Q2 2023 Trimble Inc Earnings Call
Thank you for standing by my name is Maria and ill be your conference operator today.
At this time I would like to welcome everyone to the Trimble second quarter 2023 results conference call.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
I would like to ask a question during this time.
Please simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question Press Star one again thank.
Thank you.
Now I'd like to turn the call over.
Hum.
Yeah.
Okay.
I would now like to turn the call over to Mr. Rob painter, Chief Executive Officer Mr.
Mr Painter. Please go ahead.
Welcome everyone before I get started a presentation is available on our website and we ask that you refer to the safe Harbor at the back.
Financial commentary today will reflect non-GAAP performance metrics, including organic growth comparisons, which will relate to the corresponding period of last year unless otherwise noted.
Let's begin on slide two with our key messages annualized recurring revenue as our key top line metric of Trimble. Our team led by our construction software group achieved 14% organic growth in the quarter, beating our internal expectations by 100 basis points. We now stand at a record 1.88 billion of ear or which compare.
The $1 2 billion when we began our connect and scale journey in 2028 or artist doubled since 2018 and tripled since 2015, we are on track to achieve 2 billion of ear or by the end of the year a remarkable figure made possible by the Trimble team who continues to work incredibly hard to execute on our customer driven systems process and busy.
This model transformation.
We delivered EBITDA margin of 25, 3% also slightly ahead of our expectations, which was driven by strong gross margin of 64, 2% for perspective gross margin was 56, 8% in 2015 and 58% in 2018, EPS at 64 cents and year to date free cash flow.
<unk> right to net income of nearly 100% demonstrates the power and potential of our asset light business model.
Our revenue beat in the quarter is attributable to delivering a large federal government order in the geospatial business in the second quarter instead of the third quarter for the year, we are holding our revenue guidance and raising EPS.
Moving to slide three let's look at the progression of our connect and scale strategy through the lens of our reporting segments, beginning with buildings and infrastructure.
The back of the market backdrop remains generally favorable.
America, we see strength in infrastructure and nonresidential construction.
Customer backlogs remain healthy and technology helps to address the skilled worker shortage.
By the numbers ACB bookings accelerated on a sequential basis, and we achieved a record level of bookings in the quarter.
<unk> grew over 20%.
Our trimble construction, one offering is achieving higher win rates larger deal sizes and shorter sales cycles. Further it is helping to grow both new logo and cross sell bookings were.
We are confident in our ability to maintain momentum as our most recent release of digital systems upgrades provide significantly enhanced visibility to even further drive cross sell and up sell.
Strategically we are pivoting more of our hardware offerings to adopt aspects of the subscription business model. For example in building construction layout, our our I lay out instrument is only available as a subscription.
Well construction, we have shifted more value to the software on the systems offerings, thereby positioning us to reduce the upfront cost of our system and monetize over the life of the customer.
And geospatial the market backdrop is largely the same as buildings and infrastructure, it's serving a more highly penetrated customer base by the numbers revenue was well ahead of our internal expectations in the quarter. We continued to see strong demand from U S State Department of transportation and in the quarter our team delivered the aforementioned federal government order.
Strategically speaking, we saw air our growth and our Trimble catalyst product line catalyst offers.
Precision positioning as a service through a subscription offering we passed a milestone this quarter with over 10000 cumulative unit shipped we also expanded our product line and the reality capture space with the launch of our <unk> scanner. We see reality capture is an important product category is it creates a key linkage between the physical and digital worlds, which we can.
Uniquely serve.
In resources and utilities farmer sentiment has been trending negative despite market fundamentals such as commodity prices largely continuing to be healthy.
Our strategic focus and agriculture continues to be building out our aftermarket channel to gain dealer and customer intimacy, thereby providing farmers choice in their technology platforms.
Our revenue was down as expected E. R. R grew at a double digit rate.
Or positioning services business continues to win customers in both on road and off road capacities, demonstrating our ability to innovate in the space of positioning technologies. After 45 years in the business.
We also took strategic steps to further ongoing <unk> growth and forestry, we launched a cloud based log inventory management system that enables us to move down market, thereby expanding the addressable market and in utilities. The team delivered two of the largest software bookings in the history of the business.
In transportation the market backdrop remains challenging with the soft freight market pressure on carriers to streamline their operations for cost savings to increase asset utilization and to increase the productivity of their non driver workforce.
Against this backdrop the overall business both increased operating income margin for six consecutive quarters and grew organic error for the seventh consecutive quarter.
In Europe in our transport business, we see early indications that the spot market might have bottomed out despite a difficult economic backdrop in Europe churn is effectively zero competitive win rates increased and the business is demonstrating an ability to manage the cost structure in line with the revenue environment.
We have early examples of success with bringing the organizations together and making some product roadmap decisions to streamline product development work.
Moving to slide four connect and scale as a platform strategy, which in turn is fundamentally a vertical industry data strategy. No surprise, then that we have been deploying artificial intelligence across trimble for some time now but for internal benefits and customer facing applications. For example, a trial program with over 200 engineers.
Using AI assisted programming denim demonstrated upwards of 25% improvement in productivity.
We have also extended AI into our sales process, where we are applying AI to the cost scripts of our sales reps to coach them and then further again to identify cross sell opportunities on.
On the customer facing front, we are improving our best in class positioning accuracy in harsh environments using AI based are modeling and machine learning on many years of atmospheric data, we're deploying AI in video intelligence solutions and transportation to detect driver fatigue, and distraction and for selective spring applications in agriculture.
In our construction software business, we are automating invoices by converting PDF data into usable accounts payable data, we've already processed over 350000 invoices worth over $1 billion.
Palling use cases, and we are just beginning let me now turn the call over to David to take us through the numbers.
Thank you Rob turning now to slide five second quarter revenue of $994 million grew 3% organically.
Revenue was above our expectations coming into the quarter driven by the earlier than expected shipment of the large orders of geospatial equivalent to the federal government that Rob mentioned earlier.
Excluding net revenues for the quarter were in line with our projections are.
Total company revenue growth versus prior year was driven by recurring software both organic and from the addition of transport yet.
Gross margins were strong again in the second quarter with non-GAAP gross margins of 64, 2% tying the record levels of the first quarter our.
Our gross margins in the second quarter reflect favorable price cost dynamics strong growth of recurring software revenues and a higher margin mix within our product offerings.
EBITDA margin of 25, 3% in the second quarter was up 110 basis points year over year benefiting from our strong gross margin performance operating and EBITDA margins continue to grow versus prior year, even as we lapped strong year ago revenues and as we continue to invest in our digital transformation.
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Cash flow in the second quarter improved on a year over year basis, even taking into account transport Eon deal related expenses are.
Our improved cash flow performance was the result of lower purchases of inventory lower tax payments and higher profitability.
Our capital allocation priority remains debt repayment and we made progress through the quarter on reducing our leverage.
Turning now to slide six for some additional color on our revenue performance product revenue, which includes both hardware and perpetual software was down 5% organically in the second quarter and was aided by the federal order, which we had previously expected to ship in the third quarter.
The year over year decline in product revenue this quarter reflects a difficult comparison with the second quarter of 2022, when our supply chain was freeing up and we were working through high hardware backlog.
As expected dealers reduced their inventories in the quarter.
We expect some modest amount of additional dealer inventory reduction over the balance of this year.
Our subscription and services revenue, which includes SaaS term licenses maintenance and support recurring transactions and professional services was up 13% on an organic basis, largely driven by strong bookings and net retention performance across our buildings and infrastructure software businesses.
From a geographic perspective revenues in North America Asia Pacific and the rest of the world were up organically by 3%, 11% and 18% respectively.
Revenues in Europe declined organically by 4% as adverse macroeconomic factors impacted many of our businesses.
Turning now to results by segment on slide seven our software software portfolio in the buildings and infrastructure reporting segment continued to perform well with organic <unk> growth of over 20%.
Bookings of recurring software offerings in the segment grew at a mid twenties percentage rate. Despite the challenges of transitioning the north American software businesses onto our new digital infrastructure during the quarter. These large system implementations are never easy, but our teams powered through the transition while still keeping our growth momentum going.
With this latest release of our digital transformation, we now have over one third of our buildings and infrastructure RR transacting through our connected system, which will facilitate the acceleration of our connect and scale strategy.
Segment revenues of products for civil construction customers were down at a mid single digit rate in the quarter, reflecting strong shipment momentum a year ago.
In the Geospatial reporting segment, we experienced organic revenue growth driven by the $18 million shipment to the federal government mentioned earlier.
India to see strong demand trends from eight customers in Brazil, and our positioning services business grew globally at a double digit rate as we accelerated our cross sell efforts.
And the transportation segment, we delivered 6% organic revenue growth driven by our North American enterprise and maps businesses.
Mobility business businesses in Europe , and Brazil also grew revenue in a R. R at a double digit rate.
As Rob mentioned earlier operating margins improve sequentially once again, a triple transportation team has made good progress in turning this business around.
And while there's more work ahead of US we are pleased with the progress.
I'll note here that segment results now include the transport in business transport in performance was largely in line with our expectations for the quarter, notwithstanding a tough macro environment in the European transportation industry.
Moving now to slide eight we ended the second quarter with error of 1.88 billion up 14% organically remaining performance obligations or R. P. O R backlog stood at $1.6 billion at the end of the quarter arpino related to recurring offerings grew by over 100 million year over year as a result of.
Are strong bookings performance products are P. O came down as expected year over year, reflecting are improved lead times with this high level of <unk>, we have significant visibility into our revenue in the coming quarters on a 12 month rolling basis, our software services and recurring revenue of 2.3 billion.
We completed the acquisition transport in in the second quarter and reduced net debt by $150 million from the closing of the acquisition through quarter and we plan to continue to Delever and as anticipated expect to finish the year with net debt less than three times EBITDA.
Turning now to our guidance on slide nine the mid point of our guidance for full year revenue remains the same as we issued last quarter.
Revenue guidance range has narrowed to 3.845 billion to $3.9 billion to $5 billion, which represents organic revenue growth in the second half of the year in the mid to high single digits. We continue to expect are are to grow at a mid teens rate for the year, our expectation for gross and operating margins as any.
Kris from prior guidance by 50 basis points, reflecting the strong performance in the second quarter and the heightened focus on margins and cost control.
The end result is an increase in the mid point of our earnings per share guidance range by three cents. We now expect full year EPS in the range of $2.57 to $2.73.
From a segment perspective, our expectation for full year growth in the buildings and infrastructure segment has improved following strong performance in the second quarter.
Our forecast and resources and utilities is down modestly from the outlook of a quarter ago, reflecting weakening macroeconomic conditions in the agriculture sector.
The outlook for transportation and geospatial is unchanged from last quarter.
For the third quarter of 2000 twenty-three, we expect organic revenue growth in the range of zero to 5%, which corresponds with the revenue range of $945 million to $985 million.
We expect gross margins of 100 to 150 basis points lower than the second quarter, reflecting a less favorable business mix.
We expect third quarter operating margins will be similar to second quarter levels.
We project EPS in the range of 56 cents to 64 cents.
From a segment perspective, we expect geospatial revenues to be down organically at a mid to high single digit rate as we won't have the positive impact of a large federal order this coming quarter resources and utilities revenue is expected to be down at a mid single digit organically Rev.
Revenue in buildings and infrastructure and transportation are expected to continue to grow organically in the third quarter at rates comparable to or better than we experienced in the second quarter.
Back to you right.
The Trimble operating system like strategy people and execution with the beliefs that that we must strive for excellence across all three dimensions <unk>.
Progress of the corner represents the quality of the strategy and our ability to execute a close of comments on people and.
Quarter, we want a number of culture awards, reinforcing our ability to attract the best talent in the industry.
We believe that part of attracting the best Y as in developing the best talent of the future.
Trimble Labs initiative, we know sponsor 30 technology labs in 14 countries.
We also believe in the health of our communities and the quarter, we announced breaking ground on a 1.7 megawatt solar array is a renewable energy source that our headquarters in our own technology is currently being utilized to increase the productivity and quality of this installation.
Finally, let me take a moment to acknowledge that Steve Berglund retired from our board of directors completing over 24 years of service at Trumbull, we thank Steve for all of his contributions dedication and years of service to the company.
Maria outcome, what's your board of directors through our next phase of growth.
Operator went to open the line two questions.
[noise]. Thank you at this time I would like to remind everyone in order to ask a question press star and the number one on your telephone keypad.
Pause for just a moment to compel the queue in April .
Yeah first question comes from the line of Christian Owens with Oppenheimer.
Hi, Good morning. Thank you for taking my question and congratulations on a nature salt.
I was wondering if we can maybe start bye bye.
Pieces.
Resources.
And David I think you you call that the three items, but I'm wondering if you can help us parse out check out the macro from the distribution channel once you're seeing an underlying command there and then walk us through how that transition is unfolding in a in a distribution channel.
Sure Hey, Christian.
First thing I'll point out is that our our business with the Oem's was up so that's the good part of the story the factors that I mentioned that caused our aftermarket business to be down year on year, a part of it is the macros, we see a softening sentiment across many of.
The geographies is much more pronounced in Europe .
Then then the rest of the world, but we really see it in Europe . We've also changed our I made an announcement of changes to our distribution network and so that's causing a R us and our dealers to sort of rethink our plans on that clearly had a had a softening effect in that.
In the corner and I were just lapping really big numbers last year. We we had we had really strong shipments as we were working through our supply chain I'll put out our supply chain improved much more quickly than the oem's. They got a lot more parts more complex supply chain. So we saw the surge last year, it's it's a <unk>.
<unk> tough to a tribute the causal nature of the aftermarket revenue declined to those three it is a mix and some of them are interrelated, but I I think overall the sort of long term outlook remains remains positive just as it was we see these as all three of these factors as reasonably temporal.
Okay. Thank you and just to clarify on the transition and the distribution network just any thoughts on how that is playing out at this point and how we should think about the impact from that transition over the the remainder of the year.
Okay Christian good morning, it's robbed the transition is playing out mostly as expected.
So we felt good about where we are and that's the topics. They a process as we go around the globe that were taken 80, 20 principal and as we work with.
Our partners around the world from those that were signing up.
Thus far I think there's very positive sentiment. This creates a closer connection to tremble gets a broader portfolio of technology to take to take to market. So we're feeling we're feeling good about it where we are and they're still clearly a lot of work to be done. So I'd say largely is expected so far.
That's super helpful. And then as my follow up I I wanted to ask about a comment that you made regarding the positioning services can you just remind us what's your what is your market share and positioning services today as we think about maybe specific to orange, yeah, just given the the cross selling opportunities that you call.
About they're just trying to think about what the overall Tan is just given your market penetration and I'll stop that thank you.
Yeah. I mean this has been an extraordinarily successful business for us really for the last couple of.
Arguably the last couple of decades.
To get that two centimeter and less accuracy on a farm or for a survey or for construction equipment Oh by the way for <unk> systems and on road vehicles, you need to have corrections because you have errors in the atmosphere you need additional geometry ground base geometry.
To augment the satellite so we've been a market leader of technology leader and this capability for a long time now uhm continued to actually find the ability to innovate.
And the space from a market share perspective, I'd say, it's pretty clear where the market leader has our technology goes on.
And agate goes in civil construction equipment the machine control. It shows up in serving all places where we have the market share lead so the correlation uhm onto to Turnbull equipment correlates to the market share we have I'd say N and beyond because you don't just have to be trimble on Trimble and we are mixed mixed mixed fleet.
On the on road space, that's became a new frontier, let's say, a new addressable market that opened up for us in the last few years as automotive companies started off towards their path.
Towards autonomy, it's a series of progressive automation, that's why you see a desk picking up as one of the first applications to so to know absolute position for the lane detection, you're gonna need to have a corrections. Unlike like we have so that's an emerging market with <unk> with the presents and expanded addressable market for.
For us in terms of actually sizing specifically the addressable market I have to admit it's a bit hard to do that but I would put it as certainly approaching 1 billion dollar.
Type opportunity type.
Type market opportunity when you put the on road business N as well.
Thank you so much.
Our next question comes from Mister Jerry Rafik Goldman Sachs.
Yes, hi, good morning, everyone.
Hi, Jerry.
Robert I'm wondering if you if you just sure a bit more of the stats for the subscription.
<unk> I know you have a very tight pipeline process, particularly in.
<unk> can you just talk about what the pipeline Oh, it looks like and any comments that you can add on transport <unk> performance beyond the prepared remarks in terms of what the lead indicators look like in <unk> in that light on business and you know if you're willing to touch on new logo growth for the subscription.
<unk> within the performance.
I appreciate it thanks.
Sure Jerry So the pipeline within construction is quite is quite strong. This team is firing on all cylinders at the moment. It showed up in the air organic error growth greater than 20%, which is clearly better than the company number at the plus plus.
Plus 14 level organically.
Bookings were grew faster than the air our growth bookings grew sequentially.
Asked me about that.
The last quarter.
You know you work backwards from the the bookings and into the pipeline and the coverage ratios Ah and we like what we see we see strong strong pipeline strong coverage ratios. The trimble construction, one offering and continues to get momentum for our sellers.
And the market, we see strong cross-sell activity within those bookings at the pieces come together quite nice and then let overlaid over the market backdrop on that and infrastructure in North America is clearly a positive catalyst for us and all of all of the market. So general.
A favorable.
Macro needs a team executing extremely well turns into a pipeline, which turns into that <unk> on the transport <unk> side of the of the house, we're four months into the into.
Enter the acquisition so it's still relatively still.
Still relatively new we like what we're seeing in the business. So far so I think about the people I think about the macros I think about the business and I think about the integration opportunities that we have that we have there now the macro is still more challenging in Europe , it's a math micro monetization business models.
Fundamentally transaction based or consumption based.
And then the nature of the mix of that consumption impacts the revenue what.
What we think we saw in the quarter is that it looks like spot prices might've hit I might've hit a bottom time, one time will tell.
If that's the case.
And then the business model is there too and poised to increase accordingly from a customer perspective from wins in the market. You know we don't lose customers in this in this business. We did have new logo wins in the quarter.
[noise] continued to have bookings growth in the quarter. So I liked the start that we have in the business.
Super Thank you for the detailed color and David could I ask on on the fourth quarter revenue outlook are really interesting. So essentially you know an acceleration in sales of about three points ahead of normal seasonality <unk> can you just unpack what what gives you if that confidence because.
Caterpillar's cutting production and we've got a bit of a different <unk>. Your hardware markets. I'm wondering if you could just talk about the visibility that you have <unk> cause that opened up your guide looks pretty interesting.
Yeah sure J, one thing I'll say is that if you compare trembles trends with the Oems you have to keep in mind the year on your comps, including channel inventory, which are completely different for us we worked through our our supply chain issues in early last year, we saw the surge of shipment.
Our channel inventories have been declining that's not true for all of the Oems the way I guess.
Get comfort on the fourth quarters from a couple of directions first from the bottom up look at the businesses. The the pipeline the underlying trends and then from the top down perspective, I look at comparisons of our projections with the period before COVID-19 in the supply chain. If you actually look at our organic growth going back.
Two four years ago, so which is pre the previews disruptions actually the fourth quarter.
<unk> pound organic growth is very comparable to Q3 and is actually consistent with what we've seen for several quarters. So it looks like a ramp up but when you. When you take the noise of the supply chain, driven ups and downs from a year or two ago. It it looks very achievable. So we're very confident in this fourthquarter outlook.
Super Thank you.
Our next call comes from <unk> with banking. Please go ahead.
Hi, good morning, guys.
Okay.
So I was hoping you could draw down more into the hardware business can you just talk about <unk>.
Segment by segment, you know what you're seeing in terms of no that'd be here on your slow down.
Then also can we talk about the progress of of Destocking to an extent you think you're gonna be finished and when do you think you'd be able to produce in line with retail demand.
Yeah, Hey, Chad.
The first thing I'd say is there were nearly all the way through the Destocking you won't be a meaningful factor from the back half of the year. There was some destocking and Q2. It was much smaller than Q1, so I don't really call that out as a as a major driver, but there's ah it's not just the destocking. This year it was the inquiries.
<unk> inventory levels last year that you're comparing against so you've gotta put those two together to compare our business trends with with retail demand and that's true across the.
Across the market's we serve the from the segment perspective, the business, where we think there has been some and user sales to retailer sales and user decline as in geospatial that as the segment that has most impacted by residential construction both of them.
The United States and Europe . So that's that's been this office if you take the channel dynamics out both this year and last in the other businesses in in egg and in civil construction. It looks like there's modest sales to retail growth even with the numbers were posting so that's kind of how we see.
That's helpful and then I want to hit on your your digital transformation can you just talk about you know how that is progressing. Thank you talk to <unk> about 30 of products are being sold this way.
Maybe you could talk also about just you know what you've learned so far now with it that third of that business second being being transformed.
Yeah. So we got through the next phase of our digital transformation during queue to we put our north American construction enterprise software businesses together on a common digital platform and as I said in my prepared remarks. These big processing system changes are never easy they can be disruptive.
It's we are now in a position only just now to take advantage of the benefits that the common platform provides to us and further enhancements to that are gonna roll out even this quarter. So we're we're getting to the point where we're.
Cross sell and the connect and scale vision is enabled and not hindered by a diversity assistance now we have common technology, we have visibility into our pipeline salespeople <unk> can see what customer business is across the trimble portfolio in ways that they couldn't systematically before so.
We're just getting going <unk>.
Just beginning to realize the potential of this new process and tool for that business and we will continue over the next year or two to roll out the same approach to the rest of our business.
Great. Thank you.
Our next question comes from Mister Jonathan home with William Blair. Please go ahead.
Hi, Good morning, just wanted to start with T. C. One and can you maybe give us a little bit of additional color in terms of you know how this is may be impacting your ability to transact with customers. That's why I was where do you see one maybe it has surprised you.
Hey, Jonathan Good morning, a throb.
G T. One so far has been I'd say, a large success and I think we're just getting started with it.
Oh I've had an.
The example of a customer say, okay, I I I used to have to have 14 different transactions with the added to do business and now I can do it under one.
Frame agreement, we're making ourselves easier to do.
Business with when we sign a frame agreement, let's say with a customer who may be it's only buying one solution within T. C. One if you sign the frame agreement, it's now easier to.
<unk>, so to Atlanta, and expand as more easily enabled because you don't have to go back in with a set of terms and conditions.
Conditions uhm customers are able to.
Connect workflows, as we have tighter and tighter integrations and the data across the products and solutions that we sell to customers. So any side take surprise with M. T. C wanted to me as to the upside absolutely validates connect and scale and as a beacon for the rest of the company.
Any.
Of what we can do it when we rethink how we go to market and how we take our solutions to market. So I was very encouraged with what we're seeing in the business and proud of the team that's delivering here.
Got it and you also mentioned a I during the prepared remarks can you give us a little bit of a sense of you know how this could be a potential driver of revenue b timeframes for that as well as on the productivity side. Thank you.
Certainly let's split the two and then the slide that goes along with her prepared remarks that we made it on purpose put one distinction of the internal facing example separate from the customer facing an example, so if we take the productivity opportunity internally I think the place will see it show up first is with them.
The R&D on the developer side with a co pilot trial that we ran.
In the second quarter of the church and productivity benefits I think this is going to be the way that business is done so.
I would like to believe that will see the show up over time as we can get more scalability out of the resources. We have set another way is if this works that turns into op leverage them on revenue growth that we have in the future. So call it more scale ability more more effectiveness in turn.
Effectiveness and efficiency, which.
Which I think would ultimately manifest.
And off leverage our that marginal contribution on the revenue.
Revenue growth.
On the customer facing side I think this would be very interesting to see how.
At this monetize over time, you know you right now I would say, there's an aspect where we make the solutions, we sell better trembles, a premium price provider in the market. I think this is part of earning that premium is continuing to innovate and develop and then have the best there's another aspect of capabilities.
Which we believe will come through when you're buying a bundle such as T. C. One when you're buying that platform offering her that cloud offering such that if you have I'll say, it and incremental set of analytics capabilities.
We want to deliver them when you're buying.
When you're buying something like T. C. T C. One so where you can uniquely get them by virtue of that business model I suspect that that's going to be the way that we will see this monetize I think.
Stand alone analytics.
I have a question if those will actually be able to monetize independently and on their own I really think it comes through making our solutions better.
Great. Thank you.
Okay.
The next question comes from the liner Tammy.
<unk> with J P. Morgan. Please go ahead.
Hi, good morning. Thank you so much so unfashionable construction one can you give us some color on what percent of your being a customer now have.
T C one and using multiple solutions on it and do you have any said Cola time fame to convert a second per cent of the customer base into Tuesday on customized.
Hi, Tammy good morning, it's Rob.
Let's take that and three slices within <unk>.
With N B and I you know we have the civil construction fundamentally we have the civil construction business machine control as you would.
And then the construction software.
Within the civil construction business, we don't we really don't have T C. One.
Today, but that is absolutely, we're calling us connecting.
The machine control offering with the software and when we do that informally today like that's the path will will for sure be going so I'd say, we're not fundamentally doing it in in the civil space today. So there would be no customers that were heading.
There within.
Within the construction software business that we have this is for sure where were taken a business and we're we're having success I have one caveat within that which is R. Sketchup product in architecture and design business cause catsup has millions of users from from makers to architects and so.
It's a different market segment. So I don't think that the million millions of users of Sketchup are going to all be relevant for T. C. One so if I take out within the subset of the construction software. We would we would have an ambition to have you know as well more than half of our customer base on a tremor.
Construction of an agreement we've got many thousands of customers on the frame agreements today. The team does a great job, even if somebody's not buying a full bundled opportunity.
That they're putting them on the frame customers on the frame agreements such that they have a path to have access.
To more of our solutions and to have more of those.
More easily so I hope that gives you a little color of how we think about.
The T C. One opportunity within within <unk> Uhm, what will continue to do I guess I have a little bit more Tammy is.
Our sweet spot today is that that contractor level with the T. C. One offering then then we look at an architecture and engineering experience for four T. C. One we look at our civil contractor experience for T. C wants to have a <unk> a series of expansions through Taylor.
Ring experiences to the customer segments that we serve and then actually also rolling this out on a global on a global basis. So overall, we're still in the early innings and that's good news in terms of the continued growth opportunities.
[noise] God. That's that's very helpful color. Thank you and and my follow up question is the price cause benefit under quota that you saw that helps gross margin can you quantify how much it was and what segments drove that.
Yeah, I mean, just to give you a loan.
Higher level of <unk> color on that for the moment, so the qualitative before connotative on the qualitative side the gross margin improvement.
Is fundamentally about the mix of the software business. So this isn't a price.
I'll say, a price driven benefit where we also see benefit and the margin is from the cost debating of inflation coming down in the supply chain you know purchase price variances going down are going going away. So that means the hardware businesses are returning to increase their gross margins by and by and large you put that on top.
Selling more software, which comes naturally with a higher gross margin and you'll get you'll get that 64.2% gross margin, which is a tie in the record. We had from Q1 and is a remarkable change from gross margins of the past at tremble. So it's more of a much more driven by that then price.
Got it thank you so much.
And next question comes from Mister Robb Nathan with Derek.
Please go ahead.
Yes, good morning, I wanted to see if you could.
Speaking to the maybe the B and I and geospatial areas collectively.
Could you segment out what you're seeing between infrastructure entrenching Nonresident Struction and then just with respect to residential construction do you think you were at a point of stabilization there.
So hey, we're all good morning.
Other robbed [laughter].
On the morning, if we look at it and good morning, if we look at the segments within the market clearly infrastructure is the strong point.
Both I'd say North America, but also also globally.
There's also a mega projects happening around the world and those are those are positive for us on the non <unk> scifi exclude infrastructure nrem.
What are we see pockets of continues to be pockets of strength and if I think here in North America, I think about renewable energy projects, we think about some onshoring.
Manufacturing data centers correlate to.
AI.
We believe those are areas, where we're seeing.
Strength.
Oh mm residential specifically you know, there's a little bit of a mixed hail mm you know their stuff.
A fair amount of new homebuilding happening stay within the U S here for a bed on residential.
But instead, we see sort of up and down <unk> on that I mean, it's been net down on residential for sure.
And hopefully we can get to some stabilization on that I don't know that I would call. It stabilized yet in North America, but you know the <unk>.
Bonhomie, it looks like we might be able to head for us. If we have for that soft landing then that would be a good thing I residential it's been harder in Europe , and and that one has you'll have much more of a challenge than.
And the U S and that's worth that's worth calling calling out so you put the some of that all together and.
You get the forecasts weapons, where where you get the results that we have in the forecast that we put going forward.
That's helpful.
And it just as a follow up David you did and I know, we just had the discussion around gross margin, but David you did speak to.
You know that steps down in the third quarter, what should we expect it.
Steps back up in the fourth the mix becomes more favorable again.
Yeah, <unk>, it's mostly mixed driven both the dynamics from Q1 Q2, and then two two for the rest of the year, we do expect it to step down in Q3, and then up again modestly in queue for driven by more <unk> more software mix in the business.
Pretty good thank you.
Sure.
Our next question comes from Mister Devon, Oh with Keybanc capital markets. Please go ahead.
Great. Thanks for taking my question, you know <unk> bug, a construction software business his wallet and I'm really strong results. There uhm I think money will become patterns reported yesterday and saw charged me a cupcake slightly.
I'm just curious if you've seen any similar dynamics around China, and a quarter a noticeable uptake of <unk> and you can also comment on top retention Park.
I was trying to from awkward that'll be helpful.
Yeah. The in our construction software businesses across the board, we're seeing very strong demand. So is Rob mentioned earlier the pipeline is strong we've seen no uptick in churn and that retention trends are really good. So the the fundamental subscription metrics look very solid across our construction.
And software business.
Got it and not have to wait to hear and then a quick follow up for me you mentioned the closing of a large federal government ordering geospatial uhm any details on your how large that deal that I just want to get more color on how much revenue got pulled forward from three do you want to take you. Thank you.
It was just a touch over $18 million geospatial equivalent for the federal government.
Awesome.
Thank you.
You're welcome.
Ladies and gentlemen, this concludes today's call. Thank you all for joining you may now disconnect.
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