a number of new leaders into the business and we're more proactively migrating customers from old technology platforms to new technology platforms.
The nature of the businesses that we have long subscriber lifetimes and is therefore in our interest to take short term financial pain to upgrade customers to newer technology platforms in order to preserve the lifetime value of our customer relationships.
During the acquisition of Cubic's and working on the mobility business, we anticipate 2020 profitability roughly in line with 2019 profitability.
Our commitment is to make progress in 2020 that puts us on a course to deliver 2021 profitability closer in line to the Trimble model.
And the other reporting segments revenue exceeded expectations led by solid performance and all of buildings and infrastructure as well as Gio spatial.
On earnings per share performance exceeded expectations with robust performance in buildings and infrastructure resources and utilities and geospatial.
Let me now turn the call over to David.
Thanks, Rob good afternoon.
In my commentary I will review the results for both the fourth quarter and the full year of 2019 before closing with guidance.
Starting on slide eight fourth quarter total revenue was $827 million on a non-GAAP basis up 4.3% year over year and above our guidance range.
To break that down currency translation, subtracted, 1% and acquisitions net of divestitures added 1%.
Organic growth was 4% with approximately 3% growth from the impact of the 14th week.
Our our or annualized recurring revenue grew to $1.13 billion in the quarter up 6% year over year and was up 5% on an organic basis.
Adjusted EBITDA, which includes income from our joint ventures in equity investments was $193 million with a margin of 23.4%.
Operating income dollars increased 4% to $178 million with operating margins of 21.6% essentially flat versus prior year.
Our non-GAAP tax rate was 19% also flat on a year over year basis.
Net income was up close to 10% and non-GAAP earnings per share in the fourth quarter were 53 cents of 5% or over 10% year over year.
Fourth quarter cash flow from operations was 122 million up 20% year over year, while cash flow from operations for the full year was 585 million.
Also up 20% year over year.
Free cash flow, which we defined as cash flow from operations minus capital expenditures was 108 million for the quarter and 516 million for the year, each measure up 23% year over year.
Consistent with changes in tax laws and to align with our international business operations, a non U.S. intercompany transfer of intellectual property completed in the fourth quarter resulted in a onetime GAAP tax benefit for the fourth quarter of 2019.
Our fourth quarter 2019, non-GAAP rate remained consistent with the prior year and we expect that our 2020 non-GAAP rate will be 17% to 18%.
Our balance sheet remains strong and provides us flexibility to simultaneously consider a range of capital allocation actions, we expect to continue to de lever and pursue modest share buybacks, well, having dry powder deployable for attractive acquisition opportunities.
During the fourth quarter, we completed the acquisitions of Citi works and can that we did not repurchase shares.
Turning to slide nine when looking at the full year for additional perspective, we view 2019 as a year that presented both opportunities as well as challenges.
Revenue grew 4% overall in 2% organically.
Operating margins for the year contracted 20 basis points to 20.4%, reflecting margin dynamics and transportation as well as the impacts from subscription transitions.
EBITDA margins expanded 10 basis points to 22.7%.
EPS grew five cents or 3% to $1.99 exceeding the guidance ranges that were previously provided during our third quarter earnings call.
Lastly, our 2019 free cash flow was strong driven by the growth in EBITDA working capital management and lower acquisition expenses.
Turning now to slide 10, let's go through the fourth quarter revenue details at the reporting segment level, which are presented on a year over year basis.
Buildings and infrastructure delivered 10% organic growth with high single digit growth in both the building and civil construction businesses.
Approximately 4% of growth came from the 14th week.
He builder viewpoint, and civil engineering businesses, each experienced double digit growth in the quarter.
Geospatial improved sequentially relative to the third quarter and was down 5% year over year on an organic basis and improved trend from recent quarters. Despite a modest reduction in distributor inventory levels.
Segment revenues benefited by approximately 1% from the 14th week.
As discussed previously our revenues derived from Oems in China were down significantly year over year, creating a continued year over year headwind for the operating segment.
Resources and utilities was up 1% on an organic basis, approximately 2% came from the 14th week.
Segment revenue was up about 6% on a year over year basis betting benefiting from the inclusion of Citi works, whose revenue stream largely consists of term licenses and software maintenance, which provides a predictable revenue stream.
Lastly, the transportation business produced a little less than 5% organic growth in the quarter approximately 4% came from the 14th week.
We note that all of our segments other than geospatial have grown at a double digit compound rate over the last three years.
Moving on Slide 11, let's go through the operating income details that are reported segment level.
Fourth quarter operating income for buildings and infrastructure grew 26% year over year with margins expanding 370 basis points to 29.0%.
Geospatial experienced margin expansion as well with operating income margins, expanding 200 basis points, despite a slight contraction in revenue.
Resources and utilities operating income grew 8% expanding margins by 40 basis points.
Transportation operating income contracted as a result of the dynamics that Rob described earlier and margins were 14.8% for the quarter.
Please turn now to slide 12 for a review of our revenue mix by type, which is presenting on a presented on a trailing 12 month basis.
Software services and recurring revenues continued to grow up 15% with organic growth in the high single digits and now collectively represent 57% of total Trimble revenue.
Within that recurring revenue, which includes both subscription as well as maintenance and support revenues grew 19% year over year and grew approximately 17% excluding the 14th week.
Recurring revenue now represents 34% of totaled Trimble revenue.
Software and services grew 9% year over year and hardware contracted by 7%, reflecting in part the recent headwinds in our OEM related businesses, particularly in China.
On slide 13, I will now closed with guidance, which excludes the impact of any future acquisitions or divestitures and assumes stable exchange rates.
We approached 2020 with optimism about our business model and long term prospects, while still cognizant of some challenging market conditions in the short run.
We ended the year with 1.13 billion in annual recurring revenue and a high degree of confidence that subscription and other recurring revenue will continue to grow at a healthy pace.
We also have strong broad based momentum in our buildings and infrastructure segment, and we expect a positive year for the Geospatial segment, which was impacted in 2019 by OEM and China related weakness and which will benefit in 2020 from new product introductions.
Profitability will also benefit from structural cost reduction activities that we implemented in the second half of 2019.
However in the short term, we're cautious about a number of factors the agricultural market remains challenged and we do not believe that the phase one trade bill will have a meaningful positive impact on our agricultural business in 2020.
So were agricultural business plans for this year reflect the continuation of the market conditions, we have seen since the beginning of the implementation of terrorists.
In addition, Rob discuss the challenges related to yield DNR transportation business.
Finally, we are actively monitoring the potential impact the corona virus could have.
Our business with customers in China represents about 2% of Trimble revenue and this business will be heavily impacted in Q1.
First quarter results will also be impacted by delays in our China based supply chain and to a lesser extent by projects and commercial activity indirectly related to the Chinese economy.
Our plans assume a resumption of more normal activity in the coming days and weeks, although there is obvious uncertainty and how quickly the corona virus contagion will be controlled.
If the contagion spreads further and recovery efforts are delayed the impact on our business would grow.
For the first quarter, we expect non-GAAP revenue of 780 to 810 million and earnings per share of 40 to 45 cents.
The first quarter revenue range assumes total company growth of minus three to plus 1%.
Organic growth in the minus 4% to flat range plus a little over a point from acquisitions with a little under a negative point from FX.
Our cautious outlook in Q1 reflects an estimate of an approximately 3% negative year over year impact to revenue growth from Corona virus and includes costs associated with meeting the demands of the ELD mandate.
Our current full year 2020 total company growth is estimated at plus 1% to plus 4% with organic growth in the flat to 3% range.
Currently we expect organic revenue growth to improve as we go through the year.
We expect our growth in the high single digits overall for the year with growth rates increasing through the year.
Organic growth in the fourth quarter of 2020 will be negatively impacted on a year over year comparison basis by about 3% due to the 14th week in the fourth quarter of 2019 and that has a little less than a point negative effect on the year.
From a profitability perspective.
Earnings per share full year guidance is for flat to mid single digit EPS growth, which incorporates a number of factors.
We expect margins to expand in many of our businesses driven by growth in software mix as well as recent cost reduction activities.
Tempering that margin growth are the short term negative profitability impacts from subscription transition incremental cost primarily in the first half of the year to upgrade customers to newer technology platforms related to the yield the mandate and the cubic's acquisition, which is expected to be modestly dilutive in 2020.
From a cash flow perspective, we expect to follow up a very strong 2019 with operating cash conversion of greater than 1.1 times non-GAAP net income.
Interest expense should trend down as we go through the year as we currently expect to dedicate a significant portion of cash flow to debt pay down.
With that I'll hand, it back over to Rob.
Thanks, everyone for taking the time to be with US today I want to close by acknowledging the efforts of our 11500 global Trimble colleagues for delivering a solid 2019.
2020 will be an important here as we laid the foundation for our connect and scale 2025 strategy.
My message to investors is the same as our employees. We've got this we appreciate your support operator lets please open up the line for questions.
Thank you Sir.
Ladies and gentlemen, if you would like to ask a question. Please press star one thing I telephone keypad and weak for your needs to be announce accusation cancel good question press the pound Keith we would like to ask you to limit your questions Q1, and one follow up.
Your first question comes from the line and Dignan with Jpmorgan. Your line is now open.
Yes, hi, good evening.
First question.
That the and a call.
Actual.
Dollar cost that you incurred in Q4 on the backup that.
What do you have that dollar bad EPS impact. However, you want to get I tried the actual impact Patrick contemplating in at 2020 Q1 and beyond.
Hi, Dan so.
If we look at the if we look at the fourth quarter results and the transportation.
Segment, and if I look at it on a year over a year over year basis, that's probably the best way to look at it at an op margin level are and so at the operating margin level. We were I'd say five to six points a degradation in the transportation segment from.
From the which is primarily threefold.
First being hardware margins compressing towards the end of the the second phase of the of the mandate going into effect.
Second one word to some discrete one time costs associated with it things like over there updates, which drive cellular bells up and then a third impact was a bit of churn and the and the business that hit the fourth quarter as we look to 2020 in the business.
What I would set for expectations as a margin profile that's roughly in line with the performance of 29 team to think of revenue and profitability roughly roughly the same and so we have some aspects of the business and transportation that will will be improved.
Thing and growing next year with somewhat of an offset and the LTE side, which neutralizes that so I would expect in 2020, <unk> revenue and margins to be about the same.
As 2019, and that's all in service of getting the 2021.
Results.
In line and protecting the long tail subscriber base that we have.
Okay. That's helpful. On when you talk about AD sales clean line.
Are you talking organic like for like are you talking.
Including the two big Cubic's sales.
Mostly organic but there is some revenue that's associated with cubic so on an organic basis I would expect it to be slightly down and transportation and 2020 now part of the down that will also have in 2020 relates to our back office enterprise business, our troops, which has a transportation management system.
And we're beginning.
The conversion to a subscription business model, which will be negative at the at the top and bottom line, but obviously virtuous to the business model as we grow the trigger the air are in that business.
Okay, and just one final clarification on cubic's and when I looked up that's on its website.
Our second it popped up blends the AD free software.
So can you just talk a little bit about the profitability at that business and.
You didn't take will be a drag but is that just counting purchase accounting or is that lower margins.
On a go forward basis.
It is I want to be lower margin, and and 20 and 2020 and there's a call. It a freemium business model. So with over 21000 shipper participants currently using the cubic's shipping community. So a subset of those are paying participants in the model. So we're driving.
Suffer volume to the to the plan to the community and the platform to map to on a trimble side our carrier our carrier platform. So we think this is a.
Well, we think the very exciting space and the stability. We think we have to uniquely connect the supply and the capacity side of transportation. So in the short term it will be a drag to.
Yes.
And we think this accelerates our ability to go after this strategy. There's certainly a lot of transformation digital transformation happening in all of our markets. We think are at the front and center of that digital transformation.
This is the next logical place and our and our view and transportation as this connectivity between the shipper and a carrier. So if we would have done an organic inorganically and would have been an area, where we wanted to put incremental investment.
This is with the community of 20, 121000 carriers and growing 21000 shippers and growing.
Yes.
Just to US was the best what's the best in quick Us move.
Your next question comes from the line as Andrew the guest free Darren. Thank you line is now open.
Thanks for taking my question I guess first.
Could you quantify what the exact dilutive effect PPS is cubic's and then maybe secondly.
The 3% I guess headwind from the krona virus can you maybe expand on how you came up with that number.
Sure on the cubic side in 2020 or be it would be quite a few pennies of s.. So low single digit low to mid single digit.
EPS.
Hits from from that acquisition and the investments, we're making and the business and to stick to grow that business.
On the Corona virus so.
Hey, Here's the way we look we looked at it we have.
Business that we do in China, the caught domestic China business and then we have a supply chain and that comes out of China and it's less about the finished good supply chain, it's really more about the components that come out of China. So.
For the business that we have in China. It can take the 2% of revenue.
Looking to.
Mid guidance and call it close to 807 or call. It 795.
Take 2% of that cut that in half and you've got what we would estimate to be a hit potential hit their impact in Q1 that Doesnt bridge. The whole number the rest of it as railway supply chain dynamic and answer first there would be about one to one and a half weeks of relevant lost sales.
As a result of that so the way we would come up with that calculation is as follows we see about a three week and so this is what's baked into our numbers, we see a three about a three week I'll call. It delay the first is Chinese new year as extended one week.
The second as that we're midway through the second week, where our factories are coming back online ours included but most of these factories are running at about a third.
Capacity do that and due to the nature of how they are the officials are allowing people back end to work.
And then the third week of potential delay, we see is relative to the freight.
Freighters moving slow out of China commercial carriers arm, our current flying to China right now so theres additional freight time, a lot of which is going to Hong Kong to then get.
Out of out of the region. So if you take if you add those week a week a week up you get three weeks. We figure we have we estimate we have about two weeks.
I'll say, a buffer and supply and inventory so three minus two equals one we apply that to the the relevant relevant revenue assurance could remember is not all the revenue streams would be relevant and this analysis.
And you get the you get to 3% we talked about.
The air our if I look at the air our specifically, we would not expect an impact on than an annualized recurring revenue coming out of the quarter. So this really is.
Mostly centric to the hardware business.
A lot of detail. Thank you.
Your next question comes from the line Richard Eastman with Baird. Your line is now.
Yes. Thank you thanks for the questions.
Could you just speak.
The balance if we're looking in 2020 court ruled zero to 3%.
Maybe just some thoughts around the B B Eni business. You said is that kind of maintain a single digit growth rate with maybe a point headwind on the.
The deferred revenue side or just maybe just go through the other three segments here are in you and geospatial and B.
Relative to the zero to three.
Sure Rick So I would think about first half of the year second half of the year with your second half of the year at an accelerated growth rate.
As compared to the first as opposed to the first half of the year. If we look at it at a segment.
More of a segment level.
I'll give you kind of a high level view of that buildings infrastructure would.
For us be on or I'd say on Apple to Apple basis, the strongest segment coming into 2020.
What we'll see in addition in buildings infrastructure. This year is is the subscription conversion, which does create a headwind top and top and bottom. So you've heard me talk on the last calls about the success that the viewpoint business than the builder business have had as part of the Trimble.
Portfolio and they continue to port perform well at the end of last year.
Sketchup product, which is an architecture and design business.
Initiated the conversion and 20000 to I'm, sorry, 2019, and 2022 and 2020, we would hit the bottom of that trough. So we would hit decrement there and then really come out starting in 2021, and then we expect to start to see a couple of other businesses with software businesses when it within construction.
Began the begin the transition maybe really towards the back end.
End of the year. So those are the dynamics happening within buildings.
And infrastructure, we look at the geospatial business.
I will say the assertion we have on the areas. We we started out on the rough patch because the corona virus impact as quite centric to geospatial.
Before reporting segments and as we come through the year, we get some other lapping effects as we.
From the start to lap the OEM.
Challenges, we had last year I look at the resources and so ladies business.
Bit of a tale of two two halves of the of the year. Some of that's a lapping effect, but the standout performer actually as our utilities business.
Has been performing nicely in the second half of 2019, we expect to see that performing and driving growth and the business in some of that as acquisition. The three acquisitions, we talked about Raul and resources and utilities that we had announced and the fourth in the fourth quarter and then transportation.
The.
The way answer Dan's question I would answer it same when I think about the first half of second half for the year as is is revenue growth.
Really pretty even throughout the year low throughout the year any and even.
Okay, and then just maybe maybe one last question on the.
On the on the been business itself.
Any how did you perform in the quarter and then has there been any.
No negative impact that you could see from from the Brexit.
There were some questions about that but anything anything kind of materialize or visible there.
And by the time it rolls up at the segment or the company level it doesn't become it doesn't become material.
Certainly there appears to be some.
Well I'll say more clarity I guess, it's not perfect clarity of where thats clarity of where it ends, but maybe not clarity of how it ends.
But that increased clarity, okay can provide some stabilization.
And the market, what I would want to say as the the segment had a our that sub segment of buildings and infrastructure. The bem businesses had a really nice fourth quarter.
Some of which would have been the 50 Threerd week, we had but really if I look at the fundamentals star standout performer was that architecture and design business. This catch up transition to subscription we saw 50% year over year unit growth every single quarter.
Last year really just a tremendous performance from that.
Team and showing the possibilities of expanding the addressable market through the model conversion.
Excellent okay. Thank you much.
Your next question comes from the line Jerry Revich Golden Med Goldman Sachs. Your line is now.
Yes, good afternoon and good evening.
Hi, Jerry.
And your subscription growth.
We performed nicely in the quarter accelerating from 30% to 18% despite headwinds that you spoke about.
In transportation can you can you just talk about what parts of the business performed well then how began.
Headwind was good churn in transport I appreciate poor points from extra week, but still.
The underlying performance looks like it accelerated.
If I started at the top to top level, we would have expected to see in another three points of air our growth from the transportation business were it not for.
Some of the churn and then if I look at the.
If I look at the segments it under under lie at the buildings and infrastructure.
Businesses, we're really the standout performer in terms of growing the recurring revenue in the quarter secondarily and our resources and you told his business that positioning services I know you've written reports on an era teekay networks or whether it's our R&D care, our TX networks that we.
Provide ubiquitous and accuracy to customers on a global basis.
At another outstanding quarter, an outstanding.
Okay and indeed.
Subscription momentum you mentioned a moment ago.
Shrunk performed puts catch up.
It sounds like bill pipeline to be.
And.
Teekay is pretty strong as well based on your comments on the call. So is this level of double digit subscription growth.
So suitable into the early part of 20 based on the pipeline that you folks see who each of those segments.
In aggregate, what I would expect to see is.
At the high single digits in the first half a year and in the possibility for the double and the second half of the year and the Delta on that is the transportation business, we see getting back to.
Where we want to our towards where we wanted I should say in the second half of the year and that would be opportunity to get that back and the double digit on organic on our on an organic basis.
And lastly, Red line to quality you spoke about essentially.
Well fewer reporting business segments and more central Trimble initiatives can you give us an update on your plans for engaging.
Equipment.
For the other businesses based on what success you had seen Chubb any change you plan on I think in the past you had outlined $500 million worth of potential translation codes subscription.
I'm wondering if you could sort of update that and give us.
So I mean and cadence as you work through the plans.
Yeah, So what I'm talking about before moving closer to about 450 million of perpetual.
Revenue that we have that we would look at and and analyze and ability to convert to subscription not all of that will make sense to do the plan. We have is to accelerate the path that we were on for that a good amount of that will take this year 2020 to do the underlying.
Planning and infrastructure building to start delivering upon it in 2021 and I would say in some cases, it's a multiyear acceleration of the plans to move towards subscription.
Two places where I would expect to see if the most on the software side would be and and the Bim software on the construction side and secondarily and transportation in the back office software that we have those are the follow the 80 20 rule and those are the two big opportunities represent the two big opportunities we have to accelerate trends.
Question I'm committed to.
Yes, I'm, making the investments we need to on the underlying systems and plumbing of Trimble in order to help us execute upon the conversion strategy. It's the right thing to do for the business and I think.
The and the potential as I think.
Outstanding for for the for the company when we do this and it's more than just converting to a subscription business model for the sake of changing a business model in our strategy. When we talk about connect and scale 2025 as connect to life cycles that we serve if we're going to connect the lifecycle that we we serve we need to be able to deliver.
Integrated on bundled offerings of the hardware and software so.
Talk about Configurable packages are collections of the solutions that we have so we think on many fronts that this enables.
Additional opportunities down the line and ultimately I think this can enable a data strategy for trimble. The other place to look out for this year.
For us is on hardware side and will have dropped that a couple on a couple of calls that will investigate and experiment with some hardware as a service type business models and those may show up as a term licenses in the ended May we'll have to bridge for the street when were.
I'm trying that one thing to now about the term license offer by the way as it sits at about $75 million and that's not picked up an EMR.
Which although right and the old accounting and 65 accounting that would have been considered recurring revenue. So thats missing when we talk about that 1.3 1.13 billion of air are that excludes the term license software cap as well, which is an attractive revenue stream.
In addition to converting additional businesses to subscription and software meats, starting to make some experimentation on the hardware side.
Okay.
Your next question comes from the line, Jonathan Ho with William Blair Your line open.
Hi, good afternoon.
Just wanted to start with the strategic realignment and sort of the business unit sharper sharper focus that you talked about what does this may be allow you to do that you couldn't during the past and sort of what's the impact on visibility and having that maybe tighter span of control.
What I think it I think about clarity when I think about reducing the number of segments. So if you take the construction business as an example, and we're pursuing a strategy of connected construction and agriculture, we talk about connected farm and transportation, we talk about a connected.
Supply chain. So this connectivity is central to the strategies that were pursuing I'm a believer in single points of accountability I am so in the construction business. We have a single point of accountability for affecting positively affecting the strategy to connect construction, so the extent to which we need to make capital allocation decisions.
And priorities and trade offs I'm, we're doing so now within construction under one leader as opposed to what would have been multiple leaders.
Reporting I guess, given they all cost structure multiple multiple leaders reporting to me.
It consolidates that effort within construction, so I think we can be faster.
I think we can be better as a result of the.
Of the structural reorganization that we made so that clarity into directional clarity and to prior priorities speed at which we can make decisions. I think these are all really important things in terms of visibility, let's say and if you mean visibility into the financials in the pipeline the visibility increase.
Is going to come as we get more and more recurring revenue.
And the business you know as David mentioned now I think it's 34% of our revenue is as recurring that keeps going north in this business and these businesses and.
And that will be that'll be a good thing for for the visibility.
Got it and you reference you may be some impacts from I guess private investment in M&A activity in the in the the industry can you talk about maybe where that's most pronounced and whether thats actually change some of the competitive dynamics as well. Thank you.
Sure Jonathan I think its most pronounced in construction and transportation and if I back up at a secular level to me the secular context as the digitization of industrial markets and so from a good news perspective, its validating that I think we're playing on the right field. We've been doing this for 20 plus.
20, plus years Trimble.
And at some point right as the thesis played out that there would based market for 0.2 and are going under a digital transformation and ultimately is going to attract capital than you had an event like L.D. as a government mandate in North America, Okay, that's going to attract capital on its own discrete basis based on the Companys having to have the technical.
LNG either have it are you doing NAFTA you have to have it so thats certainly created a level of.
Disruption and and the market and I'd say disruption on a number of levels because a good amount of the competitors that came out of already gone out of have already gone out of business, just and because capital comes into a market doesn't mean, it's smart money that comes.
And to the enter the market so thats benefit of what we've seen and transportation and construction to an extent as well and our construction as such so.
A large and fragmented business I'm on on really on a global basis that I would say that's been.
Less less disruptive, but those are the two places Jonathan where weve.
Where we've seen our recent capital come in.
Thank you.
Your next question comes from the line, Jason familiar with Keybanc Your line now.
Hey, guys. Thanks for taking my question really just one for me when you talk about your operational focus and some of the changes you're making how should we think about the pace of change and and is it's going to be multi quarter time initiative or an ongoing kind of gets focus.
Well, that's a dramatic level, let's say it's.
Yes, so words.
And we've defined our strategy as we call connect and scale 2025, we work backwards from what we see as the between 25 opportunity in our and our business to get to that.
2025 strategy, we were installing an operating system that simultaneously looks at strategy people.
An execution and we talk about renewing the culture at Trimble The foundation, which is built upon inspire engage and achieve transpire purpose, we engaged to get the best out of one another and we orient to achieve.
Outcomes that I would say as an ongoing.
Thing for us and don't intend to change that in the coming months quarters years, I would call that the the constant as we move forward.
To get to your question about let's say what would change and what you should expect certainly we.
We'll be talking continue to be talking about the subscription business models and Thats something we will continue to update investors on that's why we think it's the right thing to do in the second half the year staff have another investor day came David and myself being new under the respective roles and we're talking about model conversions. It just sets up a logic.
Paul.
Timing to do that in the second half the year to get more specific about what that means on a mid to long term.
Basis, so that would be probably the thing I would point out in terms of to watch for the ongoing commentary around otherwise the rest of.
What I talked about I would say is ongoing.
Okay, Great now that's really helpful. Thank you.
You bet.
Your next question comes from the line James O'shea with Morgan Stanley. Your line is now open.
Hi, Tim This is Eric on for James Thanks for taking our question, maybe just touching on the 2025 strategy and kind of how you're thinking about the portfolio is your reviewing it.
Are you contemplating or thinking about other potential small exits first as part of the strategy.
Is there kind of still general acquisition acquisitive kind of motions that you're planning and maybe just how we should think about that part of things.
Sure. So one way to think about the connected scout 2025 strategy when Moran.
I'll say the strategy pillar, we're looking at them the nature of the markets that we serve so we need to be serving markets that have attractive fundamentals to we need to have the right solution set this delivering customer value.
Entry, we need to optimize the go to market model. Those are the three things we think about within the strategy. So when I look at and we look at the market attractiveness I'm and map that to say the portfolio of businesses that Trimble I'd say that access to the X. and y. access to think about or the two by two is it's going to be financial performance on one.
Access and strategic fit slash important.
On the other.
Okay, low and low and that matrix is not the place to be and and so when we think about what makes strategic strategic fit or could that can have on its own set of dimensions to it and aggregate when we look at the portfolio Theres, maybe 5% of the revenue that we think is relevant to take a harder look out so far.
5% not 10 20.
Five 5% that does represent potentially a number of businesses on an aggregate answer the extent side, we believe that we can be.
More focused as a team and I was really kind of becomes more focused with the management bandwidth CMBS more focus with capital that more focused with our our bandwidth.
We want to put that bandwidth, we have to impacting the strategies and I was five businesses that we.
That we talked about so that'd be the let's see the potential exit side of an analysis and the portfolio from an.
Additive side to the portfolio I would expect us to be.
Acquiring on an ongoing basis within say constraints of the.
Oh.
Sorry, and liquidity in the debt structure and right deal right right time look at our long baseline we've been an acquisitive company over time, we don't acquire for the sake of acquiring it's to positively impact in effect. The strategy as we look to these to define the transformation digital transformation on the markets were serving Cubic's is of course, an example of that.
We had announced this three deals and.
In the fourth in the fourth quarter so I.
I would expect.
To be open to the right opportunities over overtime.
Thanks, So that's really helpful for Rightsizing, our kind of our expectations on that and then maybe just.
Switching gears a bit to I know that you touched on like the phase one trying to us trade deal not having much of an impact.
Improvement and kind of conditions that your eye customers are seeing what do you think needs to change to to actually have an impact there.
Maybe how you're thinking about that.
I think it's relatively simple we moved from the phase one signed piece of paper to purchases happening purchases happen inventory goes down.
Money comes and part of that as farm income goes up capital is outlaid that'd be the chain I would draw on that now and between now and then what we would see I'd say on a positive side.
ER positive side for Trimble is that equipment in the field is aging.
And the nature of the technology, we have can make that equipment more productive. So we do look to upgrade.
Technology, that's in the field and we're not just dependent on new.
Machines coming off the line certainly helps when their machines.
Come out into the market, but the majority of our business. The strong majority of our business as an aftermarket business and I should add for context as you think about.
Modeling us.
Our agriculture business in North America is now minority.
Of our of our business in AG, we did used to be two thirds North American business, it's now and versus that the bulk Europe's now our largest.
Market.
So weve diversified geographically over these last over these last few years.
And the agriculture business, that's how we think about the trade deals. So it's clearly a good thing that.
We have the deal and now it looks it needs to play out.
Got it that makes sense. Thank you.
Your next question comes from the line called English with open Jaime Your line is now.
Thanks, So much you know we're taking these comments around the franchise and autonomous can you provide some additional detail on on what their franchise looks like should we expect it to.
Separate business line at some point and how are the capabilities can be separated out from existing businesses.
Hi, Kolon, so we think about the.
Let me work backwards from the market opportunity that we see.
We see.
A set of.
Markets and capabilities, we can serve on highway and then off highway.
I think about off highway.
What we do in agriculture, and construction, we call machine control and guidance, so thats level between level one to autonomy already today, we just never called it out on that so to the nature of the guidance as already on a spectrum I.
Im autonomy and we'll continue to work our way up that up that spec autonomous spectro towards the level five I, we think the way to get there if they extend automation into workflows.
Yes, both in agriculture.
And then construction and we also think when you bring together the whole portfolio of Trimble and we talk about connected construction are connected farm and if you really extend that analogy all the way out and we've got level five autonomy at some point in time those machines need to know what.
We need to work for the need to plan need to fit inside some of their system and guess, what we have those systems by virtue of the connection the physical and digital to feel the office the hardware and software that we do today, we think we're really well position to do that and so we're bullish on the opportunity we have there when we look at on highway.
World, We've been a arguably you could say a supplier.
In addition mapping systems, we sell a positioning stack of technology as you can trace back to 41 year history of Trimble and roots and positioning technologies, so whether it's our T.K., our TX providing correction services to our inertial technologies to dead reckoning technologies to the GPS chipsets.
We have we have a set of technology, that's relevant and world moving towards autonomy.
Hi way and like off highway it may start with the automated driving systems.
Yes systems, where we're doing work with companies today, whether it's the Oems are the tier ones and so we see continued.
Say.
Set of possibilities interesting in attractive possibilities to us in that world. So then what we did structurally it's I guess organizationally is we looked across the company, where we had.
I will say pockets or divisions are businesses.
Had relevant technology in the world of up and the roadmap Ami and we brought those together under one leader so rather than having a set of potentially subscale efforts at a number of different parts of the company, we brought them together and to.
To that to that.
Ontario, one leader one one direction.
So we feel really good about it and it also maps to the geospatial business quite well so we think about.
A good number of these businesses are with our geospatial reporting segments. So you'll have a fair amount of technologies Matt.
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Thanks, So much and then just looking at the cash conversion that continues to be strong and.
Environment, where you've got persistently low cost of capital and the debt markets.
How does that impact your acquisition strategy and the potential to acquire some significant capabilities as you work towards this connect to scale target over the next five years I mean are there transformational.
Position like you've done in buildings and infrastructure that can be replicated another other segments, particularly on the transportation side.
Well, we're certainly open open to it if it's the number is clearly if it's consistent with the strategy and we've been and.
We are investment grade and so we'd like to maintain investment grade status that right sort of balance.
Let us leverage set of parameters of course, you can go above that and work your way down there and in due course.
We think we are strategically positioned and a very attractive place in all of its really in all day end markets that we serve and we want to continue.
To lead those end markets that we serve and so to the extent the transformative deals present themselves. We would certainly be be open to it again, if it fits the strategy and.
It's the right team and the right culture fit in and if our businesses are in a place too.
To be ready to UBS absorbed the work.
To do that I will say by way of.
Context or backdrop on the market's run.
Really not a lot of deals that are companies out there that actually kind of hit the threshold that of that size, we've talked about that more and construction that we havent transportation, but say on the construction market.
You know within about an 18 month 12 to 18 month time span of when we did the viewpoint and even older deals small set of companies that were operating at scale, we're largely or acquired and pretty short order. We look at markets like agriculture, Theres really if you look at AG software company, there is not AG software companies or.
Scale.
Then you get to transportation, which is where you are and.
There's a few but any.
Perfect. Thanks, so much guys.
This concludes our DNA session I will now turn to call that back to Mr. Michael late.
Thank you everyone for joining us on the call. We'll look forward to speaking to you again next quarter.
Ladies and gentlemen, this concludes today's conference call. Thank you.
You may now disconnect.
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