Trimble Inc

NASDAQ:TRMB

Earnings Call Transcript 2019-Q1

[Operator]

Good afternoon. My name is Erica, and I will be your conference operator today. At this time, I would like to welcome everyone to the Trimble First Quarter 2019 Earnings 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. [Operator Instructions]

Thank you. Mr. Michael Leyba, you may begin your conference.

[Michael Leyba, Director of Investor Relations]

Thank you, Erica. Good afternoon, everyone and thanks for joining us on the call. I'm here today with Steve Berglund, our CEO; and Rob Painter, our CFO. I would like to point out that our earnings release and the slide presentation supplementing today's call are available on our website at www.trimble.com, as well as within the webcast and we will be referring to the presentation today. In addition, we will also be posting our prepared remarks on our Investor Relations website at investor.trimble.com shortly after the completion of this call.

Turning to slide 2 of the presentation, I would like to remind you that the forward-looking statements made in today's call and the subsequent question-and-answer period are subject to risks and uncertainties. Trimble's actual results may differ materially from those currently anticipated, due to a number of factors detailed in the company's Form 10-K and 10-Q or other documents filed with the Securities and Exchange Commission. The non-GAAP measures that we discuss in today's call are fully reconciled to GAAP measures in the tables from our press release.

With that, please turn to slide 3 for an agenda of the call today. First, Steve will start with an overview of the quarter. After that, Rob will take us through the remainder of the slides, including an in-depth review of the quarter, our guidance, and then we will go to Q&A.

I would also like to briefly mention that during the month of May, we will be attending the JPMorgan Global Technology Media and Communications Conference on May 14 in Boston, as well as the Goldman Sachs Industrials & Materials Conference on May 15 in New York.

Please turn to slide 4. And I will turn the call over to Steve.

[Steve Berglund, Chief Executive Officer]

Good afternoon. We delivered in most respects, the quarter we anticipated three months ago. Compared to prior year, revenue of $805 million was up 8%. Annualized recurring revenue of $1.07 billion was up 30%. Adjusted EBITDA of 21.4% was up 60 basis points and trailing 12-month free cash flow was up 38%. We continue to expect that growth and profitability metrics will be relatively stronger in the second half of the year than the first half. The quarterly results provide further evidence of the ongoing transition of the Trimble business model towards increased software content with the growing proportion of that in the form of subscriptions. Although, the change is taking place through relatively small quarterly increments, the aggregated multiyear effect is transformational.

Rob will speak more specifically to the rest of the year, but a summary view is that the Building and Infrastructure and Transportation segments both continue to operate in healthy markets.

The Geospatial segment is challenged by a slower OEM demand. And Resources and Utilities is currently constrained by a U.S. agricultural market, which is suffering from trade dispute on a certain date.

Although, revenue growth was at the low end of our strategic growth model, ignoring exchange rate effects we believe the fundamentals continue to support our long-term expectation of 9% to 12% of combined organic and inorganic revenue growth. This optimism is driven by our estimate of the penetration still available to us in our targeted markets, which allows us to expect higher growth than standard GDP or industry-specific growth metrics.

Innovation remains our principal mechanism to achieve market penetration and above average growth. Our three points of emphasis on innovation are, to increase our reliance into platform technologies that have utility across the company, to use those platforms to create solutions that are targeted to add individual protocol markets, and to discipline that innovation within our management construct of 3-4-3, which places equal weighting on performance in the next three months, the next year and the next three years.

Our innovation consists of a combination of transformative point solutions, which are targeted at individual operations within the workflow and on comprehensive information solutions that unify office and field workflows. Beyond that, our competency in both hardware and software allows us to create value by integrating the physical and digital worlds into unique solutions.

The strategic agenda was advanced through a number of actions in the quarter. Although the list is not complete, it is representative of Trimble's ability to bring together different elements to create unique and powerful solutions.

In the Buildings and Infrastructure segment, the recent e-Builder and Viewpoint acquisitions continue to enable our objective of reinventing project, delivery and construction, by transforming workflows through a constructible model. The two acquisitions are now embedded within an integrated Trimble market concept, which is delivering a continuous flow of incremental functionality to the market.

The Buildings and Infrastructure segment also had two significant product launches. One was the beta release of WorksManager which is cloud software that creates a two-way interlink between the digital design and the office and machines in the field. The other meaningful product announcement was the XR10 with HoloLens 2. This is a mixed reality device in a hard hat that allows an on-site construction worker to utilize mixed reality and Trimble's unique construction workflows on the work site. Both technologies emphasize Trimble's comfort in both the digital and physical worlds as source of relative advantage.

In the Resources and Utilities segment, we released our first version of AutoSync software and firmware that synchronizes materials management and the management of the farm implement. This allows us to leverage the installed base of field displays to provide common guidance lines, boundaries and operational information across all connected devices.

In the Transportation segment, we reorganized and integrated the mobile and enterprise businesses in a unified, more cost-effective organization with the expectation of accelerated progress. We have now completed the process of combining the PeopleNet, TMW and ALK brands into the Trimble identity. The Transportation segment also had a significant product release Trimble PULSE Telematics in February. It connects data from the field to the back office, enabling workflow optimization for technicians providing field services.

In the Geospatial segment, we expanded the vehicle-based mobile mapping portfolio that was successfully launched in 2018. By introducing a lower-priced version, we have expanded our addressable market to midsized surveying and engineering firms and state departments of transportation.

In the last two quarters' calls, we identified a number of emerging watch list issues that might impact us. There were four issues identified as we left the fourth quarter which provide us with an inherent upside if the trajectory changes, since we embedded a level of conservatism in our forecast to account for their impact. The first was the impact of trade policy, which continues to create a significant uncertainty for U.S. farmers and the resulting reluctance to invest. This hesitancy to invest impacted our Resources and Utilities segment performance in the quarter which was partially offset by better performance in other regions. The China-U.S. trade agreement is likely to create clarity for U.S. farmers and provide us with immediate upside potential.

The second issue was Brexit, which remains an unresolved issue although deferred. Although, the Brexit effect is hard to pinpoint in what was a generally upbeat quarter for us in Europe, the uncertainty is impacting the appetite for investment to some degree. Beyond Brexit, the European export economy is exposed to a slower Chinese economy. To the extent that these issues impact decisions on new investment in plant and infrastructure, it impacts us as well.

The third watchlist item was the combination of slower Chinese growth and intensification of Chinese government policies that create explicit preferences for Chinese companies over non-Chinese companies. Our first quarter revenue in China was down significantly year-to-year, primarily as the impact of slower economic conditions on our Chinese OEM sales and secondarily, as a result of the mandated preferences for Chinese-sourced products.

The relative silver lining is that our downside exposure to China is limited as it represented less than 2.5% of total company revenue in the quarter.

The rest of Asia outside of China improved more than 10% and is offsetting much of the Chinese impact. We continue to believe in China as a long-term growth market and believe that clarified trade expectations can provide us with a net upside. The fourth watch list item was OEM demand, which as we anticipated was a drag on the first quarter. This is a mixed bag. On the one hand, we are encountering some short-term headwinds in our more traditional OEM markets in tiny and embedded components. On the other hand, we are establishing significant new OEM partnerships in construction and agriculture.

Our improving profile was evident at Bauma, the world's largest construction show where we were present as part of the machine solution in 20 OEM booths. Recent press releases of new or extended OEM partnerships have included Kobelco, Liebherr, Doosan and Volvo. Strategically, our primary market focus is not on OEMs, but remains on the end user, which accounted approximately 85% of our 2018 revenue. The logic is that those end users principally farmers, contractors and trucking operators live in a mixed fleet universe and it is important that OEMs operate within an interoperable hopefully Trimble-centric technology ecosystem.

Another positive external consideration remains the U.S. infrastructure bill, albeit with a still unclear probability. Both political parties support the concept of a significant increase in infrastructure spending, but both are struggling with finding a funding mechanism. If a bill should pass, we expect that it will contain elements that will promote more cost-effective spending through an emphasis on digital construction. Passage of a bill would have an immediate move-the-needle impact on results in multiple reporting segments. In summary, despite some uncertainties, we remain on track strategically and anticipate strengthening organic performance during the rest of 2019.

Let me turn the call over to Rob.

[Rob Painter, Chief Financial Officer]

Thanks, Steve and good afternoon, everyone. Let's turn on slide 5 with a review of the first quarter results. Starting with the top-line, first quarter total revenue was a little less than $805 million growing 8% year-over-year. Breaking that down currency translation subtracted 2% and acquisitions added 7%. Organic growth was 3%.

ARR or Annualized Recurring Revenue grew to $1.07 billion in the quarter up 30% year-over-year and up in the low-teens organically. Gross margin in the first quarter was 58% up 90 basis points, which came from a combination of M&A and organic growth. While the adjusted EBITDA margin was 21.4% in the quarter up 60 basis points year-over-year.

Operating income dollars increased 8.3% to $152.9 million with operating margins of 19%. While operating income dollars increased net income was essentially flat on a year-over-year basis and earnings per share at $0.45 was also flat year-over-year. This was a result of higher interest expense and the increase in our non-GAAP tax rate from 19% to 20%.

For additional context on a trailing 12-month basis, revenue was up by 15%. EBITDA margins have expanded by 220 basis points and EPS has increased to 23%. Cash flow from operations was $148 million up 78% year-over-year and up 35% on a trailing 12-month basis. Free cash flow, which represents cash flow from operations minus capital expenditures was $133 million in the quarter and was up 38% on a trailing 12-month basis. Cash flow growth in the quarter was driven by operating income growth, favorable working capital dynamics and lower acquisition expenses as compared to the first quarter of 2018.

Moving to the balance sheet. Our business model continues to be asset-light. Deferred revenue was $464 million up 29% year-over-year. This correlates to the increasing recurring revenue mix in the business. Net working capital inclusive of deferred revenue stands at 3% of revenue on a trailing 12-month basis.

Next a few comments on debt and liquidity. We closed the quarter at a gross debt level of just over $1.89 billion and net debt of $1.68 billion representing 2.31 times net debt to adjusted EBITDA on a trailing 12-month basis. Less than a year ago, we stated that we would delever to under 2.5 times within 24 months of our acquisition of Viewpoint and we have achieved that in less than 12 months due to strong cash flow and EBITDA progression over the past few quarters as well as by continuing to pay down the debt itself.

As evidenced, we paid down an additional $73 million of debt in the quarter and have reduced our gross debt by approximately $300 million since we closed the Viewpoint acquisition in the third quarter of 2018. For perspective, on our liquidity, we have borrowing capacity on virtually all of our $1.25 billion revolver.

The point is that our business model works, our balance sheet is resilient and well designed with well staggered maturities on the debt and ample liquidity should we need it. In addition to the repayment of debt in the quarter, we also repurchased $40 million of our stock.

From an overall financial performance perspective, I would like to highlight and emphasize three metrics from the quarter. First, our annualized recurring revenue continues to demonstrate strong and consistent growth, reflecting the ever-increasing software and subscription content within our business mix.

Second, the growth in our free cash flow demonstrates our technology orientation and the asset-light-centricity of our business model. Third, our ability to delever rapidly following a large acquisition, such as Viewpoint, further evidences the cash generation capability of our business model.

Let's move to Slide 7. We have revenue details at the reporting segment level. Overall, revenue was in line with expectations. As is the case in every quarter, there were puts and takes. We continue to see softness in the OEM portion of our Geospatial business particularly in China.

We also saw a continued softness in the North American agricultural market, which has been adversely impacted by the trade situation with China. And finally, we experienced discrete delays and project completion sign-offs that postponed the capture of revenue in the quarter.

In terms of where we performed better than expected, I'd like to highlight Buildings and Infrastructure as well as Transportation. In Buildings and Infrastructure, we outperformed in the aftermarket in both civil and building construction.

Two notable highlights. First, the subscription transition in the SketchUp business has been successfully received with a better-than-expected mix of subscriptions, which negatively impacted short-term revenue, but was then partially offset by higher-than-expected unit growth. Second, our Viewpoint and e-Builder acquisitions were in line with expectations.

Subscription bookings growth continued to be strong and ARR for the two acquired businesses combined was up approximately 20% year-over-year. In Transportation, the truck routing mapping and navigation business was a standout performer in the quarter with a difficult prior year comparison.

Moving to slide 8. Our overall geographic revenue mix remained relatively unchanged on a year-over-year basis. We experienced growth of 10% in North America driven by construction growth in the U.S. In Europe, we experienced growth of 10% with general growth across the region including the U.K.

In the Asia Pacific region, we saw a slight headwind of negative 1%, driven mostly by difficult conditions in China, while other major regional markets were up. And lastly, in other regions we were up 3%, including contributions from a recent acquisition of Veltec in Brazil.

Please now turn to slide 9 for a review of our revenue mix by type, which is presented on a trailing 12-month basis. Software services and recurring revenue continued to grow up 28% with organic growth rates in the low teens. This now represents 53% of total Trimble revenue. Within that recurring revenue, which includes both subscription as well as maintenance and support revenues grew 29% year-over-year and now represents 31% of total Trimble revenue.

Software and services grew 27% year-over-year and the hardware has grown at a low single-digit rate, reflecting in large part the recent headwinds in our OEM-related businesses as well as difficult comparisons in Transportation from the Phase one implementation of the ELD mandate a year ago.

Lastly, I would like to mention that, starting this quarter, we have disclosed additional revenue details on the summary tables provided on our Investor Relations website. These revenue details correspond to the numbers on this slide.

Next let's turn to slide 10, where we have the operating income details by segment. In short, the operating income results are consistent with the revenue commentary with Buildings and Infrastructure as the strongest performer. Resources and Utilities and Geospatial margins reflected and were impacted by the aforementioned revenue dynamics, while Transportation margins were largely in line with expectations and are expected to expand in the second half of the year.

Moving now to guidance on slide 11, overall, we continue to see the year playing out as we discussed in last quarter's earning call, with organic growth, margins and earnings growth improving throughout the year, coupled by a continued shift towards software and subscription revenues.

For the second quarter, we expect revenue of $850 million to $880 million, and EPS of $0.52 to $0.56 per share. The second quarter revenue range implies total company growth of 8% to 12%, with organic growth in the 3% to 7% range, plus 7% from acquisitions, less 2% from FX due to the strengthening of the U.S. dollar.

Our second quarter organic growth guidance reflects an expected improvement from the first quarter, which does not assume macro level improvements and is driven by two factors. First, the second quarter is traditionally the strongest quarter for civil construction. Second, in Transportation, we will have lapped the ELD related installation surge.

One comment on cash flow for the second quarter, please note that while we accrue interest quarterly, the cash interest payments take place in the second and fourth quarters. For the full year, we are reaffirming the view we discussed last quarter, expecting full year company growth in the 6% to 10% range with organic growth of 4% to 7%, 3% or 4% from acquisitions and a negative 1% from currency impacts.

We continue to expect organic revenue growth and operating margins to improve through the year with EPS growth in the high-single-digits for the full year with double-digit EPS growth in the back half of the year.

From a revenue seasonality perspective, let's step through the sequential quarters. We expect second quarter revenue to be the highest revenue in the year, which is normal given that it represents the peak of the construction season. In the third quarter, we expect slightly lower sequential revenue, reflecting an expected seasonal summer dynamic.

Finally, we expect fourth quarter revenue to be sequentially above third quarter revenue, in part because our fiscal year this year is 53 weeks, which includes an extra week in the fourth quarter.

For this same reason, we would expect operating margins to be strongest in the fourth quarter given that the fourth quarter normally has the highest proportion of software-related revenues and the extra week will bring in an extra week of recurring revenue with healthy margins.

From a cash flow perspective, the strong first quarter reinforced our expectation that cash flow from operations and free cash flow will grow faster than net income during 2019, and the cash flow from operations will exceed net income.

From a capital allocation standpoint, we expect we will continue to delever while selectively evaluating buyback and M&A based on market conditions and available opportunities.

In closing, the guidance for the second quarter and the full year reaffirms our previous guidance for the first half of 2019 as well as the overall year.

Let's now take your questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Jonathan Ho with William Blair.

[Jonathan Ho, William Blair]

Hi. Good afternoon. And just wanted to congratulate you on the solid results here just given the challenges that are out there. Can you maybe give us a little bit of a sense of maybe how you see the situation around the macro unfolding and perhaps some of these headwinds from China? Are there steps that you can take to sort of mitigate what's happening there, and just any sort of broader thoughts around those topics?

[Steve Berglund, Chief Executive Officer]

Well, I don't know that we've got, let's call it particularly great insight compared to what is already available to you. But, certainly what we're seeing is that Europe continues to remain generally strong. We look in the direction of Germany, which is being affected by China maybe more than others in terms of its export markets, and whether that will put a damper on investment. But, so far it's holding up.

There's, of course, the Brexit issue that will have a specific impact on UK potentially, but then the rest of Europe. So Europe -- but, Europe seems to be comparatively robust with some puts and takes. Brazil. Brazil is a market that's been very strong for us for quite a while in agriculture, but I think we're beginning to get a sense and our belief system is strengthening that Brazil is potentially an upside market relative to the other markets. We now have a position in Transportation in Brazil with the acquisition of Veltec and then we believe that we are seeing kind of call it greater potential for construction. So I think Brazil has a possibility of entering into our dialogue more generally across the company not just in agriculture. So hoping -- Argentina of course is on the other end of that spectrum, which is comparatively troubled at that point in time.

But -- and then China, okay China has something of a wait-and-see. I think that even in a diminished growth market in China there are opportunities. Now we are currently in a position where we've got specific issues with some specific OEMs in China. Okay. As we work through those, I think we're back to let's call it the long-term trend line in China. And under normal circumstances I think that we find China attractive even at diminished growth prospects. So I think there's plenty of market there to be had.

I think the -- where we're waiting to see about what's actually in any potential U.S.-China trade pack is about relative access. As I said in the script, China is more -- maybe has intensified since the beginning of the trade issues with the U.S. has intensified their relatively preference for local companies, if -- as part of the trade. Any trade agreement that that would re-equalize the level of playing field we would more have confidence. But I think China is just a place of caution at this point in time. Hopefully, we get some clarity in the near future on that relative to at least the trade situation.

Japan, we are doing -- is quite an attractive market for us at this point in time in part being boosted by Olympic-related spending and such. But Japan's -- against the 10-year standard is doing quite well at this point in time. South Africa which is always been a relatively strong market for us is struggling at this point in time. So I think I have more or less covered the world there. But -- so I'd say steady as you go. Watching China and of course the U.K. particularly closely at this point.

[Jonathan Ho, William Blair]

Thanks for the color. That's super helpful. Just one other one for me. In terms of the infrastructure bill, you guys talked about seeing -- potentially -- needle-moving benefit. How should we think about those potential impacts?

[Steve Berglund, Chief Executive Officer]

Jonathan you kind of faded out there for a second. I think I got it, but can you just repeat the question?

[Jonathan Ho, William Blair]

Sorry just regards to the infrastructure bill, where would you potentially see those immediate impacts take place?

[Steve Berglund, Chief Executive Officer]

Well, if an infrastructure bill is passed and is truly an infrastructure bill that means roads and bridges and things like that as opposed to let's call it other extraneous spending that sometimes wanders into the infrastructure bill. I think -- I believe there would be an immediate impact for us, because I think that contractors seeing a more certain flow of projects would start to build the capability to effectively compete for those projects. In our view that leads straight back to investment and technology to be able to bid aggressively as well as control the projects.

So I think that what we would see before any money actually get spent, we would see an investment by contractors, anticipating the money flow and getting ready to be competitive in the bidding process. So I would see that as the dynamic is that we would not necessarily have to wait. Yes, because when the money starts to flow, it would be enhanced, but I think there would be immediate effect in terms of anticipating and getting ready for money flow.

[Jonathan Ho, William Blair]

Thank you.

[Operator]

And your next question comes from the line of Jerry Revich with Goldman Sachs.

[Jerry Revich, Goldman Sachs]

Yes. Hi. Good afternoon and good evening, everyone.

[Rob Painter, Chief Financial Officer]

Hi Jerry.

[Jerry Revich, Goldman Sachs]

I'm wondering if you folks can talk about the bookings growth performance on e-Builder and Viewpoint particularly with subscription bookings what was that performance like this quarter. And then, you guys spoke about SketchUp being ahead of expectations maybe touch on that as well first.

[Rob Painter, Chief Financial Officer]

Sure. So, we shifted – Jerry, we shifted the commentary on the acquisitions, the recent acquisitions to an ARR, in terms of the disclosure going forward. I think given that both businesses are 75 -- more than 75% of recurring revenue.

The real metric we think to pay attention to is this recurring -- or excuse me is the ARR that gives you the best sense of how the business is performing. The other -- but in short, to give you just a little bit of flavor of the booking they continue to be strong double-digit growth in year-over-year bookings on Viewpoint and e-Builder.

And for a little more color on the SketchUp business, we went into the quarter expecting – well, this is the first quarter of the transition, official transition out of data, went it expecting a higher mix of perpetual to subscription because we do offer both.

And it was the inverse. And we really saw the big uptick in the subscriptions. And so I would say it was a nice upside. It really to us at least as an early indicator what appeared to show, that it's a way to increase the size of the addressable market.

[Jerry Revich, Goldman Sachs]

Okay. And then Rob, you mentioned on your ARR metric the organic growth was double-digits. Can you just say that's around the major pieces? We covered a few of them here, but can you comment on the transportation and logistics, the subscription business how that's tracking? And any parts of the subscription portfolios that are weaker for us to keep an eye on as well? Any comments there would be helpful.

[Rob Painter, Chief Financial Officer]

Well, good news would be there are no meaningful weaknesses to speak of in the subscription business taking a walk around the company, in the transportation business. We continue to grow the subscription base.

Our enterprise offering which is the back office transportation management software is beginning to offer, a subscription model to a customer base. And that allows us to penetrate a part of the market that we think we weren't accessing before.

Still very early days, so that's all in that I would say upside from a subscription point of view. When we look at the one I called out as the standout performer was the routing, mapping and navigation software which continues to find its way to new logo acquisition through market segmentation.

And the team's done a really nice job of identifying, vertical markets and working backwards from those markets and putting product and go-to-market plans around that. And from -- if I step next into the Resources and Utilities the correction service business we have which is a subscription business continues to grow.

And when you look at units there are customer accounts, so healthy growth there in the business. And then, when we go to the Geospatial, it doesn't have meaningful subscription to speak of.

So then going to Building, an Infrastructure market and looking at the rest of the software portfolio that we have there particularly in the BIM-related construction software space the really the business overall has performed performing quite well double-digit growth currency neutral, double-digit growth in those businesses.

So, really nice set of performances in all I'd say the software businesses in aggregate and double-clicking on that within subscription in particular.

[Jerry Revich, Goldman Sachs]

Yeah. And in your prepared remarks you folks included a lot of discussion on the puts and takes around what could drive the hardware part of the business. Can you just talk about the subscription and the recurring revenue piece if we do -- if you hit pockets of the slower growth?

And what are your expectations for the resilience of the recurring revenue piece and the subscription piece within that specifically?

[Rob Painter, Chief Financial Officer]

Well, our belief that, would be that there is a higher degree of resilience in that revenue stream for starters. Of course we'd say if you take ARR at $1.07 billion coming out of the quarter, we've got line of sight to that $1.07 billion 12 months forward.

Now what you have to do, of course, there is to retain that revenue base and -- which is a way of saying don't turn that revenue base if there were to be a bigger pocket -- air pocket in the economy. But at some level, time will tell how the resilience holds up. But from our view that we have of it right now we feel like -- and our track record would suggest that we have a very high degree of retention.

You've heard me talk before about the Viewpoint and e-Builder businesses where our net retention ratio is greater than 100% so we're penetrating existing customers and cross-selling greater than return customers which is a really incredible part of those business models of those two businesses.

So, in aggregate, Jerry, I would say the resilience factor is markedly higher in that revenue stream as opposed to others and we have still evidence of that in the quarter. I mean, clearly, the hardware growth was lower than that of the software and the perpetual software growth was lower than that of the subscription.

[Jerry Revich, Goldman Sachs]

Okay. Thank you.

[Operator]

Your next question comes from Ann Duignan with JPMorgan.

[Ann Duignan, JPMorgan]

Hi. This is Ann Duignan. Good afternoon, good evening. Steve, maybe I'll start with your comments on infrastructure spending and infrastructure projects. I think you've probably been around long enough to remember the shovel-ready program that were put in place back in 2008 or 2009 where literally all that happened both state and local governments stop spending, because the money was all coming from the federal government. And so net-net, we didn't really see any positive impact from that school of projects.

So, I'm just curious why you think that this infrastructure spending bill could be different. And what's the probability of it getting signed before the next election or at all given where the funding debts are?

[Steven Berglund]

Yeah. Without a doubt Ann, skepticism perhaps even cynicism is appropriate here. You are right is -- the 2008/2009 version so-called shovel-ready was, yeah, a mystery act where -- when one pocket came up, the other pocket in some fashion state and federal. So I don't know for sure that -- with any certainty that this will be different. But good news is we have no upside at all built into our forecast so anything that will come out of it would be upside.

I think that we have actually spent a reasonable amount of time in Washington, with trade groups and whatever. I think maybe the tone within the Department of Transportation is perhaps different this time. There is a level of seriousness there. Now whether that can be brought through the political process without getting mutated into non-recognition is an open question. So I think the outcome is still very much in doubt.

I think if you listen to the rhetoric from the two sides, they're talking maybe two different things. One side is maybe talking more about highways and bridges. The other is talking about broadband, infrastructure and such. So it's not at all clear what the actual substance would be. So recognize that. And again, we're not counting on anything. We're not building on anything.

Now I think in terms of relative probabilities here against the standard of three to six months ago, I think that there is maybe marginally more room for optimism. I think that -- again the meeting -- the recent meeting between the President and the Democratic political leadership in the House and Senate -- okay, that was for public consumption. There is still no agreement on funding, but okay, it is -- it does represent something. And I think if you look at the -- look particularly on the House side, I think Congressman DeFazio is very -- seems to be very much determined to get something done. Ultimately, the issue is one of funding sources and I think that still remains the great divide between the two sides. But again, I think in terms of relative activity and relative profile, I think it is much more active today than it was six months ago. So, we'll just wait and see.

But if it did happen, it would be a big deal for us. But we're -- in the meantime, we're assuming basically zero impact in our forecast. So we're hunkered down, waiting for something to happen. But, I think, maybe, the probabilities are somewhat better than they were six months ago, but probably, realistically not very high.

[Ann Duignan, JPMorgan]

Thank you. I appreciate the color and the cynicism. Maybe switching gears a little bit to bauma and the construction side. Trimble really did display its products on a variety of different OEM exhibits. And I'm just curious, as you build up equipment on more and more OEM excavators, et cetera, does that drive back up your hardware percent of sales back towards the 50% versus 47%, where it's at today? I mean, it's a nice problem to have, but does it change the mix again?

[Steve Berglund, Chief Executive Officer]

I guess at least in the abstract it would probably in the short term. But, again, I think, the -- at least over time I think our view of what's actually happening is, we put the hardware on the machine. And, okay, the machine hooks into a, let's call it a network, into an information system. And then, subsequent to putting the equipment, the sensors on the machine, if you will, the capabilities on the machine, there's a subsequent software sale.

So, actually, I would think over a period of time it would not really alter the equation between hardware and software. If anything, it would probably boost software faster than the hardware. I don't think we've got, let's call it, particularly intricate model of it. But, I think, the hardware feeds the software. The hardware supports the software. And ultimately, we see it more as a software play in the longer term than a hardware play.

[Ann Duignan, JPMorgan]

Okay. I appreciate the color. That’s interesting. Thank you.

[Operator]

And your next question comes from the line of Richard Eastman with Baird.

[Richard Eastman, Baird]

Yes. Good afternoon. Can I just ask maybe a higher-level question? When I look at the operating profit in all four of the segments, what kind of steps out of me is that, again, OpEx must be -- must have kind of crept up in all four segments or -- what I'm trying to get at is, your gross margin -- adjusted gross margin is up 100 basis points to 58% company-wide. I assume that's kind of software creep, so that's good.

But when I look at the segment profit by all four segments, it's all -- you get some incrementals. I think in Transportation, it's 19%. Maybe 25% in BIM or in -- yes, B&I. But I'm just trying to get a sense of -- is there -- within any of the four segments, is there some intended incremental spend that's kind of pulling down either the incremental or driving up the OpEx? Or is -- what we're seeing mainly just absorption on the lowest revenue quarter of the year?

[Rob Painter, Chief Financial Officer]

Hey, Rick, it's Rob.

[Richard Eastman, Baird]

Yes.

[Rob Painter, Chief Financial Officer]

There're probably a couple of things in there to unpack. I'd start by saying, really, it's largely in line with the expectations we had coming into the quarter when we look at the margins by the reporting segments. One thing to -- I'll say to note in the business model, as we become more software-centric is, R&D arguably is a proxy for cost of goods sold. And so, for software companies, we would tend to expect to see higher gross margin and -- but at the same time some higher OpEx on -- let's say, on a comparable basis versus our hardware businesses, so just one thing to note in terms of the mix that we might see going forward.

You clearly saw the 100 -- or the 90 bps of improvement on the gross margins on a year-over-year basis, which would reflect that. Some of the OpEx, of course, now in B&I segment you're going to see the Viewpoint in the quarter in 2019 that you wouldn't have seen in 2018.

So that would make it really difficult around a comparison that's tough to make. Otherwise, when you step through the other segments, the Transportation is as we expected. We have been spending more on R&D in that area and that's been intentional there. And then where Geospatial would have looked a little off on a model would have been a shortfall on the OEM-centric revenue within the Geospatial.

[Richard Eastman, Baird]

Okay. Maybe I can follow up with that just a little more detail. I think trying to ask big picture, but it's a little bit more detail. But I mean can I just ask maybe a follow-up question in the Building & Infrastructure segment of the business? Can you just tease out the growth rates for the BIM business and the civil construction? And was this core of engineers' softness that we saw at the end of last year? Did that to carry into the civil construction business? Is there still a drag there?

[Rob Painter, Chief Financial Officer]

So there's the risk -- answer the last part first. There is still a slight drag on a year-over-year basis. The -- that business was in line with our expectations for the quarter though. So there wasn't any surprise there for us whereas we did have some surprise to the downside in the back half of last year.

But the comp is a tough comp for us in that business. The thing -- one of the things to note about the federal business is that a good amount of the Fed business is program-driven. And so the timing of when a program hits and delivers can vary year-to-year quarter-to-quarter, a quarterly view only of federal business is inherently incomplete and could lead to conclusions too good or too negative one way or the other depending on the comparable.

So the main thing I'd want to hear on the Fed business is it was as is expected. When you look at it on with comparable basis on a year-over-year, what would have masked in aggregate is that the field sales which is that aftermarket when we talked about 85% of our revenue is Trimble is serving the end-user.

That business was strong for us and civil construction was up double-digit year-over-year as was the building construction and the BIM-centric software businesses in constant currency basis double-digit growers. So very good performance at the end-user level on both segments.

[Richard Eastman, Baird]

I see. Okay, very good. Thank you.

[Operator]

Your next question is from Gal Munda with Berenberg.

[Gal Munda, Berenberg]

Hey guys. Thanks for taking my question. And the first one I have just in terms of the quarter versus the year how it's kind of shaping up. You kept your guidance for the year. When you look at the quarter performance, how does it compare to what you expected going into that -- in terms of the segment? Would you say that Building and Infrastructure performed slightly better than you expected? And maybe Geospatial alike or was it exactly in line? Because I just wanted to kind of clarify that.

[Rob Painter, Chief Financial Officer]

Hi, Gal. So the Buildings & Infrastructure and Transportation were above -- slightly about the expectations we had, Geospatial and Resources and Utilities slightly below and netted to the numbers that we walked through at the aggregate level. They're not dramatically above or below puts and takes level. But the one that would have been the strongest performer was Buildings & Infrastructure by really most any metric and it had the highest expectations for us as we came into the quarter. And what -- can you repeat your other question Gal?

[Gal Munda, Berenberg]

So the other question is actually just trying to look -- focus on free cash flow for a second. You made an interesting comment of the drivers of the free cash flow which doubled year-on-year.

When I look at your business today now that it's more than half of it's software and you're transitioning towards subscription model is it fair to say that net working capital should decrease as a proportion of revenue going forward? In other words have lowering net working capital especially because of the deferred revenue growth expectations is that something we could continue seeing over the midterm or not just in any given quarter?

[Rob Painter, Chief Financial Officer]

I think it is a reasonable assumption Gal that the working capital would continue to go down. Now it's already quite low. It's at 3% of revenue. So if that heads closer to 0 or negative that's possible. I don't know that that would be fundamental shift for us.

I think one thing we would keep in mind we would be looking at as we move more to subscription businesses from the payment term perspective for billing annually versus quarterly that could have dynamics on the cash over time as opposed to let's say perpetual license, if I'm taking that revenue all upfront. So the way in which we bill the customers, we would pay attention to that. But the general business model does tend to be a prepayment and therefore a pickup in deferred.

[Gal Munda, Berenberg]

Perfect. And just the last thing to clarify on that, do you guys have any multiyear contracts? In other words would you have any unbilled deferred revenues which would be off balance sheet? Or is this not significant for you?

[Rob Painter, Chief Financial Officer]

So the -- well actually one of the disclosures posed in the 606 shows the backlog. So there's a backlog of over $1 billion that's disclosed in the Q and it shows a breakdown over tranches of time. I think 76%, 78% of that is within 12 or so months. So there's a -- and that backlog is backlog that's contracted backlog. And as I said, contracted and unbilled backlog

[Gal Munda, Berenberg]

Okay, perfect. Thank you so much.

[Rob Painter, Chief Financial Officer]

And that backlog does include some of the deferred.

[Gal Munda, Berenberg]

Sure.

[Operator]

And your next question is from Colin Rusch with Oppenheimer.

[Kristen Owen, Oppenheimer]

Hi, good evening. This is Kristen on for Colin. Thank you for taking our questions.

[Rob Painter, Chief Financial Officer]

Hi, Kirsten.

[Kristen Owen, Oppenheimer]

So just wanted to follow up on the strong organic growth that you saw in Buildings and Infrastructure, how much of that do you attribute to some of the cross-selling opportunities that you're seeing as a result to the e-Builder and Viewpoint acquisitions? And what kind of margins are you seeing on that cross-sell business?

[Rob Painter, Chief Financial Officer]

Well, from a incremental growth out of the cross-selling, I would say we're in very, very early innings of that opportunity for us. What we have done and I think we've probably talked a little bit about this before as we think about it both from a product aspect as well as a go-to-market aspect and of course both of those work backwards from the strategy we have of project delivery in the construction space from a product perspective to give you a little flavor of -- a couple of examples in the quarter of some integrations that we and workflows that we now have between let's say between e-Builder, Viewpoint and the traditional Trimble solutions.

For example we released an integration between our estimating product and mechanical electrical plumbing space and the ERP from Viewpoint. And so what that means now is that the ERP can consume the estimate that's been established. And once you've consumed -- the ERP has consumed that estimate, now when you break that down into the project budget and you're breaking down line item codes by -- line item cost by phase code and actually also working all the way through out to the buyout lists, you're able to have a really nice integration between the estimating system and the job costing system.

We had a proof of concept as another example released with the telematics equipment we have in the construction site with the back office and that's because the back office is managing again the job costs as well as the cost -- say the cost management can now connect to the utilization of the field equipment in the field. And from a -- a third example of -- and this is really between e-Builder and Viewpoint is an ability for contractors and owners to exchange information seamlessly. And what that's allowing them to do is better connect the supply chains and eliminate the data entry between the two systems.

So there's good things happening on the product side. And on the go-to-market site what we had already done a couple of quarters ago was compare the customer list and the customer opportunities. So call that sort of Stage one effort the basics of that comparison. And then from there we put in -- I think it was last quarter cross -- or two quarters ago cross-selling spiffs for the sales teams to cross-sell one another's products.

We've seen a few million dollars of activity from that but very early stage. As these product integrations really mature this gives us an opportunity to really put the pedal down more on the go-to-market side. So that's a long answer to your question. The nice organic growth that was produced wasn't on the back of the integration efforts yet and so we see that as opportunity for us to step into -- in let's say a reasonably short timeframe.

[Kristen Owen, Oppenheimer]

Okay. I appreciate that. Just switching to transportation and logistics. When we look a year after so the Phase 1 implementation, a lot of the operators that we've talked to that ended up with the ELD devices that didn't really do what they claim to do. So, what kind of opportunity are you seeing there?

And then maybe with your existing customer relationships how would you assess your success in capturing some of that upsell business the recurring software business after you sold the hardware?

[Steve Berglund, Chief Executive Officer]

Well, we certainly have seen an element of buyer's remorse in the market and there's definitely some instances where that's created selling opportunities for our business. As you would expect on the heels of the regulation, there was a lot of capital that came into the market and not necessarily what's a good capital developing good solutions for customers.

So that in some cases has created buying or let's say new opportunities for us to -- once a customer has had a taste of the technology and what it can do. And if they want to move up more from a compliance-only into more of a spool stack solution to manage the driver to manage a truck and to manage a fleet that's where we will shine as you move up in functionality.

There's clearly still a lot happening in the market. It's a very dynamic market. The second phase of ELD goes into effect in December. And so it does -- I will say it remains a competitive and busy market for sure.

Now, if you look at the portfolio we have kind of reiterating the comment that Steve made about the strategic and an operational alignment we have in the Transportation business. Those -- the business we have both in the back office as well as in the field mobility is under one management team right now working towards more integrated offerings of our of the respective technology suites.

And so if you think about whether we call it cross-sell or upsell or integrated selling opportunities this puts us in a position to execute on that better than we've -- better opportunity than we've had at any time in the past.

So, we feel good about where we sit there between the teams and the opportunity in front of us. And if there's anything else I can give you color on, I'd be happy to do so.

[Kristen Owen, Oppenheimer]

Yes. It just -- would it be fair to say that that's where the incremental R&D spend in that segment is going?

[Rob Painter, Chief Financial Officer]

Yes. There's an element of the integrated offering that takes us to really cloud offering to be able to connect supply and demand in the transportation space as well as the ELD work itself certainly still continues to drive some incremental R&D for that business.

[Kristen Owen, Oppenheimer]

Okay. Perfect. Will leave it at that. Thank you.

[Operator]

And your last question comes from the line of Rob Wertheimer with Melius Research.

[Rob Wertheimer, Melius Research]

Hi, good afternoon. To the extent that you can I'm just trying to understand a little bit better of the issues on OEM and Geospatial. Is that business that's permanently lost? Do OEM switch on other solution so easily? Is it temporality deferred? Is -- I just -- maybe it's competitive, but if you can comment maybe on this something, but I wonder if you could give any characterization of whether that bounces back or it's gone.

[Rob Painter, Chief Financial Officer]

It's more the case of bounce back but there are certainly some cases where we may -- the business may move and that's -- can be the nature of the OEM business and why we favor so much the end-user businesses that we have.

I know Rob you wouldn't -- I wouldn't expect you to remember this, but for others on the call, in the old reporting segments that we had, we had a segment called advanced devices and I think selling board level chipsets for example really actually going back to the 40-year history of Trimble. And so we had businesses in that old advanced devices. If we still had that reporting segmentation, it would have looked like some of the businesses in there that we were referencing on the call today.

So, the short answer Rob is there's a little bit of both in that comment. Now, what I'd want you to also hear is that when we talk about the OEM businesses the OEM business are associated with our vertical market.

So, say OEM business we have in transportation or in agriculture or in construction those businesses -- those OEM businesses all did well and generally in aggregate met the expectations that we had. It was more of the OEM businesses that are really more in a -- more of a component of OEM business where we saw less revenue than expected.

[Rob Wertheimer, Melius Research]

Okay, that's helpful. Thank you.

[Rob Painter, Chief Financial Officer]

Thanks Rob.

[Operator]

We have reached the end of our Q&A. Mr. Leyba your closing comments please.

[Michael Leyba, Director of Investor Relations]

Yes. Thank you, everyone, for joining us on the call and we look forward to speaking with you again next quarter. Thank you.

[Operator]

And this does conclude today's conference call. You may now disconnect.