Q2 2020 Trimble Inc Earnings Call
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Ladies and gentlemen, thank you free standing by and welcome to Trimble second quarter Conference call.
Hi, all participants are already and I listened El Nino after the speakers presenting she'll be a question and answer session. That's a question. During this session you'll need to press star one on your telephone keypad and please be advised that today's conference is being recorded if you require any freezing assistance. Please press star zero.
I would now like it's kinda call over to your speaker for today, Mr. Rob Peter Chief Executive Officer.
Go ahead Sir.
Good afternoon, everyone before I get started a quick reminder, that are presentation is available on our web site and we ask that you. Please refer to the safe Harbor at the back.
Despite difficult circumstances in the second quarter or team rose to the occasion.
So deeply grateful for the ingenuity and commitment to outcomes demonstrated by my colleagues and a worldwide network of partners over these last few months.
What I said are calling me remains true today that is we will get through this crisis, we are well positioned to enter the macroeconomic shock and we will emerge stronger on the other side of this or belief in our long term strategy remains on diminished.
Slide to lift the five key messages, we want to convey today.
First our resilience the quality of our strategy and the strength of our financial model enabled us to outperform our own expectations in the second quarter.
There are at 1.21 billion adjusted EBITDA margins at 25.7% and deferred revenue at 531 million, we're clear highlights.
Our shift to a more hardware connected software centric and recurring revenue business model is paying off.
Second.
The decisive financial and strategic actions, we took in March have put us in a position to restore employee pay as of August and senior executive pay shortly thereafter I.
I think all of my colleagues for their professionalism and demonstrated commitment. These last few months have strengthened our culture.
Third we take our responsibility to address racial and justice in climate change seriously. So.
Speaking personally I have a heightened sense of awareness that a strengthened my resolve to leverage our platform to lead trimble to a different place.
We have been public inner stance against racial and justice.
We established a diversity equity in inclusion working group, representing both senior leadership in Trimble as well as advocates appointed from within the organization.
We have also donated money through our Trimble foundation to causes that align with our values.
And we remain humbled to know that we have a lot more to do.
With respect to climate change, we're pleased with named will be Lambertson, our head of operations to our larger role where she now has additional responsibility as head of sustainability for Trimble.
Fourth we reiterate our focus to execute on our connected scale 2025 strategy.
We will balance cost containment and investment in innovation during the downturn.
We're connecting the industry Lifecycles, we serve such as construction agriculture utilities and the transportation supply chain.
By reporting segment in the context of unprecedented conditions, we were satisfied with our progress in the quarter in three ever for segments.
Well, we remain convinced of both the long term market opportunity of or supply chain strategy as well as the viability of our strategy. We are currently performing below our potential and our transportation segment.
Earlier in the year I set expectations of demonstrably financial recovery in the beginning of 2021, given the environment and circumstances, we now believe the recovery will take longer than anticipated.
In addition to the difficult macro and pandemic effects, which have suppress the demand there are three discrete topics that impact or near term results and transportation.
First our acquisition of Cubic's as we announced in February remains strategically important but it is currently dilutive.
Cubic's takes us to the shipper market, which is key to our connected supply chain strategy.
Second we continue to execute a subscription business model transition in our enterprise business, and then or mobility business, we launched a hardware as a service offering we have high conviction on these model transitions.
Third we continue to work through our yield the product delivery commitments and our mobility business in our offering incentive programs to customers to upgrade older technology.
Overall, we will take near term actions to enhance our competitive position and we'll measure the success of our actions by delivering profitable or our growth enterprise bookings and by growing the size and transaction volume in the shipper community.
We're pleased that in or other three segments building and infrastructure delivered solid air or growth offset by expected disruptions in our hardware sales and new perpetual software bookings.
While we see projects coming back online. We also see uncertainty into 2021 for new projects and we're closely monitoring the impact of stimulus measures.
Especial did an exceptional job managing expenses and funding available revenue opportunities in the quarter and resources and utilities was led by growth in our utilities business in positioning services business and by relatively positive performance in the aftermarket agriculture business.
Our fifth and lastly.
While short term market uncertainty remains high our long term market conviction remained strong we see green shoots in many of our markets and we believe the second quarter Roma Mark the bottom of our revenue decline.
Nevertheless, uncertainty prevails and we do not believe it would be prudent to provide guidance for the balance of the year.
I will turn the call over to David to take us through the numbers.
Thank you Rob let's start on slide three with a review of second quarter results second quarter revenue was 735 million down 14% on a year over year basis.
Currency translation, subtracted, 1% and acquisitions and divestitures added 2% for a total organic revenue decrease of 15%.
Gross margin in the second quarter was 58.9% up 200 basis points year over year, driven primarily by improved revenue mix.
The introduction of higher margin, new products and lower discounting also had a positive impact.
Adjusted EBITDA margin was 25.7% up 250 basis points year over year, driven both by improvements in gross margin and strong cost control.
Operating income margins also expanded 260 basis points to 23.1%.
Net income dollars decreased by 2% on a year over year basis, while earnings per share fell by one cents to 52 cents per share.
Moving to slide for our second quarter cash flow from operations was 147 million demonstrating the strong cash flow generation of our business.
Operating cash flow exceeded net income in the quarter free cash flow is $135 million.
We paid down over $140 million of debt in the quarter and the net debt to adjusted EBITDA ratio fell to 2.2 times.
At the end of the quarter, we had $1.2 billion available on our revolving credit facility and approximately 200 million in cash.
In addition, we have no scheduled principal payments on our debt until July 2022.
Our access to liquidity therefore remained strong.
Given our strong and improving capital structure, we are open to acquisition opportunities that will accelerate the implementation of our strategy.
We anticipate continued prioritization of debt reduction in the allocation of free cash flow, but we'll consider a modest returned to share repurchases.
Now turning to slide five the highlights some of the key metrics we are following.
First I want to note that we've redefined our air our metric.
There are now includes the annualized revenue of term licenses under GAAP. The revenue from term licenses is recognized upfront rather than ratably and for that reason term licenses are excluded from the recurring revenue line that we report each quarter the term licenses, our renewable and recurring in nature, and therefore share the funding.
It'll economic characteristics of subscriptions, so we believe that including term licenses in our air our definition provides a more complete picture of our recurring business.
Note that with this change we have restated the air our measure in prior periods and that information is available in the financial summary document on our Investor Relations website.
Error was 1.21 billion in the second quarter and grew 6% versus prior year.
Organic growth available with 3%.
Net working capital inclusive of deferred revenue represents approximately 1% of revenue on a trailing 12 month basis, demonstrating the working capital efficiency of our business.
Through this period, a proactive cost management, we've continued to invest in key growth initiatives.
One indicator of our investment posture can be seen and our R&D spending.
Our trailing 12 month R&D is nearly 15% of revenue and we believe our focus on innovation will enable us to emerge from this recession stronger than we entered it.
Finally, I'll note progress against two metrics the point to the health of our business going forward.
Deferred revenue is up 17% versus the end of the second quarter, a year ago and our backlog ended the second quarter at $1.2 billion also up from the level of year ago.
As a reminder, backlog represents contractual commitments that will be recognized as revenue in the future.
Most of the backlog represents the unrecognized value of subscription and maintenance agreements, but it also includes over 200 million from nonrecurring revenue businesses, we expect to substantial majority of that backlog to convert to revenue in the next 12 months.
Both of these metrics give us enhanced visibility into our revenue trends in the coming quarters.
Moving to slide six I'll elaborate a bit on rob's earlier comments about the increasing diversity and resilience of our revenue base.
Recurring revenues made up 39% of total terminal Trimble revenue in the quarter and grew by over 4%, even an extraordinarily difficult economic environment.
Of our major sources of recurring revenue only transportation saw a decline in the quarter for reasons, Rob mentioned earlier.
Our other major sources of recurring revenue, including viewpoint E builder building construction software and positioning services collectively so recurring revenue growth of greater than 10% in the second quarter.
These offerings are essential to the continued operation of our customers businesses, even in the toughest of times.
By contrast, our nonrecurring revenues, including hardware perpetual software and professional services experienced meaningful year on year declines in the second quarter.
These businesses were adversely impacted by project suspensions, OEM factory shutdowns and restricted access to our clients facilities.
While many of these restrictions these late in the second quarter, our overall nonrecurring business remains meaningfully below year ago levels as we entered the third quarter.
Looking at geography, the results in the quarter were largely correlated with impacts from co bid in terms of shutdowns and the pace of reopening.
The cobot related dynamics in North America in Europe were similar with business conditions very poor in April and improving through the quarter North America was down 17% and Europe was down 13% with a significant difference being north America's higher waiting in the transportation segment.
Asia Pacific was the best performing the quarter up 1%.
Rest of World was down 19%, driven principally by difficult business conditions in Brazil, and the weakening of the Brazilian currency.
Turning now to slide seven we take a deeper look at each of the reporting segments.
Buildings and infrastructure revenue was down 12% on an organic basis recurring revenue growth was particularly strong and viewpoint E builder and sketchup.
Hardware perpetual software license and professional services revenues were down greater than 20% in the quarter segment margins expanded 400 basis points due to higher margin revenue mix and cost reductions.
Geospatial revenue was down 11% on an organic basis with nonrecurring revenue down in the mid teens and recurring revenue experiencing growth.
Margins were up 680 basis points.
Resources and utilities revenue was down 13% on an organic basis growth from the utilities business, including city works helped offset some of the decline in agricultural revenue.
Margin expansion of 440 basis points was driven by improved revenue mix and cost reductions.
Transportation revenue was down 24% on an organic basis and margins declined 710 basis points.
The adverse trends in the transportation segment were driven by the factors Rob mentioned earlier.
Turning to slide eight and the outlook for the third quarter, we continue to face significant uncertainty in the demand trends in our core markets driven by the risk of cobot related restrictions and the broader impact of the pandemic on the economy. Therefore, we lack of visibility in the business that is needed to put forth the guidance range. However.
Can provide some color on trends that we're seeing in our business in the markets we serve.
Overall, we expect that revenue in the third quarter will be down on a year over year basis, albeit at a rate of decline more moderate the we experienced in the second quarter.
We anticipate the revenues in the resources and utility segment will grow in the third quarter versus prior year due to the relative resilience of these end markets. The fact that we're comparing against a tough 2019 and the addition of Citi works, we projected revenue in both the buildings and infrastructure end geospatial segments will be below prior year.
The transportation segment will experience the greatest revenue declines in the third quarter driven by the same factors, which adversely impacted second quarter performance.
Looking at our trends by revenue type, we anticipate continued growth and recurring revenues due to the resilience of these offerings and the ongoing conversions to subscriptions across our software businesses.
By contrast, our nonrecurring revenues are likely to decline in the third quarter, albeit at a slower rate than we experienced in the second quarter.
We expect gross margins to continue their expansion on a year over year basis due to increased software mix. Although we don't expect the gross margins will remain as strong as we experienced in the second quarter.
Turning to operating expense note that spending in the second quarter was extraordinarily low across our business. We anticipate that operating expense will be higher in the third quarter than in the second quarter.
We estimate that revenue and margin dynamics will result in year over year decremental margins in the mid Thirtys.
Ill add here that we remain committed to maintaining healthy operating margins going into 2021.
Our view is that 2021 will be characterized by only slow and gradual economic recovery.
We continue to evaluate our business portfolio and look to exit those businesses, which are peripheral to our strategy or don't meet our financial objectives.
In terms of cash we expect cash flow to be down on a year over year basis in the second half due to the drop in revenue and EBITDA.
Nevertheless, we continue to expect operating cash flow will exceed non-GAAP net income for the full year, and we expect slightly lower capital expenditures for the year.
Now I'll turn it back to Rob.
Let me close by talking about key elements of connecting scale 2025, and our progress in the quarter, which I will describe in four elements.
First connecting solutions across our industry Lifecycles two examples here and transportation, we announced further integration with cubic's between shippers and the Trimble carrier network and construction, we press released to win with S., and CF and France to manage railway construction assets and building construction data.
Second delivering breakout innovation that connects the physical and digital worlds, we launched a couple of analytics offerings and our construction business leveraging our content and project job site data to enable customers to optimize project delivery.
Near and Dear to me the government of Nepal completed field work for measuring Mount Everest tight using Trimble GNSS equipment.
Third accelerating our business model transformation.
And transport and transportation, we began offering hardware as part of subscription bundles and our utilities business, we announced and Aiotv solutions as a service offering for remote monitoring of water and wastewater infrastructure and here in the third quarter, we will introduce or machine control platform as a service initiative, which we announced.
Earlier in the year at Con Expo.
Fourth we are taking actions that enable us to efficiently and effectively scale our business.
We divested a small seismic business in the quarter, we have shrunk a real estate office footprint by 30 offices year to date, and we've increased our spend and focus on our digital fulfillment systems initiative.
With that I would like to thank everyone for taking the time to be with us today and especial. Thank you to our global Trimble colleagues operator, let's please go to QNX.
Okay and at this time to ask a question you will need depresses our line.
Okay.
And we draw your question.
Yes, I'll remind you we will limit the Q an equal one question and one follow up.
No.
Well Matt.
Okay.
And your first question comes from the line of Dignan from JP Morgan Your line is open.
Yes, hi, good afternoon everybody.
Just a couple of clarifications and you've entered into Q3 guidance how quickly I find myself scrambling. Thank you.
Restate, what you said about your expectations are our our and 10-Q three for instance, nonrecurring revenue.
And then putting all the pieces together.
Given lower gross margins are higher operating expense would you expect adjusted earnings to be down quarter over quarter in Q3.
Hi, I'm David volumes.
So.
Yes, we expect.
Our to continue to grow in the back half of the earned in the third quarter.
Because those businesses are resilient and the conversions continue.
Nonrecurring.
Revenues will be down so that results in the in the total being down lower than.
But not as down as much as in Q2.
Gross margins probably won't come in in Q3 as good as Q2 operating expense will go up a little bit so and we're not certainly signaling increasing.
Dollars the operating profit.
And why would you expect post margins to be down in Q3 at AMR, it's going to continue to grow.
While gross margins will be up year on year for of a lot of reasons, none big but many cumulative as you've seen Q2 was a very high gross margin grade. So we do think gross margins will be above prior year, but but probably not higher than Q2.
Okay, and then just as a follow up on the classification side could you just.
Dig into that segment, a little bit more and tell us what luxury thinking are cyclical issues Parsons are there any structural issues that we need to be concerned about learning and dance Ben.
Great.
Transportation profile now.
Should we think about that maybe beyond this year and enter 2021.
Hi, Dan This is Rob so when I think about.
The than the macro of the end markets, we serve I would say transportation's, particularly specifically North America transportation is certainly in the most challenged at the moment there as I think as you know away a supply demand imbalance, which is creating pricing pressure on the carriers.
And that.
That actually started in 2019 and was playing through to the beginning of year I think the market probably expected balance to.
Come back there on the pricing side, and then and then the pandemic set that set that back so I would look at.
The the macro backdrop and transportation and I put at least half of.
The delta to the two that macro backdrop and that also includes trucking companies idling some assets and so if you're idling some assets that could have adverse impact on.
On our units serving those those trucking companies at least in the near term. So let's say a view forward for some quarters or the couple of quarters or than maybe the next the next year.
So that exist that backdrop, and then just to reiterate a couple points from the prepared remarks.
And our enterprise business or the back office software or transportation management system, we are intentionally.
Engaging in a model transition some moving from perpetual to a subscription offering.
And that is emphatically the right thing to do for the business for the market for the customers and as we all know has short term negative impacts to the TNL. So we're offering we are offering both models and we're seeing.
Almost two thirds actions above two thirds of our new bookings are coming from subscription offerings at a more we're driving that subscription offering the subscription bookings that does create a near term.
Near term drag and then the last bit I talked about was the cubic's acquisition, which takes us to the shipper side of the transportation market, which was when we announced in February we did announce it as a dilutive deal so.
That that hangs heavier and in a market that is down. So those are the majority factors and then yes, we also talked about.
The itself and continuing to work our customers through.
Through the migration and out Canada yield the comes after the U.S.
And the R&D issues should be resolved by end of picture and I leave it there. Thank you.
Yes.
I think it'd be fair to say that and from the end of this year and probably at bleed into the beginning of next year as well I'm working through working through those working through our product commitments.
Okay. Thank you and interest at time I'll leave it there. Thanks.
Exam.
And your next question comes from the line of Jerry Revich from Goldman Sachs. Your line is open.
Hi, good afternoon, everyone.
Hey, Gerry.
Im wondering if you could just update us on the performance.
The builder and viewpoint since you folks.
Ownership can you just talked about.
The growth in logos that you folks.
Bluebird, yes.
What kind of win rate for a new logos.
As with team delivered.
Can you just frame to performance for us.
For the past your question, especially.
Over the past quarter.
Yes, and for those who may not know viewpoint any builder to acquisitions from a couple of years ago that that are in our buildings and infrastructure.
Space They continue to port perform very well, so very pleased with the respective management teams and what they're delivering.
Since they've been a part of Trimble that give you a bit of quantitative to overlay the that qualitative.
And the second quarter AMR grew in the mid teens for both of those businesses. So.
It's emphatic demonstration of the of the strategy working and the business model working when we look at new logos that those businesses.
Have driven in the last in the last couple of years.
If we look at EEI builder about two thirds of the our growth has been through new logos.
So at that also a good sign of driving new growth since being part of Trimble and then on the viewpoint side. It's been about one third no new logo and two thirds from existing customers and that makes sense because.
We are transitioning the model there to a subscription model, whereas the builder was already a subscription.
Subscription model and then to connect the dots to that if you'd look at new logo wins, it's around or RFP type when ratios there around 50%.
And in the majority of times, when we don't get a deal. It's it's from a no decision.
So hopefully that gives you some color Gerry.
I appreciate it Rob and then what stood out was the growth in deferred revenue.
This quarter.
Was that because bookings were.
Stronger than there are can you talk about that or was there any acquisition impact quarter.
Yes, there is some acquisition impact in there.
Gary but the the.
The bigger portion of that is the.
Our growth.
The health of the recurring businesses, both subscriptions and maintenance and support.
Okay and then it was nice to hear about two thirds of the transportation back office.
Customers signing up for the subscription offerings could you talk about so.
Okay.
In the addressable market that you're seeing obviously not a lot of voters in April but I'm wondering any conclusions that we could draw from what's going on June July in terms of how much the subscription offering it's helping you folks.
Expand the tail so to speak.
Yes. Good question, what we can see and what we've learned from other businesses, where it made the transition as it certainly does expand the addressable market I'll use our sketchup business and construction as an example, and we had another quarter of over 50% year on year unit growth.
And that to me as a tremendous sign of.
In a clear sign of expanding the addressable market, if we look and transportation the fundamentals there would be taking us predominantly from the larger carriers into the medium size carriers, who are not.
Going to want to have caught a custom implementation so they're going a lot more of a standard configuration out of the out of the box offerings. So there's a logic to it and so we do see ourselves, reaching a set of customers that we weren't reaching before but I also say that the largest subscription booking we've had in the last.
That was three quarters was from a very large very large carrier. So it does seem to be attractive to both to both segments.
I appreciate the discussions thanks.
Sure.
And your next question comes from the line of Jason Sardinia from Keybanc Capital. Your line is open.
Hi, Thanks for taking my question.
On a build up the.
Thank you.
Service.
Offering for utilities segment.
Two new announcements you made.
Kinda feedback from customers.
For those particular products, how should we think of pace.
Kind of transition.
Sure I'd say, it's pretty early days to give a quantitative view of how they work are performing in the market I can say qualitatively and they work customer driven initiatives that we that we made to.
To make the move to the subscription.
Subscription offering and I use them as an example to show really across the board Trimble that we're looking to the business model conversion.
I mean, one in a down market.
We all know moving from Capex to Opex has a financial advantage we talked on the last question about the expansion of the addressable market that we believe that we can see.
Through this and then there's the pursuit of our the connect part of the connect and kit scale strategy, so being able to connect.
The data being able to connect stakeholders across the industry continue and we really believe in the pursuit of the strategy that to connect the data, which is really where we think there's huge optionality going forward as you connect the data.
Business model transition and as an enabler to be able to get data back to.
Back to the cloud and so theres, both strategic and financial reasons that have us very motivated and committed to this and so I was wanting to show examples from parts of the company don't often Harris.
Talking about or or.
Elements, such as hardware of changing the business model that we havent talked about before.
Signals or just how serious we are about this so time will tell on on customer pickup and so we can certainly come back to that in the future calls.
Great.
[music].
A lot of other software company.
Different.
Thanks.
Core.
No.
And then.
I have to say you're very faint it's hard to hear you. So I missed the question.
Okay, Let me try to take a.
A lot of other software companies are talking about customers accelerating different digital investments.
The strength in the quarter from viewpoint in Neil.
And then why couldn't that construction end markets.
Though.
Gotcha.
Well for sure at a secular level. We believe there is an acceleration of of digital.
And it's.
If you look at what we do as Trimble the connection of the physics solutions that connect the physical and digital world and really the an essence were digitizing market such as construction agriculture transportation. So we believe it a secular level that we're in the right that were in the right place we've seen some of the now use.
Points as an example, some of the acceleration in there. They are and then the bookings we had this quarter were customers who had on prem.
On Prem software weren't able to get conductivity. They wanted and so we actually did some lift and lift and shifts during the quarter two to help our customers and that has a side benefit of course once they've seen how the software operates in the cloud.
We've seen them by and large want to stick to that delivery delivery method.
In the short term, we have to disruptions of being able to actually access customers.
So.
With separate the very near term from the mid to long term in terms of the digits as digitization.
Secular so long term I think it's there and the short term new logos have certainly been harder to reach from the new bookings that we've had and again that has a certain logic to it and we saw new bookings trends in the corridor and the second quarter move from quite negative at the beginning of the quarter and progressively move.
Better through until the end of the quarter and and here into adhering to July. So hopefully gives you a little bit of color of how we see it on both sides.
Great. That's very helpful. Thank you.
And your next question comes from the line up or Rob, whereas theme run from million Research. Your line is open.
Thank you operator, hi, guys.
Just following on your last answer there I think you're you're just for the quarter progress.
Logos or new customers was construction related transportation, obviously had a tough quarter could you talk about.
The non hardware side.
The quarter, there and whether there's any about similar digital push.
Really taking all.
And you mean, specifically in transportation Rob.
Correct.
And our and the enterprise business, we saw bookings progressed better throughout the throughout the quarter will that could that software.
Software oriented of course in nature, and the enterprise business I would say bright spot. There I think if we look at the I think kind of elevate back a second when we look at some of the macros, which I know you know well whether its.
Truckload line haul indices or shipment indexes are class a units sales.
Those were those were all pretty negative and in the quarter and maybe even historically negative now by the end of the quarter and and June it looks like those indices may have bottomed. We saw spot rates increase if you look prepare April to July class eight orders were up in.
In June and so if we see that freight demand coming back then and our let's.
We feel like the markets got to at least an incrementally better backdrop than it did in the first couple of months of.
Q2.
Okay, and if I can just ask maybe even a different one but you took early prudent approach to.
Under which is highly uncertain.
How is your appetite if an acquisition appears I mean do you feel like that's just as long haul because I know the other world works out of an obscure sours Trimble actively looking I mean, what's what's your current feeling on on willingness to do that thanks.
Sure well from a financial perspective, and financial strength perspective.
You'd look at the net debt.
The EBITDA somewhere in a we're in a strong and healthy position you know that the working capital was less than 1% of revenue in the quarter.
And producing strong cash flow over 500 million of deferred revenue.
On the books, so we have the financial wherewithal to pursue an acquisition.
Hi move to that financial answer from a strategic perspective.
It really is a function of.
Pursuing acquisitions for the sake of acquisitions, but really and the pursuit of executing the strategies and so what I would signal is that we have an openness to it but it's also not meant to be a signal that you're about to hear something meaningful or or big given what we the commentary we had in the last call.
About pulling back on acquisitions and buyback, we just wanted to be transparent that had given where we see ourselves now and we saw Q2 as the trough.
Of the other revenue decline that we would be that we would be open and so we are opening in the context of.
Particularly I'd say in the construction.
Space number number one and the overall and the overall segment secondarily would be and pricing in the agriculture space, but there's not actually relate to me deals I would say to be done in that space.
Thank you.
And your next question comes from Colleen Raj from Oppenheimer. Your line is open.
Thanks, So much guidance can you give some more granular sense of what you're seeing in construction really love to get a sense.
As a public projects versus private projects as well as building versus infrastructure. We've seen some softening in July and just look on that you guys as you move industry Q.
Sure Hi call on so if we look at I would break it down by type of projects on one dimension and the other current and future and the punch line as we see current work coming back coming back online.
And much of it never went down offline.
And what went off line has by and large come back online.
Then from a future perspective, we see customers with some concern about the 2021 pipeline and we're all watching to see what happens with.
Infrastructure, what happens with the fast act will that get renewed in September it will be continuing resolution that pushes that out what will be it will there be a backstop on state Deo T. funding as a number of factors that are impacting the view on the future that hopefully get resolved tier.
Shortly if I then.
Look at the type of construction.
Let's take rate residential non residential and civil I would say nonresidential.
The data would show Thats been hit the hardest.
And if we look at civil that's been impacted by about half of what the non raz.
Numbers have been impacted by and so when we look at the segments that we serve across the value chain and construction.
We looked at a market such as architecture and design, we would look at the data and Abbey IDEO would tell us that.
The numbers of the June stabilized after the April may decline. So that doesn't look more positive now multi residential is look more positive than commercial industrial which again that also makes sense.
And I would note than our Sketchup business, we grew units over 50% year over year. So didn't play into our whatever the number was that didn't play into our business.
And if we look at general contractors and that segment, we can see from our own systems, because we can see how our customers are you at a metal at a macro or metal level. We can see how the systems are being used and we can see that current activity is solid and we can see that project backlogs.
Are currently are currently down and then if we look at owners and occupiers of that we serve or occupiers of buildings.
Where we serve occupiers of buildings, they're looking to be more efficient with their space management and that fits nicely with one of the technologies that we have to help you managed space more efficiently. So that historically as a business. It's grown the most during down markets and our E builder business, we've seen verticals such as do.
Datacenters or government have been.
Good and of course markets like retail are not good so.
The differs within the segments.
And then civil again, we're watching to see what happens with project starts and with the project bids and that's an answer in the U.S., but if you go around the World you see places are places like in the UK just to us.
Has come back.
Our was green lighted and as soon as it is back to work and we've seen.
Some good performance in a few other markets outside the U.S. as well.
That's incredibly helpful. Thank you so.
A follow up spritely on customer engagement through the response.
Are you see marketing mountain software customer shown interest and discussing some of the enterprise solutions.
Just trying to get a sense of that that migration and how much of that it's more of a push effort and how much as a whole lot hurt.
Customers.
Well one indicator.
Especially when we have our our SaaS businesses, we can measure the intensity of the usage of the software and at the beginning of the quarter in Q2, not surprisingly we saw large dips from late March and April and then we saw and we've seen since then quite intensive usage and that's important for.
Our asset also placed through by the way through the net retention, we've seen and ratio and a number of the software businesses.
And Hey, I think maybe the work at home is it positively impacting the usage of of the system because of remote access to build a continued to do the work in terms of engaging new customers like like most companies are all companies. We're certainly shifting the nature of digital engagement and and how we reach customers.
And we're all learning.
New ways to have of sales and marketing and I'd say, so far we've seen some really nice pockets of success I give you. One example in Brazil, we did a virtual trade show a few months ago.
That had 3000 attendees and we would never get 3000 attendees will have an end person deming demonstration and we did it for a couple of thousand dollars I mean, it's incredible.
ROI from a billion digitally engaged I will say on some of the harp hardware solutions. There are aspects of seeing as believing in the ability to about there in the field.
Is important now there we had luckily have a worldwide network of dealer partners and our hardware predominant businesses.
Dave.
They have been up and running and really while it's still difficult, let's say to you know to operate in the restricted environment.
Thats fundamentally different than if we were having if that was all direct sales and we had to be on airplanes to do it because we wouldn't be able to be out there so having that.
Having that channel on the hardware businesses is proving at the moment to be yet again very positive for us.
Thank you so much.
And your next question comes from Richard Eastman from Baird. Your line is nothing.
Yes. Thank you thanks for the question.
Robert We just talked for a second about the op profit.
And I and geospatial aluminum.
Looking at is.
Hi.
Profit was up.
25 million quarter to quarter on flat sales so from Q1 Q2.
And geospatial was kind of plus 8 million.
Our profit on flat sales Ingeus spatial and you said he could you just perhaps suggest to us or give us some feel for what.
The cost takeout or just cost control did sequentially.
Versus the mix there.
Well, if we look at the cost and David can add on to this.
As you as you know we did the pay reductions in the.
In the quarter, but actually if we look at the fundamental drivers of the of the cost Delta and the and the business, we sell travel and entertainment was the largest drop not surprisingly.
And that was across the board we saw things like.
Healthcare expenses go significantly down not surprising people weren't going.
Go into the Doctor.
So those.
Those played in.
To the to the overall to the overall numbers.
So now if we're looking specifically within.
The reporting segments, Okay. So theres some nuances there and.
And I think you're asking Rick about Nbn I compared to geospatial Opex, the sequential down Q1 to Q2.
Yeah, I just want a again I'm just looking at the dollar.
Increase in op profit versus the revenue being flat quarter to quarter.
And it's it's pretty substantial and to be Eni business $25 million more in profit on flat sales from Q1 to Q2, and obviously there would be up.
The cost component to that right, but again.
Quite frankly, I'm, just thinking for modeling purposes purposes, as we move forward, we have more of a software.
Recurring revenue mix, there I would think.
Year over year, certainly, but sequentially, it's a rather.
Significant increase in op profit.
Yeah, and there's an element that is going to play through with the gross margins being higher so on even on flat on flat revenue.
That's a that's going to be a help and both of the businesses and then after that and there is about 800 bed.
Delta and the gross margins.
Between between those between the segments.
And then from a Opex point of view, David you want to add to that I'll just add to it Rob said, so we obviously for the whole company gross margins went up Q1 to Q2 and up year on year and Thats more pronounced in buildings and infrastructure, where where the hardware pieces of the business were weaker than the software were stronger for all the.
Thanks, as Rob mentioned, but that that phenomenon occurred in a geo spatial as well we had really positive revenue mix. So.
What you're seeing on the operating margin line and in those two segments is the positive confluence of improved gross margins year on year.
And.
Meaningful reductions in the operating expenditure across every category.
People.
No one went to the Doctor.
Travel basically was zero as I'm sure is true and then eager companies and really across the board operating expense was low.
So as we indicated that operating expense levels and as you think forward and.
After Q2, if they can't be sustained at that low level. So they will gradually go up, albeit not to the pre pandemic levels.
Okay. Okay.
Okay.
And then just just a second question on the on the been business could you just characterize how Europe performed in the been business in the quarter.
Really quite similar to the.
For the rest of world I wouldn't say that but anything that particularly stood out in.
And in Europe, and we do have a bit more of an Nordic and a UK concentration Nordic.
Did better not surprisingly.
Okay.
Okay very good thank you.
And your next question comes from Andrew Degasperi Seminarian break your line is open.
Thank you I just wanted to ask a question.
Im transportation, particularly the weakness could you maybe elaborate if that was due to competition. We know that syncera has been particularly aggressive I'm. Just wondering if that played a role on the weak and.
In the downtick in revenues.
Well I would the way I characterize.
Characterize it as go back that Theres the element of the macro impact.
Let.
At least half of what we're where we see the delta, but let's talk a little bit about the.
The nature of them of the market right now and so.
The ERP mandate certainly attracted a lot of capital to the to the industry and I would say not all that capital was with smart capital and we've seen some early shake out.
In the in the market with them a technology providers, whether they've exited the market are there has been reductions in force from some companies. So we're now you apply that any look at the customers themselves and if it got a pricing and balances pinching care carriers at the moment that is going to increase.
Some of the competitive pressure and the nature of how we've seen some of the competition and the market shift is really but I'll give you example is a product example is the bundling of the hardware with the software.
And then by and large that is now how the market has moved because you have up have company, hey, like ourselves, but I'll say other company younger companies.
Wind to get the long tail subscription growth and so that is certainly I've been talking about this for a few cause I certainly negatively impacted the competitive environment the hardware margins and it has that wrapping it now into the into the subscription and so one of our announcements was.
That I had in the press release was moving.
Hardware as a subscription offering so we do have that available to our to our customers and at the end.
In aggregate that does have some net impact on the cash flow up the of the business because instead of taking that hardware revenue upfront will wrap it into this is subscription overtime now on a cumulative base also be fine I'm overtime deaf cumulative cash flow growth thats.
That's.
Thats ultimately, even a better measure than they are our cumulative cash flow.
That's helpful and just a follow up on your on your.
Hardware the service.
Can you tell us whats the duration is of that ive that subscription on average.
Typically three years I mean, you can have one year or three years, but we typically are aiming for three years.
Great. Thank you.
And your last question comes from a rich Valera.
<unk> Company your line is something.
Thank you one more question on transportation, if I could.
So rob that.
The quarter over quarter decline in transportation was obviously pretty severe in abrupt about 20 million a down quarter over quarter and from what I'm hearing it sounds like you're expecting.
Gradual recovery, perhaps just a little bit in Q3, and I would assume that youre looking out over the next several quarters. That's the way to think about it that will not likely to get back any of that revenue in chunks to be upside in that we should think about this is more of a gradual recovery perhaps from the what I would think is the trough.
Q2.
That's a good way to think about it yes.
Great and then just one more if I could on on the Opex, which you have talked about.
So that was the Opex was down a very impressive almost 20 million I guess quarter over quarter Q1 to Q2 and understand that's not sustainable but any color at all on how much of that we kind of think we get back in Q2, I mean, do we get back half that a third of it.
Any any color on that at all be would be appreciated. Thank you.
Hi.
This is David that.
Depends a little bit on on how the market evolves in the virus and everything I think it's safe to say opex will be up but nowhere near by the amount that it was down in the second quarter. Many of the factors the constrained opex on.
Travel.
And a number of discretionary spending areas will continue to be meaningfully down so it'll be up I'd say up modestly from Q2 to Q3.
And in addition, we would also see some FX.
That's right. The U.S. dollar has weakened considerably so just to FX rates a lot of our cost is outside the U.S.. So that will put upward pressure on opex.
Got it okay. Thank you gentlemen, appreciate it.
And we don't have any further questions at this time I will now I'll turn it over to Mr., Mike <unk> director of Investor Relations.
Thank you everyone for joining us on the call. We look forward to speaking to you again next quarter.
Okay.
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