Trimble Inc.

Thank you for standing by. My name is Maria and I will be your conference operator today. At this time, I would like to welcome everyone to the Tremble second quarter 2023 results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, please simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star 1 again. I would now like to turn the call over to Mr. Rob Painter, Chief Executive Officer. Mr. Painter, please go ahead.

Welcome, everyone. Before I get started, our presentation is available on our website, and we ask that you refer to the safe harbor at the back. Our financial commentary today will reflect non-GAAP performance metrics, including organic growth comparisons, which will relate to the corresponding period of last year, unless otherwise noted. Let's begin on slide two with our key messages. Annualized recurring revenue is our key top line metric at Trimble. Our team, led by our construction software group, achieved 14% organic growth in the quarter, beating our internal expectations by 100 basis points. We now stand at a record $1.88 billion of ARR, which compares to $1.2 billion when we began our Connect and Scale journey in 2020. ARR has doubled since 2018 and tripled since 2015. We are on track to achieve $2 billion of ARR by the end of the year, a remarkable figure made possible by the Trimble team, who continues to work incredibly hard to execute on our customer-driven systems, process, and business model transformation. We delivered EBITDA margin of 25.3%, also slightly ahead of our expectations, which was driven by strong gross margin of 64.2%. For perspective, gross margin was 56.8% in 2015 and 58% in 2018, EPS at 64 cents and year-to-date free cash flow conversion rate to net income of nearly 100% demonstrates the power and potential of our asset-light business model. Our revenue beat in the quarter is attributable to delivering a large federal government order in the geospatial business in the second quarter instead of the third quarter. For the year, we are holding our revenue guidance and raising EPS. Moving to slide three, let's look at the progression of our Connect and Scale strategy through the lens of our reporting segments, beginning with buildings and infrastructure. The market backdrop remains generally favorable. In North America, we see strength in infrastructure and non-residential construction. Customer backlogs remain healthy, and technology helps to address the skilled worker shortage. By the numbers, ACB bookings accelerated on a sequential basis, and we achieved a record level of bookings in the quarter. ARR grew over 20%. Our Trimble Construction One offering is achieving higher win rates, larger deal sizes, and shorter sales cycles. Further, it is helping to grow both new logo and cross-sell bookings. We are confident in our ability to maintain momentum as our most recent release of digital systems upgrades provide significantly enhanced visibility to even further drive cross-sell and up-sell. Strategically, we are pivoting more of our hardware offerings to adopt aspects of this subscription business model. For example, in building construction layouts, Our RI layout instrument is only available as a subscription. In civil construction, we have shifted more value to the software on the system's offering, thereby positioning us to reduce the upfront cost of a system and monetize over the life of the customer. In geospatial, the market backdrop is largely the same as buildings and infrastructure, yet serving a more highly penetrated customer base. By the numbers, revenue was well ahead of our internal expectations in the quarter. We continue to see strong demand from U.S. State Departments of Transportation, and in the quarter, our team delivered the aforementioned federal government order. Strategically speaking, we saw ARR growth in our Trimble Catalyst product line. Catalyst offers precision positioning as a service through a subscription offering. We passed a milestone this quarter with over 10,000 cumulative units shipped. We also expanded our product line in the reality capture space with the launch of our X9 scanners. We see reality capture as an important product category as it creates a key linkage between the physical and digital worlds which we can uniquely serve. In resources and utilities, farmer sentiment has been trending negative despite market fundamentals, such as commodity prices, largely continuing to be healthy. Our strategic focus in agriculture continues to be building out our aftermarket channel to gain dealer and customer intimacy, thereby providing farmers choice in their technology platforms. Where revenue was down, as expected, ARR grew at a double-digit rate. Our positioning services business continues to win customers in both on-road and off-road capacities, demonstrating our ability to innovate in the space of positioning technologies after 45 years in the business. We also took strategic steps to further ongoing ARR growth. In forestry, we launched a cloud-based log inventory and management system that enables us to move down market, thereby expanding the addressable market. And in utilities, the team delivered two of the largest software bookings in the history of the business. In transportation, the market backdrop remains challenging, with the soft freight market pressuring carriers to streamline their operations for cost savings, to increase asset utilization, and to increase the productivity of their non-driver workforce. Against this backdrop, the overall business both increased operating income margin for six consecutive quarters and grew organic ARR for the seventh consecutive quarter. In Europe, in our Transporeon business, we see early indications that the spot market might have bottomed out. Despite a difficult economic backdrop in Europe, churn is effectively zero, competitive win rates increased, and the business is demonstrating an ability to manage the cost structure in line with the revenue environment. We have early examples of success with bringing the organizations together and making some product roadmap decisions to streamline product development work. Moving to slide four, connect and scale is a platform strategy. which in turn is fundamentally a vertical industry data strategy. No surprise then that we have been deploying artificial intelligence across Trimble for some time now, both for internal benefits and customer-facing applications. For example, a trial program with over 200 engineers using AI-assisted programming demonstrated upwards of 25% improvement in productivity. We have also extended AI into our sales process, where we are applying AI to the call scripts of our sales reps to coach them and then further again to identify cross-sell opportunities. On the customer-facing front, we are improving our best-in-class positioning accuracy in harsh environments using AI-based error modeling and machine learning on many years of atmospheric data. We are deploying AI and video intelligence solutions in transportation to detect driver fatigue and distraction and for selective spraying applications in agriculture. In our construction software business, we are automating invoices converting PDF data into usable accounts payable data. We've already processed over 350,000 invoices worth over $1 billion. Compelling use cases, and we are just beginning. Let me now turn the call over to David to take us through the numbers.

Thank you, Rob. Turning now to slide five, second quarter revenue of $994 million grew 3% organically. Revenue was above our expectations coming into the quarter, driven by the earlier-than-expected shipment of the large order of geospatial equipment to the federal government that Rob mentioned earlier. Excluding that, revenues for the quarter were in line with our projections. Our total company revenue growth versus prior year was driven by recurring software, both organic and from the addition of Transporeon. Gross margins were strong again in the second quarter, with non-GAAP gross margins of 64.2%, tying the record levels of the first quarter. Our gross margins in the second quarter reflect favorable price-cost dynamics, strong growth of recurring software revenues, and a higher margin mix within our product offerings. EBITDA margin of 25.3% in the second quarter was up 110 basis points year over year, benefiting from our strong gross margin performance. Operating and EBITDA margins continue to grow versus prior year, even as we lapped strong year-ago revenues, and as we continue to invest in our digital transformation. Cash flow in the second quarter improved on a year-over-year basis, even taking into account Transporean deal-related expenses. Our improved cash flow performance was the result of lower purchases of inventory, lower tax payments, and higher profitability. Our capital allocation priority remains debt repayment, and we made progress through the quarter on reducing our leverage. Turning now to slide six for some additional color on our revenue performance. Product revenue, which includes both hardware and perpetual software, was down 5% organically in the second quarter and was aided by the federal order, which we had previously expected to ship in the third quarter. The year-over-year decline in product revenue this quarter reflects a difficult comparison with the second quarter of 2022 when our supply chain was freeing up and we were working through high hardware backlog. As expected, dealers reduced their inventories in the quarter. We expect some modest amount of additional dealer inventory reduction over the balance of this year. Our subscription and services revenue, which includes SAS, term licenses, maintenance and support, recurring transactions, and professional services, was up 13% on an organic basis, largely driven by strong bookings and net retention performance across our buildings and infrastructure software businesses. From a geographic perspective, revenues in North America, Asia Pacific, and the rest of the world were up organically by 3%, 11%, and 18% respectively. Rest of world revenue growth was driven by strong demand for precision agriculture products from customers in Brazil. Revenues in Europe declined organically by 4% as adverse macroeconomic factors impacted many of our businesses. Turning now to results by segment on slide 7. Our software portfolio in the buildings and infrastructure reporting segment continued to perform well with organic ARR growth of over 20%. Bookings of recurring software offerings in the segment grew at a mid-20s percentage rate, despite the challenges of transitioning the North American software businesses onto our new digital infrastructure during the quarter. These large system implementations are never easy, but our teams powered through the transition while still keeping our growth momentum going. With this latest release of our digital transformation, we now have over one-third of our buildings and infrastructure ARR transacting through a connected system, which will facilitate the acceleration of our connect and scale strategy. Segment revenues of products for civil construction customers were down at a mid-single-digit rate in the quarter, reflecting strong shipment momentum a year ago. In the geospatial reporting segment, We experienced organic revenue growth driven by the $18 million shipment to the federal government mentioned earlier. Excluding this one shipment, segment revenues in the quarter were down at a mid-single-digit organic rate, an improvement from the performance in the first quarter. This segment is most impacted by the downturn in residential home construction in North America and Europe. We expect to return to organic growth on an ongoing basis in the fourth quarter. In the resources and utilities segment, revenues were down year on year, and fell modestly short of our expectations, driven by our agriculture business. While our sales to ag OEM customers grew versus prior year in the second quarter, revenue from our aftermarket channel was down. Three drivers helped contextualize the aftermarket revenue decline. One, we are lapping a tough comp versus 2022 when our revenue surged as our supply chain freed up well ahead of the OEM supply chain. Second, the changes we announced a quarter ago in our aftermarket distribution network have, as expected, impacted our short-term revenue trends as we and our dealers refine our plans going forward. And third, we are seeing the impact from a softening of farmer sentiment, especially in Europe. We continue to see strong demand trends from ag customers in Brazil, and our positioning services business grew globally at a double-digit rate as we accelerated our cross-sell effort. In the transportation segment, we delivered 6% organic revenue growth driven by our North American Enterprise and MAPS businesses. Our mobility businesses in Europe and Brazil also grew revenue and ARR at a double-digit rate. As Rob mentioned earlier, operating margins improved sequentially once again. Our triple transportation team has made good progress in turning this business around, and while there's more work ahead of us, we are pleased with the progress. I'll note here that segment results now include the Transporian business. Transporian performance was largely in line with our expectations for the quarter, notwithstanding a tough macro environment in the European transportation industry. Moving now to slide eight, we ended the second quarter with ARR of 1.88 billion, up 14% organically. Remaining performance obligations, or RPO, our backlog, stood at 1.6 billion at the end of the quarter. RPO related to recurring offerings grew by over 100 million year-over-year as a result of our strong bookings performance. Product RPO came down as expected year-over-year, reflecting our improved lead times. With this high level of RPO, we have significant visibility into our revenue in the coming quarters. On a 12-month rolling basis, our software services and recurring revenue of 2.3 billion represents a record 64% of our revenues. up 800 basis points from year-ago levels. We completed the acquisition of Transporian in the second quarter and reduced net debt by $150 million from the closing of the acquisition through quarter end. We plan to continue to delever and, as anticipated, expect to finish the year with net debt less than three times EBITDA. Turning now to our guidance on slide nine, the midpoint of our guidance for full-year revenue remains the same as we issued last quarter. Our revenue guidance range has narrowed to $3.845 billion to $3.925 billion, which represents organic revenue growth in the second half of the year in the mid to high single digits. We continue to expect ARR to grow at a mid-teens rate for the year. Our expectation for gross and operating margins has increased from prior guidance by 50 basis points, reflecting the strong performance in the second quarter and a heightened focus on margins and cost control. The end result is an increase in the midpoint of our earnings per share guidance range by 3 cents. We now expect full-year EPS in the range of $2.57 to $2.73. From a segment perspective, our expectation for full-year growth in the buildings and infrastructure segment has improved following strong performance in the second quarter. Our forecast in resources and utilities is down modestly from the outlook of a quarter ago, reflecting weakening macroeconomic conditions in the agriculture sector. The outlook for transportation and geospatial is unchanged from last quarter. For the third quarter of 2023, we expect organic revenue growth in the range of 0 to 5%, which corresponds with a revenue range of $945 million to $985 million. We expect gross margins of 100 to 150 basis points lower than the second quarter, reflecting a less favorable business mix. We expect third quarter operating margins will be similar to second quarter levels. We project EPS in the range of 56 cents to 64 cents. From a segment perspective, we expect geospatial revenues to be down organically at a mid to high single digit rate, as we won't have the positive impact of the large federal order this coming quarter. Resources and utilities revenue is expected to be down at a mid single digit organically. Revenue in buildings and infrastructure and transportation are expected to continue to grow organically in the third quarter at rates comparable to or better than we experienced in the second quarter.

Back to you, Rob. The Trimble operating system links strategy, people, and execution with a belief set that we must strive for excellence across all three dimensions. The progress of the quarter represents the quality of the strategy and our ability to execute. I'll close with comments on people. In the quarter, we won a number of culture awards, reinforcing our ability to attract the best talent in the industry. We believe that part of attracting the best lies in developing the best talent of the future. Through our Trimble Labs initiative, we now sponsor 30 technology labs in 14 countries. We also believe in the health of our communities. In the quarter, we announced breaking ground on a 1.7 megawatt solar array as a renewable energy source at our headquarters. And our own technology is currently being utilized to increase the productivity and quality of this installation. Finally, let me take a moment to acknowledge that Steve Berglund retired from our board of directors, completing over 24 years of service at Trimble. We thank Steve for all of his contributions, dedication, and years of service to the company. Berea Elcom will chair our board of directors through our next phase of growth. Operator, let's open the line to questions.

Thank you. At this time, I would like to remind everyone, in order to ask a question, Press star, then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Kristen Owen with Oppenheimer.

Hi, good morning. Thank you for taking the question, and congratulations on a nice result. I was wondering if we could maybe start by just some of the moving pieces in resources and utilities. David, I think you called out the three items, but I'm wondering if you can help us parse out sort of the macro from the distribution channel, what you're seeing in underlying demand there, and then walk us through how that transition is unfolding in the distribution channel.

Sure. Hey, Kristen. First thing I'll point out is that our business with the OEMs was up, so that's the good part of the story. The factors that I mentioned that cause our aftermarket business to be down year on year, a part of it is the macros. We see softening sentiment across many of the geographies. It's much more pronounced in Europe than the rest of the world, but we really see it in Europe. We've also changed our announcement of changes to our distribution network, and so That's causing us and our dealers to sort of rethink our plans, and that clearly had a softening effect in the quarter. And then we're just lapping really big numbers. Last year we had really strong shipments as we were working through our supply chain. I'll point out our supply chain improved much more quickly than the OEMs. They got a lot more parts, more complex supply chain. So we saw the surge last year. It's a little tough to attribute the causal nature of the aftermarket revenue decline to those three. It is a mix, and some of them are interrelated. But I think overall the sort of long-term outlook remains positive, just as it was. We see all three of these factors as reasonably temporal.

Okay, thank you. And just to clarify, on the transition in the distribution network, Just any thoughts on how that is playing out at this point and how we should think about the impact from that transition over the remainder of the year?

Hey, Kristen. Good morning. It's Rob. The transition is playing out mostly as expected. So we feel good about where we are in this. It's obviously a process as we go around the globe, but we take an 80-20 principle as we work with our partners around the world from those that we're signing up. Thus far, I think there's very positive sentiment. This creates a closer connection to Trimble, gets a broader portfolio of technology to take to market. So we're feeling good about it where we are, and there's still clearly a lot of work to be done. So I'd say largely as expected so far.

That's super helpful. And then as my follow-up, I wanted to ask about a comment that you made regarding the positioning services. Can you just remind us, what is your market share in positioning services today as we think about maybe specific to R&U, just given the cross-selling opportunities that you called out there? Just trying to think about what the overall TAM is, just given your market penetration. And I'll stop there. Thank you.

This has been an extraordinarily successful business for us, really, for the last couple of decades. To get that two centimeter and less accuracy on a farm or for a survey or for construction equipment, oh, by the way, for ADAS systems and on-road vehicles, you need to have corrections because you have errors in the atmosphere. You need additional ground-based geometry to augment the satellites. So we've been a market leader, a technology leader in this capability for a long time now, continue to actually find an ability to innovate in the space. From a market share perspective, I'd say it's pretty clear we're the market leader as our technology goes on. In ag, it goes in civil construction equipment, machine control. It shows up in serving all places where we have the market share lead. So the correlation on to Trimble equipment correlates to the market share we have, I'd say, and beyond, because you don't just have to be Trimble on Trimble. We are a mixed fleet. On the on-road space, that became a new frontier, let's say a new addressable market that opened up for us in the last few years as automotive companies. start towards their path towards autonomy. It's a series of progressive automation. That's why you see ADAS picking up as one of the first applications. So to know absolute position for lane detection, you're going to need to have corrections like we have. So that's an emerging market that presents an expanded addressable market for us. In terms of actually sizing specifically, The addressable market, I have to admit it's a bit hard to do that, but I would put it as certainly approaching a billion dollar type market opportunity when you put the on-road business in as well.

Thank you so much.

Our next question comes from Mr. Jerry Revick for Goldman Sachs.

Yes, hi. Good morning, everyone. Hi, Jerry.

Rob, I'm wondering if you could just share a bit more of the stats for the subscription businesses. I know you have a very tight pipeline process, particularly in BNI. Can you just talk about what the pipeline looks like and any comments that you can add on Transporeon's performance beyond the prepared remarks in terms of what the lead indicator is? look like in that light of business? And if you're willing to touch on new logo growth for the subscription assets within the performance, we would appreciate it. Thanks.

Sure, Jerry. So the pipeline within construction is quite strong. This team is firing on all cylinders at the moment. It showed up in the organic ARR growth greater than 20%, which is clearly better than the company number at the plus 14 level organically. Bookings grew faster than the ARR growth. Bookings grew sequentially. You had asked me about that last quarter. So now you work backwards from the bookings and into the pipeline and the coverage ratios. And we like what we see. We see strong pipeline, strong coverage ratios. The Trimble Construction One offering continues to get momentum for our sellers in the market we see strong cross-sell activity within those bookings is that the pieces come together quite nice and they overlay the market backdrop on that and you know infrastructure in North America is clearly a positive catalyst for us and all of all of the market so generally a favorable macro meets a team executing extremely well. It turns into a pipeline, which turns into that ARR. On the Transporean side of the house, we're four months into the acquisition, so it's still relatively new. We like what we're seeing in the business so far, so I think about the people, I think about the macros, I think about the business, and I think about the integration opportunities that we have there. Now, the macro is still more challenging in Europe. It's a mass micromonetization business model. So it's fundamentally transaction-based or consumption-based. And then the nature of the mix of that consumption impacts the revenue. What we think we saw in the quarter is that it looks like spot prices might have hit a bottom. Time will tell if that's the case. then the business model is there and poised to increase accordingly. From a customer perspective, from wins in the market, you know, we don't lose customers in this business. We did have new logo wins in the quarter. Continued to have bookings growth in the quarter. So I like the start that we have in the business.

Super. Thank you for the detailed color. And David, can I ask on the fourth quarter revenue outlook, really interesting. So essentially, you know, an acceleration in sales of about three points ahead of normal seasonality, 4Q versus 3Q. Can you just unpack what gives you that confidence because, you know, Caterpillar's cutting production and, you know, we've got a bit of different trends in some of your hardware markets. I'm wondering if you could just... talk about the visibility that you have, because that element of your guide looks pretty interesting.

Yeah, sure. Jerry, one thing I'll say is that if you compare Trimble's trends with the OEMs, you have to keep in mind the year-on-year comps, including channel inventory, which are completely different for us. We worked through our supply chain issues in early last year. We saw the surge of shipment. our channel inventories have been declining. That's not true for all of the OEMs. The way I get comfort on the fourth quarter is from a couple directions. First, from the bottom up, look at the businesses, the pipeline, the underlying trends. And then from a top-down perspective, I look at comparisons of our projections with the period before COVID in the supply chain. If you actually look at our organic growth going back to four years ago, which is pre these disruptions. Actually, the fourth quarter compound organic growth is very comparable to Q3 and is actually consistent with what we've seen for several quarters. So it looks like a ramp up, but when you take the noise of the supply chain driven ups and downs from a year or two ago, it looks very achievable. So we're very confident in this fourth quarter outlook.

Super. Thank you.

Our next call comes from Mr. Chad Dillard with Bernstein. Please go ahead.

Hi. Good morning, guys. Hey. So I was hoping you could drill down a little bit more into the hardware business. Can you just talk about kind of segment by segment, you know, what you're seeing in terms of, you know, the year-on-year slowdown? And then also, can you talk about the progress of destocking? To what extent do you think you're going to be finished? And when do you think you'll be able to produce in line with retail demand?

Yeah. Hey, Chad. First thing I'd say is that we're nearly all the way through the destocking. It won't be a meaningful factor for the back half of the year. There was some destocking in Q2. It was much smaller. than Q1, so I don't really call that out as a major driver. But it's not just the destocking this year. It was the increase in inventory levels last year that you're comparing against. So you've got to put those two together to compare our business trends with retail demand. And that's true sort of across the markets we serve. From the segment perspective, The business where we think there has been some end user sales to retail or sales end user decline is in geospatial. That is the segment that is most impacted by residential construction, both in the United States and Europe. So that's been the softest. If you take the channel dynamics out both this year and last and the other businesses in ag and in civil construction, It looks like there's modest sales to retail growth, even with the numbers we're posting. So that's kind of how we see it.

That's helpful. And then I want to hit on your digital transformation. Can you talk about how that's progressing? I think you talked about B&I, about a third of your products are being sold this way. Maybe you can talk also about just what you've learned so far with that third of that business segment being transformed.

Yeah, so we got through the next phase of our digital transformation during Q2. We put our North American construction enterprise software businesses together on a common digital platform. And as I said in my prepared remarks, these big process and system changes are never easy. They can be disruptive. One of the things I'm most proud of with our team and our results is that we achieved nearly mid-20s plus actually in the businesses directly impacted by the digital transformation, almost 30% bookings growth, while the tools they use to track and sell have transformed. So that is a huge milestone. We are now in a position, only just now, to take advantage of the benefits that the Common Platform provides to us, and further enhancements to that are going to roll out even this quarter. So we're getting to the point where where cross-sell and the connect and scale vision is enabled and not hindered by a diversity of systems. Now we have common technology. We have visibility into our pipeline. Salespeople can see what customer business is across the Trimble portfolio in ways that they couldn't systematically before. So we're just getting going. We're just beginning to realize the potential of this new process and tool for that business. and we will continue over the next year or two to roll out the same approach to the rest of our business.

Great, thank you.

Our next question comes from Mr. Jonathan Ho with William Blair. Please go ahead.

Hi, good morning. Just wanted to start with TC1, and can you maybe give us a little bit of additional color in terms of how this is maybe impacting your ability to transact with customers, as well as where TC1 maybe has surprised you?

Hey, Jonathan. Good morning. It's Rob. TC1 so far has been, I'd say, a large success, and I think we're just getting started with it. You know, I've had an example of a customer saying, okay, I used to have to have 14 different transactions with you to do business, and now I can do it under one frame agreement. We're making ourselves easier to do business with. When we sign a frame agreement, let's say with a customer who maybe is only buying one solution within TC1, if you sign the frame agreement, it's now easier to So that land and expand is more easily enabled because you don't have to go back with a set of terms and conditions. Customers are able to connect workflows as we have tighter and tighter integrations in the data across the products and solutions that we sell to customers. So any surprise with MTC1 to me is to the upside. It absolutely validates connect and scale and as the beacon for the rest of the company of what we can do when we rethink how we go to market and how we take our solutions to market. So it's very encouraged with what we're seeing in the business and proud of the team that's delivering it.

Got it. And you also mentioned AI during the prepared remarks. Can you Give us a little bit of a sense of how this could be a potential driver of revenue, maybe timeframes for that, as well as on the productivity side. Thank you.

Sure, Leo. Let's split the two. And then the slide that goes along with the prepared remarks that we made on purpose put one distinction of the internal facing. Examples separate from the customer facing examples. So if we take the productivity opportunity internally, I think the place we'll see it show up first is within the R&D on the developer side with a co-pilot trial that we ran in the second quarter that showed some productivity benefits. I think this is going to be the way that business is done. So where I would like to believe that we'll see this show up over time is we can get more scalability out of the resources we have. Said another way is if this works, that turns into up leverage on revenue growth that we have. in the future, so-called more scalability, more effectiveness, internal effectiveness and efficiency, which I think would ultimately manifest in op leverage or that marginal contribution on the revenue growth. On the customer-facing side, I think it's going to be very interesting to see how this monetizes over time. Right now, I would say there's an aspect where we make the solutions we sell better. You know, Trimble's a premium price provider in the market. I think this is part of earning that premium is continuing to innovate and develop and have the best. There's another aspect of capabilities, which we believe will come through when you're buying a bundle such as TC1, when you're buying that platform offering or that cloud offering, such that if you have, I'll say, an incremental set of analytics capabilities We want to deliver them when you're buying something like TC1, so where you can uniquely get them by virtue of that business model. I suspect that that's going to be the way that we'll see this monetized. I think standalone analytics, I have a question if those will actually be able to monetize independently and on their own. I really think it comes through making our solutions better. Great, thank you.

The next question comes from the line of Tammy Zakaria with JP Morgan. Please go ahead.

Hi, good morning. Thank you so much. So on Trimble Construction 1, can you give us some color on what percent of your B&I customers now have TC1 and using multiple solutions on it? And do you have any set goal or time frame to convert a certain percent of the customer base into TC1 customers?

Hi, Tammy. Good morning. It's Rob. Let's take that in three slices within B&I. Within B&I, we have the civil construction. Fundamentally, we have the civil construction business, machine control, as you would know it, and then the construction software. Within the civil construction business, we really don't have TC1 customers. but that is absolutely where we're going, is connecting the machine control offering with the software. We do that informally today. That's the path we'll for sure be going. So I'd say we're not fundamentally doing it in the civil space today, so there would be no customers that we're hitting there. Within the construction software business that we have, this is for sure where we're taking the business and where we're having success. I have one caveat within that, which is our SketchUp product and our architecture and design business, because SketchUp has millions of users from makers to architects. And so it's a different market segment. So I don't think that the millions of users of SketchUp are going to all be relevant for TC1. So if I take it within the subset of the construction software, you know, we would have an ambition to have, you know, it's well more than half of our customer base on the Trimble Construction One agreement. We've got many thousands of customers on the frame agreements today. The team does a great job, even if somebody's not buying a full bundled opportunity, that they're putting them on the frame, customers on the frame agreement, such that they have a path to have access to more of our solutions and to have more of those more easily. So I hope that gives you a little color of how we think about the TC1 opportunity within BNI. What we'll continue to do, I guess I'll add a little bit more, Tammy, is our sweet spot today is at that contractor level with the TC1 offering. Then we look at an architecture and engineering experience for TC1. we look at a civil contractor experience for TC1. So we'll have a series of expansions through tailoring experiences to the customer segments that we serve, and then actually also rolling this out on a global basis. So overall, we're still in the early innings, and that's good news in terms of the continued growth opportunity.

Got it. That's very helpful color, Rob. Thank you. And my follow-up question is, The price-cost benefit in the quarter that you saw that helped gross margin. Can you quantify how much it was and what segments drove that?

Yeah, I mean just to give you a little higher level color on that for the moment. So the qualitative before the quantitative on the qualitative side, the gross margin improvement is fundamentally about the mix of the software business. So this isn't a price, I'll say a price-driven where we also see benefit in the margin is from the cost abating, the inflation coming down in the supply chain, purchase price variances going down or going away. So that means the hardware businesses are returning to increase their gross margins by and large. You put that on top of selling more software, which comes naturally with a higher gross margin, and you get that 64.2% gross margin, which is tying the record we had from Q1 and is a remarkable change from gross margins of the past at Trimble. So it's much more driven by that than price.

Got it. Thank you so much.

Our next question comes from Mr. Rob Mason with Bayard. Please go ahead.

Yes, good morning. I wanted to see if you could Speaking to maybe the B&I and geospatial areas collectively, could you segment out what you're seeing between infrastructure and trends in non-res construction? And then just with respect to residential construction, do you think you're at a point of stabilization there?

So, hey, Rob. Good morning. It's the other Rob. Good morning. If we look at the segments within... the market, clearly infrastructure is the strong point, both I'd say North America, but also globally. There's also mega projects happening around the world, and those are positives for us. On the non, I'll say the non-RES side, if I exclude infrastructure non-RES, where we see pockets of, continuously pockets of strength, and if I think here in North America, I think about renewable Energy projects, we think about some onshoring of manufacturing, data centers, which correlates to AI, we believe. Those are areas where we're seeing strength. Residential specifically, there's a little bit of a mixed tail. There's still a fair amount of new home building happening. I'll stay with the US here for a bit on residential. But and so we see sort of up and down trends on that. I mean, it's been net down on residential for sure And hopefully we can get to some stabilization on that. I don't know that I would call it stabilized yet in North America but You know the economy looks like we might be able to head for us if we head for that soft landing then that would be a good thing residential has been harder in Europe and then that one has had much more of a challenge than Didn't in the US and that's worth you know, that's worth calling out. So you put the sum of that all together and you get the forecast where you get the results that we have in the forecast that we put going forward. That's helpful.

And just as a follow-up, David, you did, I know we just had the discussion around gross margin, but David, you did speak to some, you know, that steps down in the third quarter. Should we expect it at steps back up in the fourth, the mix becomes more favorable again?

Yeah, Rob, it's mostly mix-driven, both the dynamics from Q1 to Q2 and then Q2 for the rest of the year. We do expect it to step down in Q3 and then up again modestly in Q4, driven by more software mix in the business.

Very good. Thank you.

Sure.

Our next question comes from Mr. Devon O. with KeyBank Capital Markets. Please go ahead.

Great. Thanks for taking our question. You know, I want to ask about your construction software business as well. You know, really strong results there. I think one of your competitors reported yesterday and saw TURN maybe up picks slightly. So, yeah, just curious if you've seen any similar dynamics around TURN in the quarter. Any noticeable uptick or downtick? And you can also comment on how retention for NRR is trended from our score. That would be helpful.

Yeah. In our construction software businesses across the board, we're seeing very strong demand. So as Rob mentioned earlier, the pipeline is strong. We've seen no uptick in churn, and net retention trends are really good. So the fundamental subscription metrics look very solid across our construction software businesses.

Got it. No, that's great to hear. And then a quick follow-up from me. You mentioned the closing of a large federal government order in geospatial. Any details on how large that deal is? I just want to get more color on how much revenue got pulled forward from 3Q into TQ. Thank you.

It was just a touch over $18 million geospatial equipment for the federal government.

Thank you. You're welcome.

Ladies and gentlemen this concludes today's call. Thank you all for joining. You may now disconnect.