Michael Leyba - Trimble, Inc. Steven W. Berglund - Trimble, Inc. Robert G. Painter - Trimble, Inc..

Rick C. Eastman - Robert W. Baird & Co., Inc. Gal Munda - Berenberg Capital Markets LLC Ann P. Duignan - JPMorgan Securities LLC Jerry Revich - Goldman Sachs & Co. LLC Rob Wertheimer - Melius Research LLC Jonathan F. Ho - William Blair & Co. LLC James E. Faucette - Morgan Stanley & Co. LLC Kristen Owen - Oppenheimer & Co., Inc..

Good afternoon. My name is Vincent, and I will be your conference operator today. At this time, I would like to welcome everyone to the Trimble Second Quarter 2018 Earnings Call. Thank you. I will now turn the call over to your speaker today, Mr. Michael Leyba, with Investor Relations. Sir, you may begin..

Thanks, Vincent. 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 we will be attending the Raymond James SMID Cap Growth Conference on August 21 in Chicago and the JPMorgan 'All Stars' conference on September 18 in London. With that, please turn to slide 4 and I will turn the call over to Steve..

Good afternoon. I will start by commenting on the quarter's results and then report on progress on some of the themes we laid out at the Investor Day in May. I will loosely follow up the content starting on slide 4. This quarter's narrative remains more or less the same as those of the last year, emphasizing strength across both businesses and regions.

Reported revenue growth was 19% with organic revenue growth remaining in double digits. Reported non-GAAP operating margins improved by 2.6 points versus the second quarter last year. An even more positive perspective is to look at our fundamental operating performance without the effects of acquisitions made in the last year.

This organic view reflects year-to-year non-GAAP operating margin expansion of over 3 points and operating leverage of over 45%.

This operational strength reinforces our view that we are both leveraging current market success into a more robust financial model while we simultaneously add strategic muscle through internal developments and selective acquisitions. A current consideration revolves around tariff actions and the associated rhetoric.

Although we have been negatively affected by the imposition of U.S. tariffs on imports from China, the effect is not material to overall results. If the environment continues to shift, we are well positioned to deal with changing circumstances. Our robust international supply chain will enable us to flex and mitigate effects.

In addition to managing the supply chain, we will also be able to adapt to shifts in international demand patterns. For example, if Brazil replaces the U.S. as the provider to China for certain agricultural crops, we will be able to benefit from the ramp-up of Brazilian farms.

Another point of general observation is that the Trimble portfolio has a healthier balance than at any point in Trimble's history, and we'll be resilient in the face of downturns for specific industries.

That said, when we look at our major franchises, we see no signs of a pending slowdown in the market for construction technology, particularly as our direct exposure to machine sales has declined in a relative sense, with increased software content.

Agricultural indicators relating to commodity prices and new machine sales remain down from historical levels, and do not present many obvious downside possibilities.

Trimble's transportation market, which is currently strong, is generally resistant to industry cycles because technology implementation tends to be driven by multi-year decision making and fleet technology upgrades are not directly tied to new truck sales.

The Geospatial segment when compared to 2015 has a lower relative exposure to oil and gas and a generally more diverse book of business. At the Investor Day, we laid out the path for achieving long-term annual growth in the range of 9% to 12%.

These levels of growth result from our central role in pioneering the digitization of targeted large and mature industries. Our market leadership is enabled by our unique capability to connect the physical and digital worlds together with our deep domain knowledge.

This combination allows us to provide highly innovative solutions explicitly tailored to our targeted markets. We believe we have the elements in place to execute our strategy. Our priorities therefore are on execution and our objective is to perform to our potential.

At the Investor Day, we quantified the size of our addressable markets and the significant opportunity available to us to penetrate these markets. Our internal measures of success are therefore focused on progress in market penetration rather than a more budgetary view of incremental improvement.

The other internal execution focus is around a concept we call 343 which refers to the time periods of three months, four quarters and three years. It is intended to avoid the incrementalism of a quarterly forecast and to ensure that our three year execution carries equal importance with current quarter results.

Our execution focus includes six elements. The first is our continuing focus on markets and product lines that can produce profits and growth. Our continuous evaluation of the sources of success has resulted in an ongoing pruning of our underperforming product lines and initiatives that cannot be fixed in a reasonable time period.

Although these activities have been incremental and generally fall below the materiality radar screen, the aggregate effect has contributed to margin improvement and will contribute more in the future. The second execution element is a focus on achieving tangible benefits from cross-company collaboration.

One benefit of collaboration is ensuring technologies and products to leverage our scale and expertise. The other benefit is the creation of unique market opportunities. Let me provide two practical examples, one opportunistic, the other more strategic. We have owned ALK since 2013 and include its results with the transportation segment.

ALK provides maps with extended attributes, and generally targeted at commercial transportation applications. Since virtually all Trimble businesses require maps of one type or another, ALK has become a provider of maps to most other Trimble businesses and enabled us to regard the map as part of a unique and differentiated solution.

An alternative more strategic example of the potential collaboration exists within Brazilian agriculture. I was recently in Brazil and visited both large farms and plantation forests. The scale of these operations is accurately described as gigantic.

Without any meaningful government support, these operations are directly exposed to market forces and must rely heavily on technological innovation to remain competitive.

This need for technology extends beyond farming operations to elements of infrastructure, logistics and processing and will result in a need for solutions from all four Trimble segments. By providing a complete and unified technology strategy to these operators, Trimble can achieve both a special relationship and a significant competitive advantage.

The third point of execution focus is on implementing the 343 program and closely linking three year end game objectives to current actions. We are evolving and emphasizing a management process that focuses on the link of future outcomes to current actions.

We are using strategic planning and execution tools such as Hoshin throughout the organization to achieve appropriate levels of transparency and discipline. The fourth execution element is a proactive effort to transition our business models.

The most obvious initiative, which Rob will highlight, is the intention to transition more businesses to a subscription model. Beyond the move to subscriptions, other related elements include a more comprehensive reliance on cloud based architectures, bundle pricing and hardware as a service.

The fifth point of execution focus is achieving effective leverage from our recent acquisitions, most notably Müller, e-Builder and Viewpoint. Müller, which has been in the portfolio for a year, is performing as expected with significant efforts underway in collaborative product development and market initiatives.

It is clear that Müller has been able to access market segments that were previously denied to it by leveraging the Trimble presence. On the other side, Trimble has achieved greater access to agricultural OEMs through the historical Müller network.

The early signs are that the combined elements of e-Builder, Viewpoint and existing Trimble construction software are performing on or above target. More importantly, all three organizations have identified significant market upsides that are available through collaboration.

With the completed acquisition of Viewpoint, we are now engaged in developing and deploying a comprehensive plan of action. The sixth point of consideration is innovation, which is at the heart of any future Trimble success.

We spent approximately 14% of revenue on R&D during the trailing 12 months, and expect to maintain it at that relative level to feed revenue growth and operating leverage.

Our innovation efforts are targeted at the ongoing transformation of the construction, agriculture and transportation industries with emerging opportunities to include new technology classes such as augmented reality, autonomy and blockchain in these solution sets.

Before turning the call over to Rob, let me emphasize that in many ways the relative operating performance in the quarter represents the most impressive performance in Trimble's history and is a credit to Trimble's employees' commitment to improve. We expect to follow with more quarters of strong performance.

Rob?.

Thank you all for joining us today. Our second quarter performance was strong and ahead of expectations. Looking at our results for the first and second quarters, we remained favorably positioned in the market and we are raising guidance for the year. Let's start on slide 7 with a review of the second quarter results.

Top line and bottom line results came in ahead of plan, meeting or significantly exceeding expectations in all reporting segments. Second quarter total revenue was about $786 million, up 19% year-over-year. Breaking that down, currency translation added about 2% and acquisitions added about 5%. Organic growth was approximately 12%.

Second quarter gross margins were 57.1%, up 180 basis points year-over-year, reflecting favorable product mix as well as favorable pricing dynamics. During Investor Day, we said that we would start to introduce some new metrics to investors.

Adjusted EBITDA is now on this table and is relevant as it captures the income from our joint ventures and equity investments. We delivered EBITDA of 22.7% in the second quarter, up 200 basis points year-over-year. Operating income dollars increased 36% to approximately $160 million with operating margin increasing 260 basis points to 20.4%.

Our non-GAAP tax rate declined from 23% to 19% year-over-year, reflecting U.S. tax reform. Our net income was up about 36% and non-GAAP earnings per share in the second quarter were $0.50, up $0.14 or 39% year-over-year.

Reflecting the strong cash flow profile of the company, deferred revenue was up 16% year-over-year and the net working capital including the deferred revenue was less than 3% of trailing 12-month revenue. Cash flow from operations was approximately $185 million and was up 24% year-over-year.

To cover our debt profile in anticipation of the July 2 deal closure of Viewpoint, in the month of June, we entered into new credit facilities and raised $900 million of bonds. In connection with the closing of Viewpoint, we drew down on those credit facilities.

We currently stand at gross debt of $2.2 billion and net debt of $1.9 billion which represents 3.2 times net debt to adjusted EBITDA on a trailing 12-month basis, which is ahead of plan and favorable relative to what we previously communicated. We retained our investment grade rating and we remain committed to delevering the balance sheet.

Turning now to slide 8. Let's go through the revenue details at the reporting segment level. Revenue was up double digit organically in each segment with Buildings & Infrastructure leading the way with about 15% organic growth, and the other three reporting segments each posting about 10% organic growth.

In short, all reporting segments and all major geographies continued to perform. Furthermore, our recent acquisitions, including e-Builder, collectively performed ahead of expectations.

Recognizing that the performance at any individual quarter alone is incomplete, we will also start sharing trailing 12-month performance looking back both one and three years. In short, on a three-year basis, our performance fits the growth model we talked about at Investor Day with clear acceleration over the last year.

Slide 9 provides the geographic revenue mix in the company. The Müller acquisition, in combination with organic growth in Europe, shifted our mix towards Europe this quarter as compared to same quarter last year.

On a longitudinal basis, our addressable market analysis points towards attractive penetration opportunities outside of North America and we seek to diversify this revenue base in the years to come. While we're talking about geographies, let me add a little color to Steve's comments on trade and tariffs related to China.

From a tariff perspective, we estimate our exposed revenue to U.S. imports from China to be less than 0.25%. From a trade perspective, China represents less than 5% of company revenue. While our institutional view is that tariffs and obstacles to trade are a definitive negative, we feel the current situation is within our ability to manage.

Let's turn to slide 10 and look at our revenue mix by type on a trailing 12-month basis. The revenue mix is comprised of 52% hardware and 48% or $1.4 billion of software services and recurring revenue. That $1.4 billion breaks down into recurring revenue and software and services revenue.

Recurring revenue, which is mainly comprised of subscription revenue and support and maintenance agreements, is now over $790 million on a trailing 12-month basis or 27% of total revenue.

Software and services, which is mainly comprised of perpetual and term licenses as well as professional services, represents $590 million of revenue on a trailing 12-month basis. Each revenue type continues to grow double digit, reflecting strength across the entire business.

The move towards software and recurring revenue streams is one of the topics that we are most often asked about with our business.

At Investor Day, we said that with the inclusion of Viewpoint that we believe we will cross the 50% threshold in 2018 and that by 2021 we would have approximately 55%, or over $2 billion in revenue, from software services and recurring. These numbers are highlighted on slide 4.

From a software revenue mix perspective, we continue to see more of our software moving towards subscription business model offerings.

For example, we had previously disclosed that our SketchUp business will move to SaaS starting at the end of this year and products such as our Tekla Structure software in buildings and TMW in transportation already have subscription add-on offerings. We've identified a number of areas where we will intensify the pivot towards subscription.

As we assess the pace and impact of the conversion, we will refine and communicate any associated impacts on our mid to long range business model. Moving now to slide 11, let's go through the operating income details at a reporting segment level. At a company level, operating income was 20.4% with operating leverage at 34%.

Excluding acquisitions, operating income was over 21% with operating leverage of greater than 45%. Drivers of margin expansion were similar across each of the reporting segments while gross margins expanded based on product mix and pricing. And combined with operating expense management, this enabled us to expand our operating margins.

Parallel to the commentary on revenue, we are also disclosing our trailing 12-month operating income performance looking back both one and three years. Just like revenue, on a three-year basis our performance fits the growth model we talked about at Investor Day with clear acceleration over the last year.

Turning to page 12, the seven metrics listed here are financially representative of our identity as a technology company. From revenue mix, growth, contracted backlog and our low capital intensity, our metrics conform to those of technology companies.

Beginning in the third quarter, we anticipate beginning to disclose annualized recurring revenue as an additional important software metric. Turning to slide 13. The most non-linear events of 2018 for Trimble has been the capital deployment put towards acquiring e-Builder and Viewpoint.

In addition to Müller, these represent our largest outlay of capital in our history. Steve already commented on positive performance we've seen from Müller over the past year. The e-Builder acquisition closed in February and we remain very bullish on the business and the market opportunity. Revenue and profitability have exceeded our plan thus far.

The market is validating the strength of the business as evidenced by subscription bookings growing over 30% on a year-to-date basis, which also positions the business to extend its performance into next year.

Customers are validating the technology as measured by double digit increases in the usage of the product as well as a net retention ratio that exceeds 100%. The Viewpoint acquisition closed on July 2 and the business comes into Trimble with momentum.

The Viewpoint business already has over 70% recurring revenue and has been pivoting to a subscription based model with its office team and field offering. Greater than 70% of new bookings in the second quarter were subscriptions and the subscription bookings have grown approximately 70% on a year-to-date basis.

Coming into Trimble, the revenue and profitability are ahead of our previously disclosed expectations. Customers continue to validate the attractiveness of the combination and are already showing us possibilities we previously did not see such as integration of data feeds from our transportation business into the construction ERP systems.

The office team and field strategy of providing a strong value proposition of an extended construction management solution is taking hold with a high attach rate of team and field solutions on top of the core office technology.

In addition, product innovation continues with drawing functionality recently released which increases the strength of the project management offering in the team solution. To anchor this momentum back to strategy, when we did both these deals, we framed that we saw competitive dynamics moving fast and that we could be spectator or participant.

The last weeks and months of M&A activity in the space have validated this hypothesis and affirmed acquisition premiums.

When we combine Trimble's field and constructible model workflows with Viewpoint's construction management software and e-Builder's strength in managing capital programs for owners, we believe we have the ingredients for a disruptive industry platform which can enable true construction project information transparency between owners, general contractors and trade contractors.

We now have a construction business with over $1 billion in annual pro forma run rate revenue with more than 60% of that revenue being software related. Let's now close with guidance on slide 14. We are moving the company to a non-GAAP revenue guidance measurement.

When we publish our third quarter actuals, we will also be updating our first and second quarter non-GAAP actual results to reflect this common measurement.

This measurement will eliminate the noise associated with negative purchase accounting effects that are most pronounced with software acquisitions and will enable us to provide increased transparency to the underlying performance of the business.

As mentioned at the beginning of my remarks, looking at our results for the first and second quarters, we remain favorably positioned in the market and as such we are raising guidance for the year. For the third quarter we expect non-GAAP revenue to be between $795 million to $825 million and EPS between $0.43 and $0.47 per share.

For the year, we are raising guidance to $3.14 billion to $3.19 billion, up from previous levels of $3.12 billion to $3.17 billion and we are raising EPS to $1.81 to $1.89 per share, up from $1.72 to $1.82 per share. Three comments.

First, the annual range does not include the anticipated benefits of non-GAAP revenue adjustments in the first and second quarters.

Second, whereas foreign currency translation represented a tailwind to year-over-year revenue in the first half of the year, at current rates, we expect the second half of the year to have a minor negative impact to revenue which is reflected in our updated guidance. Currency translation does not materially impact our EPS guidance.

Third, the Viewpoint impact. We expect to add a little under $50 million of non-GAAP revenue in each of the third and fourth quarters with operating margins in the 20% range. Including the incremental interest expense of $12 million to $13 million per quarter, we expect the net impact to be slightly dilutive to EPS in the short term.

We believe we are on a path to achieve earnings accretion ahead of plan in 2019. Let's now take your questions..

We have your first question comes from the line of Richard Eastman of Baird. Your line is open..

Yes. Good afternoon. Steve, could you perhaps address, or Rob; Rob, you had mentioned some of the competitive M&A in this construction space and some newer participants now having bought assets from private equity.

But I'm curious, the one observation would be that if you look at the field-oriented software that Trimble brings to the table, it would seem a significant differentiator versus a lot of the M&A and the new participants who are either maybe seemingly heavy on the front or back end.

Could you just maybe address the pace of M&A and maybe just reemphasize where Trimble sees its competitive position?.

Well, let me answer initially kind of from the 30,000 foot level and then let me turn to Rob, to maybe refer more specifically kind of to the deal flow that we have seen over now the last nine months or so.

So I think that from kind of an existential standpoint, Trimble's history is very much field centered in terms of, okay, that is where we really got our start, that's where our strength is, and our relative emphasis on domain knowledge really is in our view very central to this.

This is not simply a matter of walking on to a construction site or into a contractors office and selling what's called a horizontal version of the world. It's very, very necessary to understand the intricacies of the construction workflow to really be able to solve some of these problems.

So, I think that inherently we believe we have an advantage simply because we are fundamentally better aware of what goes on on the construction site than many of the others are now becoming involved. So I think that from a positioning standpoint and in terms of our field centricity if you, will we feel pretty comfortable.

So without a doubt, I think that it's an attractive space. It's a large industry. The technology now enables solutions that were not necessarily possible five years ago. It is attracting a fair amount of attention, but in our view fundamentally we are advantaged from our relative historical positioning there.

And the other element is that, if you will, giving a practical example, you know the combination of Viewpoint and our historical position in the machine in terms of machine control, it would be a huge advantage to a contractor to be able to turn on the ERP from Viewpoint or for that matter for anybody else, and see the outcomes from the morning's work in terms of the relative productivity of the bulldozer or the grater or the excavator or whatever and have that actually available in real time in the ERP.

And if you look at the elements of that, I would say, Trimble is uniquely positioned to be able to provide that total solution, just as one example. Let me look to Rob to kind of comment on kind of the deal flow aspects of the last nine months..

Well certainly, we've seen activity, an increased level of activity in the space. When we announced the Viewpoint acquisition, one of our talking points was there weren't many scaled assets in the construction technology space and over the last few weeks, there's even fewer out there, fewer out there now.

So the active players, I think you know who they've been, between Fortive and Roper and, well probably those two in particular, and actually many of the I'd say the acquisitions that have taken place are potentially more complimentary to what we've done. So not even necessarily competitive..

I see, okay. And then just as a quick follow-up, within the Resources & Utility business, could you just sift through the ag exposure in North America and rest of world? Have you seen any knee-jerk reaction on spending in the U.S.

relative to China's commentary around soybeans? Or is that still on the come or how should we think about the North America versus rest the world split in ag?.

Sure. I mean over the last few years, our business, our agriculture business has become much better diversified geographically as well actually as from a product mix perspective. So the majority of our agriculture business today is outside of the U.S. So we have a geographic diversity that's greater than what we had years ago.

We're also more diversified, I'd say, on the machine versus off the machine. So from an on the machine perspective, we're historically known for guidance and our move has been more into the variable space. So there is diversification on the machine as well as off the machine as our software, agriculture software and the construction services business.

So in terms of setting context, we basically have a quite a different portfolio than we did years ago. There is also something to keep in mind from the long-term fundamentals in agriculture to put in context of the let's say, the talk of the inactions of the moment.

One would be a growing population and then the second would be farm consolidation and we do see farms continuing to consolidate and that actually tends to be a net positive for us where there is the association to the return on investment, the larger the farm.

As it relates then to let's say the specific of the question, I'd sort of reference back to Steve's commentary, if the trade is going to let's say geographically arbitrage from one market to the other, you know it's our mandate to then go follow, follow that trade. And in this case Steve's example was Brazil in soy..

Okay. All right. Thank you very much and nice, very nice quarter..

Thank you..

For this Q&A session we're allowing participants to have one question and a follow-up only. We have your next question comes from the line of Gal Munda of Berenberg. Your line is open..

Hi. Thanks for taking my question. The first one is just in terms of the way you see now after the acquisition of Viewpoint.

How can that integrate with the other software assets that you have and how high is that on priority list in terms of technological implementation? Would you think about integrating it with Vico potentially to get a full 5D bin solution and if there are plans to do that, what's the kind of the timeline you're thinking about it?.

Sure. So, if I take the integration and I take it holistically between the existing Trimble business, Viewpoint and e-Builder. I would think – we think about it both opportunistically as well as strategically.

From an opportunistic perspective, the first things we look at are where we have shared customers and many of the shared customers are coming to us with potential ideas or quick win product ideas and letting customers drive the integration that's going to make sense at a product level.

Also opportunistically we happen to have let's say each business, as it were, having three user conferences coming up in the next few months.

So there is a great deal of messaging that we're working on as it relates to talking to those customers and being in front of those customers gives us an opportunity to further talk about the product synergies that we see. From a strategic perspective and how we approach the integration, we start with segmentation, so segmentation of the customers.

The Viewpoint example is a good one to reference back to the 8,000 customers that the business has. We have that split a third, a third, a third between general contractors, heavy civil contractors and specialty trade contractors, specifically MEP contractors. So, it's mapping at a segmentation level with the product offerings.

And then going to your point, Gal, or your question about taking Vico as an example, fundamentally Vico is about enabling scheduling and that as a feature and to build that into the products on the industry platform that we talked about is certainly something that's top of mind for us.

You know we have project management solutions in the respective businesses and one of the activities we have from a cost synergy perspective, which we also think will lead to revenue synergies, is to rationalize our efforts in project management so that we can be better focused.

And in doing so, if we add let's call it the IP, the intellectual property from the Vico 5D scheduling aspect into the greater business in the portfolio, then we definitely would be bullish that there's opportunities for us.

Because this really comes back to the idea of enabling this information transparency between owners, general contractors and the trade contractors..

Perfect. And just as a follow-up, you mentioned a bit of customer overlap. Can you talk a bit more between the e-Builder and between Viewpoint what the customer overlap is and what's the cross-selling opportunity between these two? I'd imagine that there might be some overlap but probably not significant in terms of..

Actually it would be a very small overlap, Gal. e-Builder focuses on owners, managing the capital programs for owners, whereas Viewpoint is managing the construction management system for the general contractors and the trade contractors.

Where it makes a really nice fit is that the owner is ultimately working with a general contractor in order to build out the capital program. And so, the nature of the effort we would have in those two businesses is to make a more seamless connection of the data flow between the owner and general contractor.

So, the example I have is one of the big general contractors who reached out to us very positively saying, okay, I am going to be able to integrate my data to get it to the owners better than I am able to do so today, so this is a great combination. So very little overlap.

Actually really opportunity if you think about playing that out, taken if you're a general contractor working with an owner who is already in the e-Builder system, we believe that will give us a stronger value proposition to those contractors to be able to communicate better with the owners that they're serving today..

Okay. Thanks, guys..

The next question comes from the line of Ann Duignan of JPMorgan. Your line is open..

Yeah. Hi, good afternoon. Perhaps you could share with us some more details on the actual integration planning and what's going on there.

And how do you drive cross synergy sales? Do you have to integrate all the back office systems, all the ERP systems, or how do you actually generate revenue synergies from one group to the other? I'm just curious how that all happens behind the scenes..

Sure. So the first order priority for us I recall with the as-is (00:36:55) business is to continue the momentum in the business and not to distract the operators and the teams from what they're doing today. These are businesses that are growing double digit. You heard me refer to the strong double digit bookings growth in both of the businesses.

So first order of business is not to upset the apple cart with the business that we have and to continue to enable them on the growth path that they're on. So this is an, I call it an and, not an or, so that's priority one. From more specifics at the integration level, think about it at a people level and then revenue synergies and cost synergies.

At a people level, it's really as we get to know one another in the teams and reinforcing the cultures and reinforcing or I should say, ensuring that we keep the teams, keep them focused. And from a revenue synergy perspective, you look at the early sharing of the pipelines, the customer pipelines, where do we have the existing relationships.

If you take an example in the Trimble world in our civil construction world, a Department of Transportation, a state Department of Transportation in the United States is an important let's say customer user of technology.

We would want to use that door to be able to come in and talk about e-Builder, about how e-Builder is relevant to managing the capital programs in the civil construction space. So it's really finding the pipelines and getting the right people together to talk about that and some of those conversations have already been taking place.

And like anything, start with what can be the lower hanging fruit to go after before making it too complicated and going through 10,000 customers. On the cost synergies specifically, so we have a team that's – we have a number of teams that are working on various aspects of the integration.

But one of the teams is looking at cost savings opportunities. The first place we look would be in software licensing, hosting, IT infrastructure costs where we can create leverage through Trimble. At a, you asked about kind of at a systems level, we would look more at a CRM than an ERP.

From a CRM perspective, that's where you're able to mine the customer, databases, and look for the opportunities. That's where we would look to make sure that we can communicate more seamlessly between the organizations.

At the ERP or the actual transactional level, we'd be more cautious and look at that over time to see what's the right thing, see what the right thing is to do.

So, does that help, Ann?.

Yeah. And I should have said CRM obviously.

But is there a risk that you end up with a plethora of different systems that are tied together, or will you be forced at some point to consolidate CRM systems and invest significantly in IT?.

Oh, I think that we would look to consolidate some of the system activities over time. And the really the more, I'll call them, customer centric, customer facing it is, that's going to be higher up on the priority list. Elevate to a Trimble company level, less than 2% of our revenue is invested in CapEx.

So it's not a CapEx type investment that would, I'll call it, break a model. I think would actually be one about enabling a model and I think it is one that is relevant.

In fact, not really even – and just within, while whether we're talking about Viewpoint or e-Builder, but across all the businesses we have in the construction technology space, I'd view that as an enabling technology to help us go after the market opportunity.

The more it's the transactional side in the ERP system, there we would just I'd say kind of wait and see as to what's going to make sense. You have to look at the fact that we sell both hardware and software. We have business that goes through dealers. We have business that goes direct.

And so I tend to not believe that there is such a thing as one ERP system that can do all of that..

Yeah. That's helpful. I just wanted to understand the strategy or the thought process particularly on the CRM side and how we manage all of these acquisitions when the integration happens down the road. So I appreciate that. I'll leave it there. I've taken enough time. Thanks..

Okay. Thanks, Ann..

Your next question comes from the line of Jerry Revich from Goldman Sachs. Your line is open..

Good afternoon and good evening..

Hi, Jerry..

I wonder if you could talk about Müller organic growth performance.

How has that been tracking this year and how effective have your cross-selling efforts been in terms of pushing the product through your core distribution?.

Sure. So technically I wouldn't pull organic yet. It came into Trimble in July of last year. So, but of course we could look at how was the business performing before we acquired it and what does that look like..

Yeah, please..

And that's a double digit increase. Actually pretty strong double digit increase in the business over that time. So the business is doing very well would be the punch line to the answer. And then in terms of where we look for the leverage points, I reference back to Steve's commentary.

One of the nice let's call it fits between the Trimble agriculture business and the Müller business is, as Müller historically has been OEM centric and European centric, and Trimble with the global, I'll say global centric and aftermarket centric, so it's the opportunity therefore is to bring Müller into the Trimble aftermarket global dealer channel and for Trimble, for us to build access more OEMs.

And I think both of those are bearing fruit at this point..

And can you just provide some more context on that last point, Rob? Any examples stand out and what could that mean for cross-selling opportunities as we enter 2019?.

Yeah. In terms of the OEMs themselves, so we're not able to disclose the OEMs. So I wish, it would be easier probably for this conversation if I could. But places like Brazil and really and elsewhere, we're seeing positive momentum there.

In terms of where it could go on an ongoing basis, well that would be net new upside for us if we're able to create business out of it. So I would call it a favorable tailwind opportunity for us..

Okay. And then for transportation, you folks have been looking for a real acceleration in terms of back office investment among the freight industry after the ELD investment over past couple of years.

Is that playing out? Can you just give us a sense for what you're seeing in that part of the business year to date?.

Yeah so, Jerry, that one's played out a little different than the hypothesis we had coming into the year and appears to be maybe a quarter or two behind where we thought it would be.

We have a number of, somewhat anecdotal, but a number of the trucking companies are so busy right now and I think you would know that and be able to see that from the data. And many of which are also facing driver shortages and we see that in the spot market rates on freight and the inventory levels.

Where we've got, it basically turns into a number of companies that are too busy to go into bigger implementations at the moment. And so that's played out a little different than we thought. Having said that, the enterprise side of the business was up double digit year-over-year in the second quarter.

But I would also say has been a little less than what we thought it would be at this point in the year..

Okay. Thank you..

Your next question comes from the line of Rob Wertheimer of Melius Research. Your line is open..

Hey, good evening everybody. Mine is sort of a general question. You've built a really, really, interesting platform in digital construction. It's an area that's obviously hot right now. Others are acquiring and so forth.

And I'm just curious as you've gotten a little bit closer look at e-Builder and Viewpoint, I mean do you see that you have years of acquisition activity ahead where you can fill in different niches and where acquisitions or innovations bubbling up and you're continuing to really, really start to build out? Or do you really feel like you've acquired the scope and platform that you need and you'll sort of see how you can drive revenues through internal?.

Well, again. I'll make a general statement and there will be exceptions to it, but I think in general, as Rob pointed out is what's called the big game is effectively disappearing in terms of the assets that are available to acquire. There aren't that many left. There never were that many, and they're a diminishing breed at this point in time.

So certainly nothing large, but I think what you're suggesting is kind of, let's call it, a wave of entrepreneurship and small companies that might be acquirable. I think that's actually a more relevant model for agriculture than for construction. Yeah there is innovation occurring in construction. There are startups.

But I think that in general I would say in general, and I'm sure that there will be exceptions over time, but in general I would say is that we're now looking to internal development as the primary vehicle for progression going forward. Will there be potentially opportunities big and small, possibly.

But I would say is that there, I think there is not let's call it a wave of small venture-backed companies that are likely to emerge. This is a scale business, which is kind of the point for doing both Viewpoint and e-Builder and I think it requires a certain amount of scale to be successful here.

So, there may be some of that, but I would say by and large that we're going to focus on internal product development as really being the vehicle to take us forward.

Possible exception to what I just said is maybe looking more globally, is that work does tend to be done differently around the world, so that if there's something that's going to drive acquisitions, as likely to be kind of international, filling in the gaps internationally more so than from a product standpoint..

That's helpful. Thank you..

Your next question comes from the line of Jonathan Ho of William Blair. Your line is open..

Hi, good afternoon. Just wanted to start out with some other commentary around the portfolio effects that you're seeing around your solution.

Is there any way that you can maybe quantify for us like whether you're seeing more bundled sales or multi-product sales versus kind of standalone point solutions at this point?.

So, I'd give you a couple. Hi, Jonathan. I'd give you a couple of examples and then I'll let you see where you want to go with the question or the follow up on it. In the construction, we'll start in construction technology. So we have the SketchUp business, as you know, which is an architectural and design software. We have a content business.

So a 3D warehouse that feeds content, 3D content into the SketchUp product. Those two have a synergy between one another. The SketchUp product can also be sold with the Tekla Structure.

So, if you were to move from a conceptual design into engineering level detail, you start out with the conceptual design, move into the engineering detail and you can move data from SketchUp to a Tekla Structures product. Our Trimble Connect, it's a solution, our platform.

So Connect is the enabling technology to bring together the data and move the information flow across the ecosystem in construction. We have literally integrated elements of connect into SketchUp.

So as you actually log in to SketchUp, you're coming through Connect and thereby having access to the file sharing which enables the data to move throughout the project, and this is coming in at the beginning of the project. And there is levels of product integration as well as solutions offerings.

In terms of quantifying it let's say beyond that, I would actually characterize us as being in the early innings of really getting after the, and achieving the opportunity we have for the product bundling, the solution bundling.

You know if you think about what's possible and literally possible, literally doable, like taking our field layout technology. That's the hardware and the software that's bringing that, connecting that physical and the digital world.

That's the kind of solution bundles that we can already sell today and I think we're scratching the surface of what's possible for us. That's a very construction centric answer. You play it into the world of agriculture.

If you look at the penetration of software we have relative to the hardware customers, we think we're penetrated maybe on it 10% to 15% of the acres that we, and software that we cover with hardware or the guidance and variable rate technologies today, that would be a real opportunity we see for ourselves.

In the transportation space, and they're increasingly having solutions that intersect what we do from a routing, mapping, navigation software as well as the enterprise software and the mobility software. So actually we have our user, annual user conference in the transportation business, takes place in early September.

This year it's now the largest transportation technology user conference in North America. And there will be product announcements that come out at that user conference where we're able to create new, I call them new, new solutions based on integrating the data that we have available from what's in the portfolio..

Thank you. That's very helpful.

Just as a follow-up, when you start looking at the transition from I guess traditional hardware and license solutions to maybe emphasizing more hardware as a service and subscription, what sort of timeframe are we looking at for that to happen and maybe what are the implications to growth in margins just given the revenue recognition shifts with that type of a move?.

Sure. Let me start with the software one, that would have probably at this point be more meaningful than taking hardware as a service, as a business model. If we look at software, we have well over $500 million of software in services today and that's mostly perpetual software.

So if you look at that basket of revenue and think about that and a transition to subscription, here is a rule of thumb that we think about. If you were to move $100 million of that perpetual revenue to subscription revenue, by definition you'd create a headwind to growth and margins.

And so think about that $100 million and think about that, call it, divide by 3 and think about that at a subscription pricing level, is rough math, but think about dividing that by 3 and then how does that $100 million that converts over, how does that impact the total company model.

And that level of business converting that $100 million of perpetual would be approximately 1 percentage point to growth and 1 percentage point at the company level and 1 percentage point op margin at the company level. So by definition would have an impact to the operating leverage.

That math was, we took that into consideration in the model we put forward at Investor Day. To the extent that math plays out, it would really be a function of let's say how fast we turn the dial on the movement on that basket of revenue..

Thank you..

The next question comes from the line of Colin Rusch of Oppenheimer. Your line is open. Colin Rusch, your line is open. Colin Rusch, your line is open. Your next question comes from the line of James Faucette of Morgan Stanley. Your line is open..

Great. Thank you very much. I had a couple of just I guess housekeeping questions and then a broader question. But first, I just want to be sure that in the formulation of your guidance that we'd previously built in completely that Viewpoint and e-Builder acquisitions were already completely in.

And then I guess more broadly, I mean you've kind of touched on it already with what you're looking at for transportation, et cetera, but what are we seeing from a buying habit or process standpoint? It came in below a little bit with what we had modeled and hardware sales were – are hardware, and so I guess I'm wondering, are hardware sales falling off some? Or is there a mix shift that's happening there that maybe isn't apparent to us? And if you could call out a little bit what's happening in that segment, we'd appreciate it.

Thanks..

So, on the guidance question, are you asking if the guidance we made for the third quarter in the year includes e-Builder and Viewpoint?.

I'm actually asking if the previous guidance that you had given, if that had previously included Viewpoint and e-Builder?.

It had, yes, the guidance we gave at Investor Day on the year. Yes, it included Viewpoint and e-Builder..

Right. Okay. Okay, I just want to confirm that..

Okay..

Yeah and then my question on transportation..

Transportation, yeah sure. So, on the transportation business, actually the transportation business came in at about our expectations, so I'm not sure, obviously I'm not sure exactly how you modeled it out.

In terms of how the let's say the mix played out in the business, for the last couple, well, it's the last two or three quarters now, we talked about the rate of growth that we would expect on a year-over-year basis given the surge in demand we had last year leading up to phase one of the two phases of the ELD mandate.

So, that's actually been doing better than we expected so far this year, so the revenue has been ahead of where we expected. So from an overall I'd say level of business, that's been up. In terms of the mix shift, what we start to see and this would reflect in – okay, you don't see the gross margins.

But what we saw in the gross margins in the transportation business is more of a shift to the subscription software kicking in and the hardware is a lower margin business at a gross margin level. And as the subscriptions kick in, that's at a higher gross margin. So we did see some mix in the revenue. That would, I would characterize as expected.

So from my point of view, it came in about where we expected. Maybe a follow-up you'd want..

Okay. Yeah. No, that's great. Thank you very much..

Next question comes from the line of Colin Rusch of Oppenheimer. Your line is open..

Hi. Thank you. Sorry about the technical difficulties earlier, but this is Kristen on for Colin.

Can you guys hear me?.

Yes..

Fabulous. So it's sort of a follow-up to a prior question but I was struck – Steve, one of the comments that you made about some of the cross-segment collaboration that really feels like a new conversation for Trimble.

So I'm just wondering if you can provide some light on that and maybe where there are revenue opportunities across the segments and maybe even some R&D synergies. Just any color you can provide on that..

Yeah I think it probably is a point of emphasis that has grown over the last five years.

And I think maybe the most significant change in enabling the conversation has been that really the technology has advanced to the point within the last five years, so that Trimble 5 to 10 years ago was talking in a construction firm to the equipment manager and the equivalent to a corporate farmer.

We were talking to a whole different level management. Because technology has become so central to these enterprises, the conversations we're having have been elevated to the C-level suite. So we're now talking to CEO, COO, CIO, that class of people, and both in agriculture and construction and in a different way maybe transportation.

Technology has become strategic whereas 5 to 10 years ago it was kind of an add-on. Today it is a central consideration. So we are having conversations at a level of the company where they're looking for transformative effects on the enterprise.

And therefore, for example my visit to Brazil, that was the core of every conversation in Brazil, which was not just about farming or specific aspects, how can you help me transform my entire enterprise.

And I still find it amazing in terms of the points of relevancy for Trimble right across the enterprise, whether it be logistics, whether it be infrastructure, whether it be the point solutions in the operations.

So I think that we're now having these conversations and I think they've been enabled by kind of access to the C-level suite and the transformation in the sorts of conversations we've been able to have. So I think we need to improve our capabilities for talking, having boardroom conversations.

We need to pick up our game and be able to do a better job of account management which has been kind of a recurring theme fairly publicly over the last five years in terms of things we need to get done.

But I would say it's really access, the centrality of technology to the strategy of these enterprises and the fact that Trimble has many touch points of relevancy to that really, really is the change..

That's helpful color. In the interest of time, we'll leave it at that and take the rest offline. Thank you so much..

Thanks, Kristen..

We have no further questions.

Michael, presenters, do you have any closing remarks?.

Yeah. Thank you, Vincent, and thank you everyone for attending today's call. We look forward to speaking to you next quarter..

This concludes today's conference call. You may now disconnect..