Q1 2020 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Trimble first quarter 2020 earnings Conference call. At this time, all participants are in listen only mode.
After the speakers presentation, there will be a question and answer session.
To ask a question during the session you will need to press star one on your telephone.
Please be advised of today's conference is being recorded.
If you require any further assistance. Please press star then zero.
I'd now like to and the conference over to your Speaker today, well painter Chief Executive Officer. Please go ahead.
Good afternoon.
Coping 19 is on the forefront of everyone's mind.
A presentation format will be different this quarter and the structure to address topics that seem to be top of mind amongst our long term shareholders.
There's always a presentation is available on our website and we ask that you. Please refer to the safe Harbor at the back.
Before we start walking through the slides we want to acknowledge that this is an extremely challenging an uncertain time for all of us that everyone listening has their own unique set of circumstances they are dealing with.
Well. These calls are designed for investors for employees are also active listeners in fact over 40% of our employees or shareholders.
As such these updates speak to both audiences.
Current environment, we lead with a more principle to support the health and safety ever community, including employees customers and dealer partners.
We also lead with a strategic principle to keep our business moving forward.
We have customers and partners, who rely on trimble to keep their businesses running.
The good commerce defeat the global population to build and maintain or infrastructure anymore.
Hurt filled gratitude.
What the level of dedication result from our over 11500 trouble colleagues worldwide network dealer partners and our customers.
As a leadership team we activated a comprehensive global business continuity plan in early March.
The vast majority of Trimble is working remotely and we're in the process of defining when and how we gradually return to our office environment.
The ongoing economic impact of trouble correlate to win in how we and our customers establish a set of new normal working conditions.
Well it feels like we can see the light at the end of the tunnel. The factory means that there are still a great deal of uncertainty.
The essence of are planning has been to plan for the worst case scenario and hope for the best.
We took early and decisive action and I'm incredibly proud of how our team has rallied together as one trouble.
We will get through this crisis, we are well positioned to observe endure the macroeconomic shark and we will emerge stronger on the other side of this.
Well, we are managing to short term realities. We are also equally focused on executing our long term strategy.
But ship to the presentation.
Slide two has the seven key messages, we want to address today.
Because I just highlighted for team has risen to the challenge and this is 0.1.
Point to our first quarter results exceeded expectations, demonstrating the quality of the Trimble strategy and the financial strength in the first 11 weeks of the quarter Big Thank you to the trouble team.
Point, Threex, our balance sheet and access to liquidity remain emphatically strong.
Putting for as we look to the past to inform the actions of today, the multiyear execution of our strategy and the transformation of our business model has established more resiliency than at any point in our history.
0.5, we took early and decisive management actions, including increasing liquidity and implementing broad based temporary pay reductions to fortify the business my commitment to our Trimble team is to restore pay as soon as possible.
0.6, we're suspending guidance and we will be as transparent as we can what the puts and takes we are seeing in the market and in our business.
0.7, the cumulative actions, we've taken enable us to stay true to our long term strategy connect and scale 2025.
No changes.
Moving to slide three the message here is that our business is essential and her team is leading.
My opening comments address to much of what is on the slide.
Before I turn it over to David Slide four offers a few examples are no trimble is helping our customers and communities. During this time.
Transportation business for team is offering a free service to display and collect current truck stop status in a minute t. information.
We're also offering free driver trip planning to suggest open truck stops and rest areas.
Our leasing team has put together programs that are in enabling customers to extend payment terms.
In our communities I'd like to highlight or city works team, which is offering a web based G.I.S. centric platform for local governance governments to manage their emergency response efforts.
David.
Thanks, Rob turning to slide five non-GAAP revenue for the first quarter was $794 million.
In the middle of our guidance range, despite greater than anticipated weakness in demand late in the quarter as the pandemic impact like.
I'll note that Q1 revenue reflects outstanding management of the supply chain disruption coming out of China.
We exceeded our initial expectations in fulfillment of customer demand. Despite the fact that the shutdowns in China were more severe and longer lasting than we anticipated when we issued guidance in mid February.
Total revenue growth for the quarter was minus 1%, which included minus 2% from organic growth and approximately minus 1% from changes in exchange rates as the U.S. dollar strengthened during the quarter.
Acquisitions added about 2% to revenue during the quarter.
A recurring revenue was strong with annualized recurring revenue or a are up 7% year on year end up 6% on an organic basis note that this represents about a 1% acceleration from a or our performance in Q4 of 29 team.
Gross margins operating margins net income and EPS improved versus prior year EPS came in well above our guidance range.
Margins improved during the quarter for a number of reasons gross margins were higher year on year, driven principally by an improvement in mix as our higher margin software businesses performed relatively well during the quarter.
Lower levels of discounting and the introduction of higher end new hardware products also improved margins.
As the impending weakness in the economy became apparent we pulled back on discretionary spending including travel and outside services and we reduced our rate of hiring.
In addition, our expense relating to incentive and commission plans was reduced meaningfully during the quarter.
Note that the temporary pay reductions Rob mentioned in his remarks did not take effect until the last week of Q1. So we will see the vast majority of that cost benefit beginning in Q2.
Turning to slide six we're showing here revenue and profit trends by segment and I'll touch on the factors, which are expected to drive the sector businesses going forward.
The resources and utilities segment had a strong revenue and profit quarter driven by demand in the agricultural sector for aftermarket products and correction services.
Late in the quarter, our OEM business was impacted by factory shutdowns, but end customer demand proved to be solidly resilient through the quarter.
Revenue trends were aided late in the quarter by customers buying product in anticipation of shutdowns in distribution and manufacturing facilities.
Our buildings and infrastructure segment had organic growth in the quarter, driven by our civil business and growth in our recurring revenue offerings.
The organic growth occurred despite march weakness in project starts and bookings.
With a notable exceptions most ongoing construction project activity continued despite cobot 19 related work restrictions.
The Geo spatial business got off to a strong started in the quarter driven by new products and by the timing of dealer orders March results were much weaker both because dealers drew down inventories and because demand began to weaken with the decline in oil prices and the implementation of shelter in place rules.
Transportation revenue was weak in the quarter driven in part by the factors we discussed in our Q4 2019 release.
As you'll recall, we've experienced challenges related to the implementation of the yield the mandate and our telematics business.
Revenue trends weaken further in March as the Cobot 19 crisis to cold.
During the quarter, we made significant progress in addressing product functionality gaps and partly as a result, we're seeing lower churn coming out of the quarter.
Going forward, we plan to accelerate the transformation to higher performing hardware across our customers fleets.
While these steps will put continued pressure on margins. This year, we believe they will position the business for stability later, this year and growth as the market returns to more normal conditions.
Transportation market in Q1 was a meaningful turmoil relating to the pandemic providers to food retailers saw significant spike in demand well trucking company supporting capital goods or energy markets experienced a significant reduction in freight demand.
Overall, our business was impacted in March by a deterioration and market conditions and a decline in the number of trucks on the road.
I will note here that our maps business, which has a recurring revenue model saw strong demand through the quarter.
One additional observation about the timing of revenue trends within Q1.
Revenue growth was strong through the first two months of the quarter and then weakened in March as the Cobot 19, Pat pandemic took hold.
Revenue growth was in the high single digits through the first two months of the quarter and then was down in the mid teens in March.
I'd also like to comment briefly on the trends we've seen in our business. After the full cobot 19 crisis hit in March.
Art with our recurring revenue, which remains strong even in this period of facility shutdowns and economic weakness.
Customer retention so far is in line with our pre crisis experience.
Our enterprise systems are critical for clients operations.
Approximately 75% of our recurring revenue offerings represent field or enterprise software use day in and day out in the course of our customers businesses. So as long as our customers remain in business and projects activity continues than our products are essential.
In fact usage of many of our systems has grown since the crisis intensified.
We are however, seeing a delay in bookings of recurring software as customers rethink their priorities and cope with facility shutdowns, but this will have only a small impact on a revenue in 2020, and we're holding our share of the new awards that are coming through.
Our nonrecurring revenue businesses, our unsurprisingly experiencing more adverse trend since the cobot 19 crisis expanded in March.
Our OEM hardware business, which collectively makes up less than 15% of revenue have been significantly impacted by the shutdown of many of our customers production facilities hardware sales have been adversely hampered by worked restrictions that are dealers and at their customers while much of our professional service business has been in.
Impacted by the lack of access to our clients people and facilities.
Encouragingly, we entered Q2 with over $1.2 billion, a backlog of this amount roughly $250 million is from our nonrecurring revenue businesses.
This is the same period last year, we expect the majority of that backlog to convert to revenue this year.
Turning now to slide seven.
Our cash flow balance sheet and access to liquidity remained strong.
During Q1, we generated $156 million of cash flow from operations up 5% from the prior year.
We ended the quarter with $217 million of cash we have re negotiated terms of an outstanding term loan to extend the maturity from July of 2021 to July of 2022.
As you can see from the table, we anticipate no principal do on any of our outstanding debts. The next two years. We also have over $1 billion of untapped borrowing capacity on our credit facility.
Our outstanding debt is rated investment grade by both Moody's and S&P with stable outlooks from both agencies Moody's just reaffirmed their ratings stable outlook in a report issued last week.
We finished Q1 with financial ratios comfortably in compliance with our credit line covenants, we have a strong primary focus on ensuring credit facility compliance and access to liquidity as remodel potential scenarios for business in the coming quarters.
Our business generates significant cash flow consistently in excess of earnings even in times of economic downturn.
Our financial modeling shows that the business would continue to generate significant free cash flow, even an environment of revenue reduction significantly worse than what we saw it in the global financial crisis.
In summary, our balance sheet is strong and we have taken action to further strengthen our capital structure as the cobot 19 crisis has unfolded.
The current capital structure and the demonstrated ability of our business model to generate cash even under adverse scenarios gives us the platform to weather the crisis and to continue to execute our strategy.
Turning now to slide eight I'd like to point your attention to several ways in which our business model has evolved since the beginning of the last two phases of real weaknesses in our end markets. The global financial crisis at the end of 2008 in the commodity price declines of several years ago.
Note that in 2008 hardware represented nearly 90% of Trimble revenues and that the Geo spatial segment made up just under half of our business. This revenue mix left us highly vulnerable to reductions in capital spend in a number of markets, especially oil and gas.
With this business mix Trimble revenue declined 15% in 2009.
In the last 12 years, our model has evolved significantly with hardware now making up less than half of our revenue in our sector in geographic diversification leaves us better able to withstand any focus reduction in capital spending activity.
As I noted earlier, the one third of our business with the recurring revenue model is holding up well through the first months of the cobot 19 crisis.
The point here is that our business model is more resilient than ever with a more diversified and stable revenue mix.
Turning now to slide nine I'll talk about efforts, we have undertaken across a number of areas to fortify our business for the recession, we now see coming.
From a capital allocation perspective, we have taken a number of steps to ensure that our balance sheet remains strong.
We have temporarily suspended our share repurchase program and put a hold on significant new acquisitions until we can see clear signs of recovery in our business in end markets.
As I noted earlier, we've negotiated an extension on the scheduled maturity of an existing term loan.
From a cost perspective, we have taken action on a number of fronts.
These actions included an immediate reduction in discretionary spend like travel lower forecasted payouts on our incentive plans the elimination of our planned annual salary increase and a broad based temporary salary reduction program.
The salary reduction program, which took effect just as Q1 ended reduces our payroll base of $200 million per quarter by approximately 10%.
Note that the reductions were implemented in a progressive approach many of our frontline workers receive no reduction at all while our CEO board of directors and senior leadership team have accepted temporary reductions of 50%.
The $20 million per quarter salary savings, approximately 75% or $15 million per quarter will show up in operating expense with the remainder in cost of goods sold.
The salary savings when combined with our other cost reduction initiatives have reduced our quarterly run rate of operating expenses by roughly $30 million per quarter lower than the first quarter 2020 run rate and $50 million per quarter, when compared with our pre coded Twentytwenty plan.
From a supply chain perspective, we plan to keep doing what worked well for us in Q1, as we manage the disruptions in China.
Our team has shown an ability to be creative and flexible in responding to whatever disruptions, we see in the market and we were constantly readjust our plans to ensure that we meet evolving customer demand.
Now I'll turn it back over to Rob to talk about our views looking forward.
Let's move to slide 10.
Well, we're suspending our second quarter and total your guidance. We also want to be transparent and talk about the areas, where we have more and less visibility.
David described a number of ways on what's your business was impacted in March as the economic slowdown to cold.
I'll expand on those comments and give you some thoughts on how we see our business trending in the second quarter.
The overall performance of the quarter will correlate to the opening up a global economies and the return of more normalized demand patterns.
The areas of the business model, where we have the most visibility and confidence includes air our gross margins and operating expenses.
Our our represents approximately one third of our total revenue.
In the second quarter, we expect this to be up in the low single digit range on a year over year basis.
We'd also expect to see modest gross margin expansion as our revenue is increasingly weighted towards software centric revenue.
Relative to operating expenses, David covered the cost containment actions we took.
And our nonrecurring revenue businesses, new hardware demand and new logo software bookings growth has been depressed during the shelter in place time.
We are digitally engaging with prospective customers and building or pipeline, but the fact remains at the rate of deal closure levels are below what we experienced at the beginning of the year.
Looking at our reporting segments and taking a view of the puts and takes in the end markets. We have a point of view on the relative performance, we expect across the segments.
On a year over year basis, we expect revenue and all reporting segments to be down in the second quarter.
We expect resources and utilities to outperform amongst the segments driven by a correction services and utilities businesses.
On the other side, we expect geospatial to underperform amongst the segments given the hardware syntricity of the reporting segment.
Turning to our last slide I want to step back for a moment and revisit two of the three first principles. We established upfront during the crisis. We said, we would protect and strengthen the core trimble and position ourselves to exit the crisis in a stronger competitive position.
The underlying investment thesis of Trimble is stronger than ever that is the digitization of end markets that are historically underserved and under penetrated with technology that delivers productivity quality safety visibility and environmental sustainability to our customers.
With that backdrop, our long term shareholders expect us to deliver long term sustainable value.
We believe we have taken the responsible short term actions to confidently whether the economic crisis, which allows us to stay focused on her connect and scale 2025 strategy, which we believe is more relevant than ever.
The takeaway here is that we will play offense on core elements of our strategy in particular, the transition to subscription revenue models across our business.
We will also continue to invest in business processes and systems to accelerate the strategic transformation.
As evidence we're pulling forward some of our transitions into 2020 in 2021.
For example, we launched our transportation management system as a subscription offering and we now see more than half of our new bookings being subscriptions instead of perpetual license offerings.
There is another important example at Conexpo in February we announced what we're calling Trimble platform as a service the bundles are machine control and guidance kit, along with Trimble productivity software into a subscription offering.
Customers will benefit from technology assurance and a platform that can be feature upgraded.
They also benefit by converting to an opex model and being able to more easily charge machine time to specific projects.
We further connect this job cost information with her viewpoint construction ERP system and our work so west platform that bring together data elements from other trimble in non Trimble technology into a single tool to remotely manage productivity in uptime of to site.
And our agriculture business.
We're now offering bundles of our guidance hardware, along with our software and correction services.
The aim is to make ourselves easier to do business with and to reduce friction in the buying process.
Next our strategy guides us to further connector industry Lifecycles.
As evidence of our progress in the construction market, we expect Trimble connect to reach 10 million users in the second quarter and we currently have over 80000 active multiuser projects being managed and connect.
This user base provides a platform to deepen our customer engagement over time and more importantly than ever provides an environment for them to continue to collaborate on projects from anywhere.
Finally, we have not pulled back or R&D efforts, and we will continue or 40 plus year history of innovation.
Two examples I want to share here.
First at Conexpo, we announced our earthworks 2.0 system that enables extensibility of the based platform.
For example, we launched automated horizontal steering capabilities, which advances our progress on the path to economy.
Using this platform, we demonstrated remote control capabilities and operated a set of equipment in Dayton, Ohio from the show for in Las Vegas.
Second in our correction services business the team achieved a great milestone in the quarter completing a multiyear effort deploying our our TX fast technology across the contiguous U.S. parts of southern Canada and much of Western Europe.
We now covered nearly 5 million square miles with RPX fast capability, which allows users to realize once in a mere accuracy in less than one minute via internet or satellite broadcast our kicks fast is ideally suited for autonomous on road and off road applications.
To conclude I would like to thank everyone for your time and your support in a special Thank you to our global Trimble colleagues operator, let's please go to acuity.
Thank you, ladies and gentlemen, as a reminder to ask a question you. When you Press Star then one and you touched on telephone to withdraw your question. Please press the pound key.
And our first question comes from and Degnan from JP Morgan. Your line is now open.
Hi, Good afternoon, I guess, it's afternoon your came as well as though so.
Okay all of you.
My first question is.
The resource business and it really performed significantly better than we had anticipated or our forecasted can you just talk a little bit about what actually happened there and how sustainable the margins are there or.
As a one off rollout of southern new product. Thank you.
So yeah. There was a few factors that contributed to the outperform.
In the quarter.
Which include some of the following so it wasn't early planting season overall, which we think hope the business to some degree.
To the credit at the team the new product introductions that did have come out in the last month seem to be doing well in the market and we think that that contributed.
The other part the 10 resources and utilities as reporting segment as our correction services business as well as a set of utility and local government businesses. We have our correction services business had a very strong first quarter, which we believe us a quarterly to not only to the health of the business, but the or the early planting season.
And then our utilities business has been coming along nicely and those cities City works acquisition.
That that we completed a few months ago has up to it is off to a nice start so a number of factors came together in the reporting segment.
To set up a nice quarter.
And if that Q1 was supported by the early planting does that mean margins have peaked for the area. Despite everything out that's going on but seasonally we would expect Q1 margins being the strongest.
Yes, that's a good point and that would be correct.
Okay.
And then buildings and infrastructure.
Hello.
How lack of how little visibility do you really had on the hardware side in that business, just given what's going on wit and construction equipment production and then sales I know you, let's do that as a risk in one of the further I've outlined but could just and Thats, where do you see the greatest risk to your business in buildings and infrastructure.
Thank you.
Well, there's certainly less visibility into the hardware business than.
Then the recurring revenue software, we have done that reporting segment, if I take it from an angle of sentiment from customers I would say, we're hearing mixed reports from customers so far.
On the positive side, we came in as we came into the first quarters, our customers had backlog and the sentiment was strong and then as the virus to cold projects, clearly slowed down or halted and that was a negative at the end of the at the ended the quarter.
So here in the next few I'll say weeks or months as our customers get back to work, we expect I'd say the hardware side of the business to proverbial week come back to work as well.
And now what I would say as as we also hear some concern about work coming into two art looking forward into 2021, and then we also here shipped and sentiment as you would expect around some of the market work, so something like commercial work or energy related work will be difficult.
Work, such as hospitals or data centers would be would be good. So the mix of workers, we expect to change as well.
So thank you rank order your customers and be Eni and construction equipment, probably the weakest sentiment maybe or contractors next given projects just stopped and then.
Maybe the later second the architect Central and maybe a little bit less impact at this point is that fair characterization and I leave it there. Thank you.
Oh, that's pretty close I'd say I mean of the software businesses overall, though the work. We do is is essential nature. If it's an ERP system, you're either end business or you're not in that can then.
You know the technology continues to be fundamental to the business and.
And used the.
And is the next category I would take the construction equipment, let's say the contractors and then a third would be the OEM so OEM related revenue.
That we have I would put it at the bottom of the of the of the list and the rank order.
Okay I appreciate the color I'll get back in line. Thank you.
Thank you and our next question comes from Rob Worth Meyer from millions research. Your line is now open.
Yes, hi, and thank you for the question.
It's interesting you're offering some new utilities to some of your customers now deal with front a virus in various ways, whether it be on the truck side or on the safety side.
A little bit curious coming through.
You know a tough thing, but it's obviously an opportunity to potentially reaching new customers through is that expanding our reach is it mostly to existing folks do you have as it offering.
Our new features that they wouldn't otherwise seen gentlemen, can you just give a little bit of sets of how much that.
That helps expand.
Well.
The.
The apps themselves are available to any any company. So we didn't make a distinction of customer not a customer now you're probably get more value out of it. If you are an existing customer and you're integrating into the bigger workflow. So I suspect there as a degree of let's say visibility or reach to spud centrally.
Customers, but.
I should say it wasn't initiated as a marketing.
Effort.
Yeah.
Yes, I, Didnt mean, and plug and play imply I'm sorry, and then second question I guess, it's just on defensiveness.
You know again this is a little bit of a real time tasks and how bad things can get and I'm curious if it gives you a sense of.
How much trucking activity is down you, probably do and just whether you lose firms are customers or.
Individual.
Licenses, so just a sense of the defensiveness.
As to how far the markets to fall and trucking might be interesting. Thanks, I'll stop there.
Yes, that's a good question, Rob certainly the trucking market and while the say North America.
Yes, certainly challenged at the moment and we see that the same data that you do whether it's the new class eight.
Units or now inventory levels are spot market rates. So it is a tough macro.
Set up here in the near.
Near to mid term for trucking companies or David covered looking back at Q1, there were accurately actually also some quite bright spots.
And but looking forward to I would say the macro is is more negative at this point now we think about the defensibility of the business. We actually also think this.
Becomes a strength for trimble and so far as we've got the value proposition and we've got the balance sheet to continue to build to invest in this business. You know we've seen a couple of competitive companies either go out of the market are significantly cut back.
In in the last couple of weeks so from a competitive physician will continue to play off fence. In this business. We think we've got a winning strategy and we believe and the team that we have thats pursuing the strategy. So we want back off of let's say the poorest the pursuit of of the business strategy and.
And we're confident that as we come out of this.
We will come out of it stronger and that's really a major part of the orientation. We have is we really came into this is make sure we position ourselves in the to exit the crisis on a stronger competitive footing than how we entered it.
Okay. Thanks.
Thank you and your next question comes from Richard Eastman from Baird. Your line is now open.
Yes, good afternoon.
Could you.
I think in the in the guide you spoke to you know just some thoughts around the second quarter, suggesting that you know really all four business groups would be down year over year in revenue.
And just trying to sift through your commentary about weakening in March.
Are there any of the four businesses business groups that might be expected to see revenue growth sequentially.
In the second quarter.
Okay. So if we think about the the business sequentially in the and the second quarter. The short answer is that it wouldn't change and wouldn't change my answer I mean, historically, you would expect to seek.
Construction, especially civil construction coming on stronger and the second.
Quarter, given the summer season for for construction.
But we don't see that.
Happening this the second quarter, otherwise if you took a market lets say resources and utilities, which is AG centric you would expect to see that seasonally decline in.
In the second quarter, if I use that as a sort of a Contra example.
Yes, and then geospatial given oil and gas exposure, that's down sequentially and then transportation I guess you address so okay.
In your opinion remarks, Rob you had mentioned.
That you can you can it feels like you can see the light at the end of the tunnel and I'm just kind of curious.
Is that kind of a suggestion that you can you maybe maybe said differently you can see the bottom or what green shoots did you where you kind of looking at the suggests that.
Well, we stay in close contact not only.
With our dealer partners around the world, but are in customers and prospects than in the pipeline that we have in the various businesses. If we look at a market lets say if we take Asia, we can start to see business coming back in and parts of Asia. So if we take a market like China.
China is a small portion of Trimble these days less than 2% of revenue, but we have started to see business come back if we look in the nordics.
We can start to see some of the business coming back as well and so there's a bit of a geographic overlay to that Rick that.
Form so the point of view that we feel so we feel like we're seeing a light at the end of the tunnel as we look in the and North America, and the governments or local and I'll say local governments are starting to talk about.
You know returned to return to work or lifting some other restrictions that.
It's certainly plays in the some of our psychology of seeing.
People getting back to work.
You know that can be on the other end of that phone call for the demand side of this equation.
Gotcha. Okay can you just as one more question I think.
I just wanted to go back to the you'd mentioned you're entering the second quarter with.
I think it was a billion to 1.2 billion a backlog.
And I didn't trends to risk comment.
There was a reference to 250 million but.
The strong backlog again differs no cancellations I mean, you're basically just seeing project push outs is that I raised Rick David Barnes, yet the $250 million recur.
The backlog of our leaving out the recurring business and the point I made is that's that amount is higher than it was a year ago and no we havent seen any meaningful cancellations.
Yes, there are as you inferred some delays.
But nothing in our backlog is being canceled of any consequence.
Okay very good thank you.
Thank you and your next question comes from Evan All from Keybanc capital markets. Your line is now open.
Hi, Thanks for taking my questions here I'm just one for me. So I know you mentioned.
To LTE and construction Arsenal forming.
Just wondering if you could provide any color on other and industries and geographies.
That are kind of under way back to normal level towards Deanna.
I guess April and.
Foreign made I do see.
Well the markets that we see coming back to some degree or in some of the Asia markets All use China as an example, and on the Nordics.
In Europe, where the couple examples I pointed out.
That would be current time, if I look at Q1 itself ideas, Brazil as an example, where we had a strong quarter and Brazil, both in the agriculture business, but even more so in our transportation business.
In Brazil, and so there's there's there's pockets of performance around let's say around the globe I think you asked something a bit missed the first part of the question around utilities can you repeat that.
Yes, I would just following an example that are kind of performing pretty well and first quarter, but I guess are you seeing and industries that are I guess on a way back to normal level, thus far in second quarter.
And the way it I'd approach that is from a business model perspective, they are was.
Sentence first in the first quarter and certainly is outperforming differentially perform against the rest of the portfolio and and so the business is associated with that I think are the ones to highlights of the construction related air are that we have the correction services businesses perform.
And.
I really outstanding performance.
In the quarter, and where we see that business now as well so those would be a couple of the spots I would point out in particular.
Great. Thank you very much.
Welcome.
Thank you and our next question comes from Jerry Revich from Goldman Sachs. Your line is now open.
Hi, good afternoon, and good evening alone I'm glad you're all being well.
Sure.
Rob your comments about gross margin expansion really stood out to be considering what I would imagine would be pretty significant declines perpetual license sales can you just expand.
Well what level perpetual license sales declines you youre seeing in April.
Thanks are able to essentially guide to improving gross margin.
In this environment.
Yes really.
Thanks.
Well, if I took three revenue streams and architect of recurring revenue stream. We took the the aggregate of software and professional perpetual software turned software professional services as a second category and then the third one being hardware air are certainly the highest performer.
And then maybe I could reference you to the web tables that also break out the gross margin by these revenue types of course, there are going to have the highest among amongst the highest.
Gross margins.
And then if we look at and of course that grew and the in the quarter. They are that was the plus 7%.
On the other loss a book and would be the hardware businesses were at minus 8% year over year and the first quarter and are the lowest gross margin.
Category of revenue that we have and then if we look at the perpetual software and and the pro services that was down in the quarter and it'd be down as well and therefore extrapolate down in March down in April.
As well, it's just not down as much as the hardware, so I'd say kind of low single digit digit range.
And that just give me one more I guess now get within that software category. We have about 80 million on a trail trailing 12 month basis of term term license revenue shows up as software not as recurring revenue and that that traunch within software is growing nicely and as a.
As a profitable stream. So yes, you take the mix of of that in and you get the gross margin expansion was which was clearly a major driver of the beat in the quarter on the side.
And.
Pretty resilient performance for the perpetual license.
Well, Okay, and then interim James.
Option offering to spoke about accelerating.
Can you just update us.
Form in.
In terms of book each breaking the transportation management system so far.
And can you talk about.
Okay, I think the $500 million target.
Subscription opportunity you have become a JV portfolio with both.
It did later approach here, what's the cadence.
Hi, translating that from perpetual license.
Thanks.
So if we look at the transportation management system.
Business or product to line that we have.
More than half of the bookings in the first quarter came as a subscription bookings, so really actually out outperformed our own.
Expectations, we have as we do offer both subscribe to that or perpetual offerings and of course part goes without saying that having that subscription offering becomes differentially.
Good thing for customers and a tighter cash environment to move to an opex modeled also expands we believe expanded addressable market into the mid size.
Carriers through the through the conversion if I look at the other businesses I give you a couple examples.
With that actually within buildings and infrastructure. So we have a mechanical electrical plumbing business, that's well over 100 million dollar PSTN revenue same thing with us steel and concrete structure.
Business.
Both of which we think we have significant opportunity can to convert to subscription and so in fact in our M- MVP business, we launched whats called accurate anywhere that is a subscription offering and it's off to a decent start.
Our structures business.
I'd say a number of other businesses and terminal that we have put in the category of we have some subscription.
Some subscription elements of those businesses, but there there are small elements of the business and we're really looking to accelerate and do the work I'd say the groundwork in 2020 to be able to really move.
Quickly as we come into next to next year. So not all of these actions I'm talking about will turn into increased air are.
This year.
But what I would want you to here is that we we think this is the time.
At this moment of crisis. This is the time to move faster on these conversions and so we're shifting resources around shifting priorities around so that we can come to market faster with these offerings. We think it's the right thing to do.
For the long term health of the of the business and.
At a time of uncertainty like we have right now I think that calls for us to be decisive and this is one of those.
Areas, where we really are I think taken decisive action to move faster.
And Rob sorry, just a clarification. So transportation management, you had mentioned you bookings our subscription, but when you combine them subscription and perpetual what was the European growth, but you achieved as a result.
No. So what I would say from an overall bookings perspective, we just kind of step back and talk about software bookings or perpetual software bookings.
And let's separate.
January February from late March until now.
I.
The new bookings are off significantly.
And at an aggregate level and I would say in fact more than 50% down.
And these last and these last few weeks and that's quite consistent from what we hear and and the market.
So in the short term into the the new bookings are really they really are taking a hit.
Now you won't see that so much in the revenue today are now and in Q2 Q3 becomes this really becomes a factor of how long does this last when do we hit bottom how long how long does that left us what's the nature of the slope out of it will determine how much of that plays into 2021 I'm sorry.
I should just note that that that's what we see I mean overall bookings level and then if I was to get really specific about transportation management system in the booking we'll look at when we when we take a booking you know you you want to make an equivalent to what a perpetual booking would be so that you understand the real underlying driver so look at it.
On a multi year basis, so that you kind of equate it to you know that the nature of what would've been a perpetual booking as your plan the business around that.
Okay. Thank you.
Thank you and our next question comes from Colin Rusch from Oppenheimer. Your line is now open.
Good afternoon. This is kristen on for Colin Thank you for taking our question.
Just a few operational question first I was wondering if you could talk a little bit about your supply chain and Mexico on the hardware side just to remind us how much third party manufacturing exposure you have in that region. You know what you're hearing from your suppliers as they remain under those stay at home waters.
Yes, so okay. So I would say Kristen we have.
I'd say a meaningful part of our contract manufacturing comes out of Mexico in fact, much more so than China.
Of course components come from China, but the manufacturing has a substantial elements in Mexico and the short answer is that we've been up and up and running in fact in some cases, we've gotten more capacity from the contract manufacturers as other companies have you know either shutdown temper.
Fairly are they weren't essential businesses whatever factor it may be.
I'm cases actually enabled resources Rossi labor resources to move to to Trimble product, which helped and businesses like ours, which are for example in the first quarter that that exceeded the expectations.
We have.
We have one operation in Guadalajara, that's under a stay at home order that really is running at this point, but we had enough I'd say heads up on that to build a little bit inventory and it happens did business, where the demand is as also quite down so it hasn't hasn't been an impact, but the where it really matters, we have been up in up.
And running.
Okay, great and speaking to the inventory point.
Wanted to ask about your dealer channel and how much of that it's under essential services. Thank you mention can compete I activity headed to stay at home orders. So any commentary that you can provide on inventory build or what you're seeing and the dealer channel right now.
If anything at this point in the quarter today, we would see really more of an inventory reduction our drawdown.
I'd say there were certain parts of the channel in Q1, probably around the February timeframe that word I think doing a little bit of buying ahead of the impending shutdowns it's hard to.
Discern exactly what the nature of the bias.
But we look at the state levels of inventory right now and we think that actually the dealers are being quite responsible overall, so it's really something we want to pay attention to it because it's in our interest that our dealers remain healthy and.
Have and have liquidity. So we feel good about on an aggregate basis, and all that and all the businesses the level of inventory that our dealers have in terms of the essential nature of the businesses and how that impacts dealers really for the most part.
You are on a global basis, our dealers have been up and running I go back to what Trimble does.
Beating a growing population it was planting season.
Was it is planting season and construction we knew many of the projects were continuing to be at work in our customers. We're counting on us to to be there as Trimble and also as our dealer dealer partners and same thing and transportation can imagine.
This distress and transportation companies as they were moving essential goods and we needed to be they're.
Running running for them. So they have main theyve maintained being open for the most part of course with government had a complete.
Shutdown.
We as an example.
We were also down during during that time.
And then but even on an interesting note in Italy, we were actually up on a year over year basis in the first quarter based on the strength of what that team brought into the beginning of the quarter and as well in the geospatial business as well as the ongoing agriculture business.
Great. Thank you so much.
Thank you and our next question comes from Jonathan Ho from William Blair. Your line is now open.
Hi, This is John why to more for Johnson. Thanks. Thanks for taking my question just have one can you talk about your level of optimism regarding the potential for infrastructure stimulus spend.
Yes.
Sure so on.
On infrastructure I would say, we're we've got to mix view. So let me take a global view first if you look at the UK Hs to project got to notice to proceed if you look at China, they've made some big infrastructure announcement, if we talk about the U.S., which I think is what really what you're asking about.
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Well, what we know at their infrastructure is aging and that suggests that we're talking about when not if something happens and infrastructure.
We are net optimistic that something what happening on the funding side in the U.S. hopefully in the next package and the next really package, but let's be clear that has not happened yet I would note that many state and the last.
Months or couple of years have increased their DAC there their own gas taxes that enables them to take more control of their own destiny.
But if we look at the flip side to be complete with the analysis the fast that expires on September thirtyth and that needs to be either renewed or extended.
If we look at state tax revenue that is greatly suffering and that would obviously benefit from some form of a federal backstop.
And then we have the American Transportation infrastructure Act of 2019, and there we still have bipartisan disagreement on how to pay for it. So there are a set of I would say what I would call negative are cautious factors the flip side being that.
Infrastructure is such an obvious an important place for us to make investments here and in the U.S. and a logical would be a logical part of a really package, but of course, we havent seen it yet.
Thank you for the so appreciate it that's it for us.
Thank you and our next question comes from James Faucette from Morgan Stanley.
Line is now open.
Hi team. This is Eric on per James Thanks for taking your question on maybe just touching on a piece that may not be as topical but understanding you're taking maybe slower approach acquisition for now, but I'm wondering how does the current environment sparked your interest in any new potential growth areas or opportunities you could look to be.
More active in the future.
Well the first place we've looked in the current environment as internally and in that respect really.
Pivoting, we want to pivot faster I'll say faster harder to the subscription model reference we've referenced a couple of the software businesses, but I neglected dimension.
The announcement, we made at Conexpo.
That launch what we called Trimble platform as a service to.
Essentially to bundle, our machine control and guidance with.
With our construction productivity software that connect the office in the in the field together on which we think is a unique offering.
And that to US is really the first place we want to we want to think about and looking to the extent that which were leveraging balance sheet or PML, because let's let's do the math that the movement from perpetual to the subscription offering does have a short term drag.
I am too to a piano into into cash that's the first place that we want to look to that secondarily, you know as the market moves whether that's good geographies or end markets. We will we will pivot fast to what the market makes available or what it has available and.
No just maybe as a small example, but I think meaningful as I take an example, they could trade show.
Well in our agriculture business in Brazil, the team and in the first quarter did a virtual trade show in Brazil that over 3000 people attended.
Extraordinary ingenuity and creativity from the team and I would call that.
Taking a.
We got taking advantage of whats available.
And taking action around what's what's available to us and in an environment that you asked in about externally and acquisitions.
With that pivot how we think.
I would say there wouldn't be a fundamental pivot is the is the is the short answer.
That's helpful. And then maybe just kind of sticking on so the bundled subscriptions offerings.
How are those being structured where theres kind of hardware and from like thinking through replacement cycle side is there a cadence built into those offerings and maybe like just how we should think about that.
That's a good question. So if we took an example, I'll give an example in agriculture. An example on civil construction and Agriculture example, that looks like bundling our guidance hardware with our office software or office and field software with our correction services that you can get that centimeter level accurate.
I see on the farm debt.
That a farmer needs that to me is less about accounting and technology replacement, that's really about reducing friction in the buying process.
Instead of three separate transactions it can happen as one transaction at the proverbial point of sale.
We take the civil Construction example, and the technology, our Triple platform as a service offering we announced at Conexpo that does have a technology assurance aspect to it and so there we could see a cadence let's take an example of a GPS receiver.
If we havent, new GPS or really GNSS receiver available, we can use that to upgrade kit that the customer has on site to provide them. The latest fund net functionalities or technology assurances are really meaningful part of the strategy you know the the technology continues to.
To get better every every year not only the sensors are the hardware, but really the firmware and the software and so for US it's important to build a have a continued touch point.
To be able to update that to be able to update firmware and display software you have to have connectivity to the to the machine and we have that through the the telematics.
Product lines, we have that will also integrate and to this into this offering now if we get.
Forensically it.
Forensic on the accounting of it you know the accounting has what's called an SSP.
Which really breaks out.
The value into its parts and so the accounting will dictate what will show up on on the piano.
Got it that's helpful. Thank you.
Thank you.
And that concludes our question and answer session for today I'd like to turn the conference back over to Michael Labor for closing remarks.
Thank you everyone for joining us on the call. We look forward to speaking to you again next quarter.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program you may now disconnect.
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