Trimble - Earnings Call - Q1 2020
May 6, 2020
Transcript
Speaker 0
Ladies and gentlemen, thank you for standing by and welcome to the Trimble First Quarter twenty twenty Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your speaker today, Rob Painter, Chief Executive Officer.
Please go ahead.
Speaker 1
Good afternoon. COVID-nineteen is on the forefront of everyone's mind. Our presentation format will be different this quarter and is structured to address topics that seem to be top of mind amongst our long term shareholders. As always, our presentation is available on our website and we ask that you please refer to the Safe Harbor at the back. Before we start walking through the slides, we want to acknowledge that this is an extremely challenging and uncertain time for all of us and that everyone listening has their own unique set of circumstances they are dealing with.
While these calls are designed for our investors, our employees are also active listeners. In fact, over 40% of our employees are shareholders. As such, these updates speak to both audiences. In our current environment, we lead with a moral principle to support the health and safety of our community including employees, customers and dealer partners. We also lead with a strategic principle to keep our business moving forward.
Have customers and partners who rely on Trimble to keep their businesses running, to move the goods of commerce, to feed the global population, to build and maintain our infrastructure and more. With heartfelt gratitude, I plug the level of dedication and resolve from our over 11,500 Trimble colleagues, a worldwide network of dealer partners and our customers. As a leadership team, we activated a comprehensive global business continuity plan in early March. The vast majority of Trimble is working remotely and we are in the process of defining when and how we gradually return to our office environments. The ongoing economic impact of Trimble
Speaker 2
will
Speaker 1
correlate to when and how we and our customers establish a set of new normal working conditions. While it feels like we can see the light at the end of the tunnel, the fact remains that there is still a great deal of uncertainty. The essence of our planning has been to plan for the worst case scenario and hope for the best. We took early and decisive action and I'm incredibly proud of how our team has rallied together as one Trimble. We will get through this crisis, we are well positioned to endure the macroeconomic shock and we will emerge stronger on the other side of this.
While we are managing the short term realities, we are also equally focused on executing our long term strategy. Let's shift to the presentation. Slide two has the seven key messages we want to address today. As I've just highlighted, our team has risen to the challenge and this is point one. Point two, our first quarter results exceeded expectations demonstrating quality of the Trimble strategy and the financial strength in the first eleven weeks of the quarter.
A big thank you to the Trimble team. Point three, our balance sheet and access to liquidity remain emphatically strong. Point four, as we look to the past to inform the actions of today, the multi year execution of our strategy and the transformation of our business model has established more resiliency than at any point in our history. Point five, we took early and decisive management actions including increasing liquidity and implementing broad based temporary pay reductions to fortify the business. My commitment to our Trimble team is to restore pay as soon as possible.
Point six, we are suspending guidance and we will be as transparent as we can with the puts and takes we are seeing in the market and in our business. Point seven, the cumulative actions we have taken enable us to stay true to our long term strategy, Connect and Scale 2025, No changes. Moving to Slide three, the message here is that our business is essential and our team is leading. My opening comments addressed much of what is on this slide. Before I turn it over to David, slide four offers a few examples of how Trimble is helping our customers and communities during this time.
In our transportation business, our team is offering a free service to display and collect current truck stop status and amenity information. We are also offering free driver trip planning to suggest open truck stops and rest areas. Our leasing team has put together programs that are enabling customers to extend payment terms. In our communities, I'd like to highlight our CityWorks team which is offering a web based GIS centric platform for local governments to manage their emergency response efforts. David?
Thanks Rob. Turning to Slide five, non GAAP revenue for the first quarter was $794,000,000 in the middle
Speaker 3
of our guidance range despite greater than anticipated weakness in demand late in the quarter as the pandemic impact widened. I'll note that Q1 revenue reflects outstanding management of the supply chain disruption coming out of China. We exceeded our initial expectations in fulfillment of customer demand despite the fact that the shutdowns in China were more severe and longer lasting than we anticipated when we issued guidance in mid February. Total revenue growth for the quarter was minus 1%, which included minus 2% from organic growth and approximately minus 1% from changes in exchange rates as the U. S.
Dollar strengthened during the quarter. Acquisitions added about 2% to revenue during the quarter. Our recurring revenue was strong with annualized recurring revenue or ARR up 7% year on year and up 6% on an organic basis. Note that this represents about a 1% acceleration from ARR performance in 2019. Gross margins, operating margins, net income and EPS improved versus prior year and EPS came in well above our guidance range.
Margins improved during the quarter for a number of reasons. Gross margins were higher year on year driven principally by an improvement in mix as our higher margin software businesses performed relatively well during the quarter. Lower levels of discounting and the introduction of higher end new hardware products also improved margins. As the impending weakness in the economy became apparent, we pulled back on discretionary spending, including travel and outside services and we reduced our rate of hiring. In addition, our expense relating to incentive and commission plans was reduced meaningfully during the quarter.
Note that the temporary pay reductions Rob mentioned in his remarks did not take effect until the last week of Q1, So we will see the vast majority of that cost benefit beginning in Q2. Turning to Slide six, we are showing here revenue and profit trends by segment and I'll touch on the factors which are expected to drive the sector businesses going forward. The Resources and Utilities segment had a strong revenue and profit quarter driven by demand in the agricultural sector for aftermarket products and correction services. Late in the quarter, our OEM business was impacted by factory shutdowns, but end customer demand proved to be solidly resilient through the quarter. Revenue trends were aided late in the quarter by customers buying product in anticipation of shutdowns in distribution and manufacturing facilities.
Our Buildings and Infrastructure segment had organic growth in the quarter driven by our Civil business and growth in our recurring revenue offerings. The organic growth occurred despite March weakness in project starts and bookings. With some notable exceptions, most ongoing construction project activity continued despite COVID-nineteen related work restrictions. The geospatial business got off to a strong start in the quarter driven by new products and by the timing of dealer orders. March results were much weaker, both because dealers drew down inventories and because demand began to weaken with the decline in oil prices and the implementation of shelter in place rules.
Transportation revenue was weak in the quarter, driven in part by the factors we discussed in our Q4 twenty nineteen release. As you will recall, we have experienced challenges related to the implementation of the ELD mandate in our telematics business. Revenue trends weakened further in March as the COVID-nineteen crisis took hold. During the quarter, we made significant progress in addressing product functionality gaps and partly as a result, we are seeing lower churn coming out of the quarter. Going forward, we plan to accelerate the transformation to higher performing hardware across our customers' fleets.
While these steps will put continued pressure on margins this year, we believe they will position the business for stability later this year and growth as the market returns to more normal The transportation market in Q1 was in meaningful turmoil relating to the pandemic. Providers to food retailers saw a significant spike in demand, while trucking companies supporting capital goods or energy markets experienced a significant reduction in freight demand. Overall, our business was impacted in March by a deterioration in market conditions and a decline in the number of trucks on the road. I'll note here that our maps business, which has a recurring revenue model saw strong demand through the quarter. One additional observation about the timing of revenue trends within Q1.
Revenue growth was strong through the first two months of the quarter and then weakened in March as the COVID-nineteen pandemic took hold. Revenue growth was in the high single digits through the first two months of the quarter and then was down in the mid teens in March. I'd also like to comment briefly on the trends we have seen in our business after the full COVID-nineteen crisis hit in March. I'll start with our recurring revenue, which remains strong even in this period of facility shutdowns and economic weakness. Customer retention so far is in line with our pre crisis experience.
Our enterprise systems are critical for our clients' operations. Approximately 75% of our recurring revenue offerings represent field or enterprise software used day in and day out in the course of our customers' businesses. So as long as our customers remain in business and project activity continues, then our products are essential. In fact, usage of many of our systems has grown since the crisis intensified. We are however seeing a delay in bookings of recurring software as customers rethink their priorities and cope with facility shutdowns.
But this will have only a small impact on our revenue in 2020 and we are holding our share of the new awards that are coming through. Our non recurring revenue businesses are unsurprisingly experiencing more adverse trends since the COVID-nineteen crisis expanded in March. Our OEM hardware business, which collectively makes up less than 15% of revenue, have been significantly impacted by the shutdown of many of our customers' production facilities. Hardware sales have been adversely hampered by work restrictions at our dealers and at their customers, while much of our professional service business has been impacted by the lack of access to our clients' people and facilities. Encouragingly, we entered Q2 with over $1,200,000,000 of backlog.
Of this amount, roughly $250,000,000 is from our non recurring revenue businesses, up versus the same period last year. We expect the majority of that backlog to convert to revenue this year. Turning now to Slide seven. Our cash flow, balance sheet and access to liquidity remains strong. During Q1, we generated $156,000,000 of cash flow from operations, up 5% from the prior year.
We ended the quarter with $217,000,000 of cash. We have renegotiated terms of an outstanding term loan to extend the maturity from July 2021 to July 2022. As you can see from the table, we anticipate no principal due on any of our outstanding debt for the next two years. We also have over $1,000,000,000 of untapped borrowing capacity on our credit facility. Our outstanding debt is rated investment grade by both Moody's and S and P with stable outlooks from both agencies.
Moody's just reaffirmed their rating and stable outlook in a report issued last week. We finished Q1 with financial ratios comfortably in compliance with our credit line covenants. We have a strong primary focus on ensuring credit facility compliance and access to liquidity as we model potential scenarios for our business in the coming quarters. Our business generates significant cash flow consistently in excess of earnings even in times of economic downturn. Our financial modeling shows that the business would continue to generate significant free cash flow even in an environment of revenue reduction significantly worse than what we saw in the global financial crisis.
In summary, our balance sheet is strong and we have taken action to further strengthen our capital structure as the COVID-nineteen crisis has unfolded. The current capital structure and the demonstrated ability of our business model to generate cash even under adverse scenarios gives us the platform to weather the crisis and to continue to execute our strategy. Turning now to Slide eight. I'd like to point your attention to several ways in which our business model has evolved since the beginning of the last two phases of real weaknesses in our end markets, the global financial crisis at the 2008 and the commodity price declines of several years ago. Note that in 2008, hardware represented nearly 90% of Trimble revenues and that the Geospatial segment made up just under half of our business.
This revenue mix left us highly vulnerable to reductions in capital spend in a number of markets, especially oil and gas. With this business mix, Trimble revenue declined 15% in 2009. In the last twelve years, our model has evolved significantly with hardware now making up less than half of our revenue and our sector and geographic diversification leaves us better able to withstand any focus reduction in capital spending activity. As I noted earlier, the one third of our business with the recurring revenue model is holding up well through the first months of the COVID-nineteen crisis. The point here is that our business model is more resilient than ever with a more diversified and stable revenue mix.
Turning now to Slide nine, I'll talk about efforts we have undertaken across a number of areas to fortify our business for the recession we now see coming. From a capital allocation perspective, we have taken a number of steps to ensure that our balance sheet remains strong. We have temporarily suspended our share repurchase program and put a hold on significant new acquisitions until we can see clear signs of recovery in our business and end markets. As I noted earlier, we have negotiated an extension on the scheduled maturity of an existing term loan. From a cost perspective, we have taken action on a number of fronts.
These actions include an immediate reduction in discretionary spend like travel, lower forecasted payouts on our incentive plans, the elimination of our planned annual salary increase and a broad based temporary salary reduction program. The salary reduction program, which took effect just as Q1 ended, reduces our payroll base of $200,000,000 per quarter by approximately 10%. Note that the reductions were implemented in a progressive approach. Many of our frontline workers received no reduction at all, while our CEO, Board of Directors and senior leadership team have accepted temporary reductions of 50%. Of the $20,000,000 per quarter salary savings, approximately 75% or $15,000,000 quarter will show up in operating expense with the remainder in cost of goods sold.
The salary savings when combined with our other cost reduction initiatives have reduced our quarterly run rate of operating expenses by roughly $30,000,000 per quarter lower than the first quarter twenty twenty run rate and $50,000,000 per quarter when compared with our pre COVID 2020 plan. From a supply chain perspective, we plan to keep doing what worked well for us in Q1 as we manage the disruptions in China. Our team has shown an ability to be creative and flexible in responding to whatever disruptions we see in the market and we will constantly readjust our plans to ensure that we meet evolving customer demand. Now, I will turn it back over to Rob to talk about our views looking forward.
Speaker 1
Let's move to Slide 10. While we are suspending our second quarter and total year guidance, we also transparent and talk about the areas where we have more and less visibility. David described a number of ways in which our business was impacted in March as the economic slowdown took hold. I'll expand on those comments and give you some thoughts on how we see our business trending in second quarter. The overall performance of the quarter will correlate to the opening up of global economies and the return of more normalized demand patterns.
The areas of the business model where we have the most visibility and confidence includes ARR, gross margins and operating expenses. ARR represents approximately one third of our total revenue. In the second quarter, we expect this to be up in the low single digit range on a year over year basis. We would also expect to see modest gross margin expansion as our revenue is increasingly weighted towards software centric revenue. Relative to operating expenses, David covered the cost containment actions we took.
In our non recurring revenue businesses, new hardware demand and new logo software bookings growth has been depressed during the shelter in place time. We are digitally engaging with prospective customers and building our pipeline but the fact remains that the rate of deal closure levels are below what we experienced at the beginning of the year. Looking at our reporting segments and taking a view of the puts and takes in the end markets, we have a point of view on the relative performance we expect across the segments. On a year over year basis, we expect revenue in all reporting segments to be down in the second quarter. We expect Resources and Utilities to outperform amongst the segments driven by our Correction Services and Utilities businesses.
On the other side, we expect geospatial to underperform amongst the segments given the hardware centricity of the reporting segment. Turning to our last slide, I want to step back for a moment and revisit two of the three first principles we established upfront during the crisis. We said we would protect and strengthen the core of Trimble and position ourselves to exit the crisis in a stronger competitive position. The underlying investment thesis of Trimble is stronger than ever that is the digitization of end markets that are historically underserved and underpenetrated with technology that delivers productivity, quality, safety, visibility and environmental sustainability to our customers. With that backdrop, our long term shareholders expect us to deliver long term sustainable value.
We believe we have taken the responsible short term actions to confidently weather the economic crisis, which allows us to stay focused on our Connect and Scale 2025 strategy, which we believe is more relevant than ever. The takeaway here is that we will play offense on core elements of our strategy, in particular the transition to subscription revenue models across our business. We will also continue to invest in business processes and systems to accelerate this strategic transformation. As evidence, we are pulling forward some of our transitions into 2020 and 2021. For example, we launched our transportation management system as a subscription offering and we now see more than half of our new bookings being subscriptions instead of perpetual license offerings.
As another important example, at CONEXPO in February, we announced what we are calling Trimble Platform as a Service that bundles our machine control and guidance kit along with Trimble productivity software into a subscription offering. Customers will benefit from technology assurance and a platform that can be feature upgraded. They also benefit by converting to an OpEx model and being able to more easily charge machine time to specific projects. We further connect this job cost information with our Viewpoint Construction ERP system and our WorksOS platform that bring together data elements from other Trimble and non Trimble technology into a single tool to remotely manage productivity and uptime of the site. In our agriculture business, we are now offering bundles of our guidance hardware along with our software and correction services.
The aim is to make ourselves easier to do business with and to reduce friction in the buying process. Next, our strategy guides us to further connect our industry lifecycles. As evidence of our progress in the construction market, we expect Trimble Connect to reach 10,000,000 users in the second quarter and we currently have over 80,000 active multi user projects being managed in Connect. This user base provides us a platform to deepen our customer engagement over time and more importantly than ever provides an environment for them to continue to collaborate on projects from anywhere. Finally, we have not pulled back our R and D efforts and we will continue our forty plus year history of innovation.
Two examples I want to share here. First, at CONEXPO, we announced our Earthworks two point zero system that enables extensibility of the base platform. For example, we launched automated horizontal steering capabilities which advances our progress on the path to autonomy. Using platform, we demonstrated remote control capabilities and operated a set of equipment in Dayton, Ohio from the show floor in Las Vegas. Second, in our correction services business, the team achieved a great milestone in the quarter completing a multi year effort deploying our RTX FAST technology across the Contiguous U.
S, parts of Southern Canada and much of Western Europe. We now cover nearly 5,000,000 square miles with RTX FAST capability which allows users to realize accuracy in less than one minute via internet or satellite broadcast. RTX Fast is ideally suited for autonomous on road and off road applications. To conclude, I would like to thank everyone for your time and your support and a special thank you to our global Trimble colleagues. Operator, let's please go to Q and A.
Speaker 0
You. And our first question comes from from JPMorgan. Your line is now open.
Speaker 4
Hi, good afternoon, I guess. It's afternoon your time as well as ours. So good to hear all of you. My first question is around the resource business. It really performed significantly better than we had anticipated or forecasted.
Can you just talk a little bit about what actually happened there and how sustainable the margins are there? Or whether it was a one off rollout of some new product? Thank you.
Speaker 1
So yes, was a few factors that contributed to the outperform in the quarter, which includes some of the following. So it was an early planting season overall, which we think helped the business to some degree. To the credit of the team, the new product introductions that have come out in the last month seem to be doing well in the market and we think that that contributed. The other part that's in Resources and Utilities as a reporting segment is our correction services business as well as a set of utility and local government businesses we have. Our correction services business had a very strong first quarter, which we believe also correlated not only to the health of the business, but the early planting season.
And then our utilities business has been coming along nicely and the CityWorks acquisition that we completed a few months ago is off to a nice start. So a number of factors came together in the reporting segment to set up a nice quarter.
Speaker 4
And if Q1 was supported by the early planting, does that mean that the margins have peaked for the year despite everything else that's going on? But seasonally, we would expect Q1 margins to be the strongest?
Speaker 1
Yes, that's a good point, Ann. That would be correct.
Speaker 4
Okay. And then on Buildings and Infrastructure, how lack how little visibility do you really have on the hardware side in that business just given what's going on with construction equipment production and then sales? I know you listed it as a risk in one of the further out slides, but if you could just address where do you see the greatest risk to your business in Buildings and Infrastructure? Thank you.
Speaker 1
Well, there's certainly less visibility into the hardware business than than the recurring revenue software we have in the reporting segment. If I take it from an angle of sentiment from customers, I would say we're hearing mixed reports from customers so far. On the positive side, we came in as we came into the first quarters, our customers had backlog and the sentiment was strong. And then as the virus took hold, the projects clearly slowed down or halted and that was a negative at the end the quarter. So here in the next few, I'll say weeks or months, as our customers get back to work, we expect, I'd say, the hardware side of the business to proverbially come back to work as well.
And now what I would say is, is we also hear some concern about work coming into or looking forward into 2021. And then we also hear shift in sentiment as you would expect around some of the end market work. So something like commercial work or energy related work will be difficult. Work such as hospitals or data centers would be good. So the mix of work is we expect to change as well.
Speaker 4
So if I were to rank order your customers in B and I, the construction equipment probably the weakest sentiment, maybe your contractors next, given the projects just stopped and then maybe the later cycle, the architects, etcetera, maybe a little bit less impacted at this point. Is that a fair characterization? And I'll leave it there. Thank you.
Speaker 1
That's pretty close. I'd say, I mean, in the software businesses, overall, the work we do is of essential nature. If it's an ERP system, you're either in business or you're not. And the technology continues to be fundamental to the business and, and and used. The maybe it's the next category.
I would take the construction equipment, let's say the contractors. And then the third would be the OEM. So OEM related revenue that we have, I would put at the bottom of the list in the rank Okay.
Speaker 4
I appreciate the color. I'll get back in line. Thank you.
Speaker 0
Thank you. And our next question comes from Rob Wirthmeyer from Melius Research. Your line is now open.
Speaker 5
Yes, hi and thank you for the question. You know it's interesting you're offering some new utilities to some of your customers to help deal with coronavirus in various ways, whether it be on the trucking side or just on the safety side. I'm a little bit curious, mean, it's a tough thing, but it's obviously an opportunity to potentially reach new customers. So is that expanding your reach? Is it mostly to existing folks that you have?
Is it offering new features that they wouldn't have otherwise seen to them? And can you just give a little bit of a sense of how much that helps you expand?
Speaker 1
Well, so then the, the apps themselves are available to any any company. So we didn't make a distinction of, customer or not a customer. No. You'll probably get more value out of it if you are an existing customer and you're integrating into the the bigger workflow. So I suspect there is a degree of, let's say, visibility or reach to potentially new customers, but I I should say it wasn't initiated as a marketing effort.
Yes,
Speaker 5
I didn't mean to imply. I'm sorry. And then the second question I guess is just on defensiveness. Again, is a little bit of a real time test and how bad things can get. And I'm curious if it gives you a sense of how much trucking activity is down you probably do and just whether you lose firms or customers or individual licenses.
So just a sense of the defensiveness as to how far the markets have fallen in trucking might be interesting. Thanks. I'll stop there.
Speaker 1
Okay. That's a good question, Rob. Certainly the trucking market in, well, let's say North America is certainly challenged at the moment. And, you know, we see that the the same data that you do, whether it's the the new class eight, units or, now inventory levels or spot market rates. So it is a tough macro, set up here in the near, I'll say near to midterm for trucking companies.
And David covered looking back at Q1, there were actually also some quite bright spots. And but looking forward, yes, would say the macro, is more negative, at this point. Now when we think about the defensibility of the business, we actually also think this becomes a strength for Trimble. And so far as we've got the value proposition and we've got the balance sheet to continue to be able to invest in this business. And we've seen a couple of competitive companies either go out of the market or significantly cut back in the last couple of weeks.
So from a competitive position, we'll continue to play offense in this business. We think we've got a winning strategy and we believe in the team that we have that's pursuing the strategy. So we won't back off of, let's say, pursuit of the business strategy. And we're confident that as we come out of this, that we'll come out of it stronger. And that's really a major part of the orientation we have as we really came into this is make sure we position ourselves to exit the crisis on a stronger competitive footing than how we entered it.
Speaker 2
Okay. Thanks Rob.
Speaker 0
Thank you. And our next question comes from Richard Eastman from Baird. Your line is now open.
Speaker 6
Good afternoon. Rob, could you I think in the guide you spoke to just some thoughts around the second quarter suggesting that really all four business groups would be down year over year in revenue. And just trying to sift through your commentary about weakening in March, are there any of the four business groups that might be expected to see revenue growth sequentially in the second quarter?
Speaker 1
Okay. So if we think about the businesses sequentially in the second quarter, the short answer is my answer. I mean historically you would expect to see construction especially civil construction coming on stronger in the second quarter given the summer season for construction. But we don't see that happening this second quarter. Otherwise, if you took a market, let's say resources and utilities, which is ag centric, you know, you would expect to see that seasonally decline in the second quarter if I use that as a sort of a contra example.
Speaker 6
Yes. And then geospatial, given the oil and gas exposure, that's down sequentially. And then transportation, I guess you addressed. Okay. In your remarks, Rob, you had mentioned that you can it feels like you can see the light at the end of the tunnel.
And I'm just kind of curious, is that a kind of a suggestion that you can maybe said differently, you can see the bottom? Or what green shoots did you were you kind of looking at to suggest that?
Speaker 1
Well, we stay in close contact not only with our dealer partners around the world, but our end customers and prospects in the pipeline that we have in the various businesses. If we look at a market, let's say if we take Asia, we can start to see business coming back in parts of Asia. So if I take a market like China, now China is a small portion of Trimble these days, less than 2% of revenue. But we have started to see business come back. If we look in The Nordics, we can start to see some of the business coming back as well.
And so there's a
Speaker 6
bit of a
Speaker 1
geographic overlay to that Rick that informs the point of view that we feel like we're seeing a light at the end of the tunnel. As we look in North America, and the governments or local and I'll say local governments are starting to talk about, you know, return to work or lifting some of the restrictions that, you know, it certainly plays into some of our psychology of seeing people getting back to work. They can be on the other end of that phone call for the demand side of this equation.
Speaker 6
I got you, okay. And can I just ask one more question? I think I just wanted to go back to the you had mentioned you're entering the second quarter with, I think it was $1,000,000,000 of backlog. And I didn't catch the rest of that comment. There was a reference to $250,000,000 but the strong backlog again defers no cancellations.
I mean you're basically just seeing project push outs. Is that
Speaker 3
Hi Rick, it's David Barnes. Yes, the $250,000,000 is the backlog of our leaving out the recurring business. And the point I made is that that amount is higher than it was a year ago. And now we haven't seen any meaningful cancellations yet. There are, as you inferred some delays.
But nothing in our backlog is being cancelled of any consequence.
Speaker 6
Okay, very good. Thank you.
Speaker 0
Thank you. And our next question comes from Devin Ahl from KeyBanc Capital Markets. Your line is now open.
Speaker 2
Hi. Thanks for taking our questions here. Just one for me. So I know you mentioned utility and construction are still performing. Just wondering if you could provide any color on other end industries and geographies that you are seeing that are kind of on their way back to normal level towards the end of, I guess, April and thus far in May that you're seeing?
Speaker 1
Well, the markets that we see coming back to some degree are in some of the Asian markets. I'll use China as an example and then the Nordics in Europe were the couple of examples I pointed out. That would be current time. If I look at Q1 itself, I can use Brazil as an example where we had a strong quarter in Brazil both in the agriculture business, but even more so in our transportation business, in Brazil. And so there's pockets of performance around, let's say, around the globe.
I think you asked something, but I didn't miss the first part of the question around utilities. Can you repeat that?
Speaker 2
Yeah. That was just kind of like an an example, that are kind of performing pretty well in first quarter. But I guess, are you seeing other industries that are, I guess, on their way back to normal level thus far in second quarter?
Speaker 1
Yeah. The way I'd I'd approach that is from a business model perspective, the ARR was up 7% in the first quarter and certainly outperforming, differentially performing against the rest of the portfolio. So the businesses associated with that, I think are the ones to highlight. So the construction related ARR that we have, the correction services business has performed a really outstanding performance in the quarter and where we see that business now as well. So those would be a couple of the spots I would point out in particular.
Speaker 2
Great. Thank you very much.
Speaker 1
You're welcome.
Speaker 0
Thank you. And our next question comes from Jerry Revich from Goldman Sachs. Your line is now open.
Speaker 7
Yes. Hi. Good afternoon and good evening, everyone. I'm glad you're all doing
Speaker 1
Hi, Jerry.
Speaker 7
Rob, your comments about gross margin expansion really stood out to me considering what I would imagine would be pretty significant declines in perpetual license sales. Can you just expand what level of perpetual license sales declines you're seeing in April? And how you folks are able to essentially guide to improving gross margin in this environment that really stood out to me?
Speaker 1
Well, if I took three revenue streams and we took the recurring revenue stream, we took the aggregate of software and professional perpetual software term software professional services as a second category and then the third one being hardware, ARR is certainly the highest performer. And then in the I could reference you to the web tables that also break out the gross margin by these revenue types. And of course, ARR is going to have the highest amongst the highest gross margins. And then if we look at and of course that grew in the quarter, the ARR that was the plus 7%. On the other, I'll say, bookend would be the hardware businesses were at minus 8% year over year in the first quarter and are the lowest gross margin category of revenue that we have.
And then if we look at the perpetual software and the pro services, that was down in the quarter and it'd be down as well. And therefore, extrapolate down in March, down in April as well. It's just not down as much as the hardware. So I'd say kind of low single digit range. And I'll just give you one more, I guess, nugget.
Within that software category, we have about $80,000,000 on a trailing twelve month basis of term license revenue. It shows up as software, not as recurring revenue and that tranche within software is growing nicely and is a profitable stream. So yes, you take the mix of that and you get the gross margin expansion, which was clearly a major driver of the beat in the quarter on the EPS side.
Speaker 7
And that's pretty resilient performance for the perpetual license business as well. Okay. And then in terms of the subscription offering, so you spoke about accelerating the shift. Can you just update us on the performance in terms of bookings growth in the transportation management system so far this year? And can you talk about relative to, I think, the $500,000,000 target of subscription opportunity you have within the existing portfolio with the, integrator approach here, what's the cadence on, translating that from perpetual license to recurring?
Thanks.
Speaker 1
So if we look at the transportation management system business or product line that we have, more than half of the bookings in the first quarter came as subscription bookings. So really actually outperformed our own the expectations we have as we do offer both subscription and perpetual offering. And of course, it probably goes without saying that having that subscription offering becomes differentially a good thing for customers in a tighter cash environment to move to an OpEx model. It also expands we believe expands an addressable market into the midsize carriers through the conversion. If I look at the other businesses I give you a couple examples within actually within buildings and infrastructure.
So we have a mechanical electrical plumbing business that's well over $100,000,000 in revenue. Same thing with the steel and concrete structure, business, both of which we think we have significant opportunity to convert to subscription. And so in fact in our MEP business we launched what's called AccuBet Anywhere. That is a subscription offering and it's off to a decent start. Our structures business, and I'd say a number of other businesses in Trimble, that I put in the category of we have some subscription, some subscription elements of those businesses but they're small elements of the business and we're really looking to accelerate and do the work I'd say the groundwork in 2020 to be able to really move quickly as we come into next year.
So not all of these actions I'm talking about will turn into increased ARR this year. But what I would want you to hear is that, you know, we think this is the time in this moment of crisis. This is the time to move faster on these conversions. And so we're, you know, shifting resources around, shifting priorities around so that we can come to market faster with these offerings. We think it's the right thing to do, you know, for the long term, health of the of the business.
And, you know, at a time of uncertainty like we have right now, I think that calls for us to be decisive. And this is one of those, areas where, you know, we really are I think taking decisive, action to move faster.
Speaker 7
And Rob, sorry, just a clarification. So transportation management, you had mentioned what happened. You booked these subscription. But when you combine them, subscription and perpetual, what was the year over year growth that you achieved as a result?
Speaker 1
No. So what I would say from an overall bookings perspective, if we just kind of step back and talk about software bookings or perpetual software bookings, and let's separate, you know, January, February from late March, till now, I I the the new bookings are off significantly at an aggregate level. And I would say in fact more than 50% down in these last few weeks and that's quite consistent from what we hear in the market. So in the short term, the new bookings are really they really are taking a hit. Now you won't see that so much in the revenue today or in in a q two q three, you know, it becomes this really becomes a factor of, how long does this last when do we hit bottom?
How long you know, how long does that does what's the the nature of the slope, out of it will determine how much of that plays into 2021. So I do I should just note that that's what we see on the overall bookings, level. And then if I was to get really specific about transportation management system and the booking, you know, we'll look at when we we take a booking, you know, you'll you you wanna make it equivalent to what a perpetual booking would be so that you understand the, you know, the real underlying drivers. So look at it on a multiyear basis so that you can equate it to, you know, the nature of what would have been a perpetual booking as you plan the business around that.
Speaker 7
Okay, thank you.
Speaker 0
Thank you. And our next question comes from Colin Rusch from Oppenheimer. Your line is now open. Good afternoon. This is Kristen on for Colin.
Speaker 8
Thank you for taking our questions. Just a few operational questions. First, I was wondering if you could talk a little bit about your supply chain in Mexico on the hardware side. Just remind us how much third party manufacturing exposure you have in that region and what you're hearing from your suppliers as they remain under those stay at home orders?
Speaker 1
Yes. So I would say, Kristen, we have I'd say a meaningful part of our contract manufacturing comes out of Mexico, in fact, much more so than China. Of course, components come from China, but manufacturing, has a substantial element in Mexico. And the short answer is that we've been up and running. In fact, in some cases, we've gotten more capacity from the contract manufacturers as other companies have either shut down temporarily or they weren't essential businesses, whatever factor it may be.
So in some cases, actually enabled resources, I'll say labor resources to move to Trimble product, which helped in businesses like agriculture, for example, in the first quarter that exceeded the expectations. We have one operation in Guadalajara that's under a stay at home order, that really isn't running at this point. But we had enough, let's say, heads up on that to to build a little bit of inventory. And it happens to be a business where the demand is is also quite down, so it hasn't hasn't been an impact. But where it really matters, we've been up and up and running.
Speaker 8
Okay. Great. And sort of speaking to the inventory point, wanted to ask about your dealer channel and how much of that was under essential services. I think you mentioned some pre buy activity ahead of those stay at home orders. So any commentary that you can provide on inventory build or what you're seeing in dealer channel right now?
Speaker 1
Yes. If anything, at this point in the quarter today, we would see really more of an inventory reduction or drawdown. I would say there were certain parts of the channel in Q1 probably around the February timeframe that were I think doing a little bit of buying ahead of the impending shutdowns. It's hard discern exactly what the nature of the buy is. But we look at the levels of inventory right now and we think that actually the dealers are being quite responsible overall.
So it's really something we want to pay attention to because it's in our interest that our dealers remain healthy and have liquidity. So we feel good about on an aggregate basis and all the businesses at the level of inventory that our dealers have. In terms of the essential nature, of the businesses and how that impacts dealers, really for the most part, on a on a global basis, our dealers have been up and running. Go back to, you know, what Trimble does, you know, feeding a growing population. It was planting season, or was and is planting season.
In construction, we knew many of the projects were continuing to be at work and our customers were counting on us to to be there as Trimble and also as our dealer dealer partners. And same thing in transportation, you can imagine, you know, the the stress on transportation companies as they were moving essential goods and, you know, we needed to be there, running running for them. So they've main they've maintained, being open for the most part. Of course, with the government had a complete, shutdown with Italy as an example, we were also down during during that time. And and then but even on an interesting note in Italy, we were actually up on a year over year basis in the first quarter based on, you know, the strength of what that team brought into the beginning, of the quarter and and as well in the geospatial business as well as the ongoing agriculture business.
Speaker 0
Great. Thank you so much. Thank you. And our next question comes from Jonathan Ho from William Blair. Your line is now open.
Speaker 7
Hi. This is John Widemore for Jonathan. Thanks for taking our question. I just have one. Can you talk about your level of optimism regarding the potential for infrastructure stimulus spend?
Speaker 1
Sure. So on infrastructure, I would say, we've got a mixed view. So let me take a global, view first. If you look at The UK, HS2 project got a notice to proceed. If you look at China, they've made some big infrastructure, announcements.
If we talk about The US, which I think is what really what you're asking about, well, what we know is their infrastructure is is aging. And that suggests that we're talking about when, not if, something happens in infrastructure. So we are net optimistic that something will happen on the funding side in The US, hopefully in the next package, in the next relief package. But let's be clear, that has not happened yet. I would note that many states, in the last months or couple years have increased their own gas taxes.
That enables them to take more control of their own, destiny. But if we look at the flip side, to be complete with the analysis, the FAST Act expires on September 30 and that needs to be either, you know, renewed or extended. If we look at state tax revenue, that is greatly suffering and that would obviously benefit from some form of a federal, backstop. And then we have the, American Transportation Infrastructure Act of 2019. And there, we still have bipartisan disagreement on how to to to pay for it.
So there are a set of, I would say, what I would call negative or cautious factors. The flip side being that, you know, infrastructure is such an obvious and important place, for us to make investments here in in The US and a logical would be a logical part of a relief package. But, of course, we haven't seen it yet.
Speaker 7
Thank you for the color. Appreciate it. That's it for us.
Speaker 0
You. And our next question comes from James Faucette from Morgan Stanley. Your line is now open.
Speaker 9
Hi team. This is Eric on for James. Thanks for taking our question. Maybe just touching on a piece that may not be as topical but understanding you're taking maybe a slower approach to acquisitions for now. But I'm wondering has the current environment sparked your interest in any new potential growth areas or opportunities you could look to be more active in the future?
Speaker 1
Well, the first place we've looked in the current environment is internally. And in that respect, really pivoting we wanna pivot faster, I'll say faster, harder to the subscription, model. We've referenced a couple of the software businesses, but I neglected to mention the announcement we made at CONEXPO that launched what we call Trimble Platform as a Service to essentially to bundle our machine control and guidance with our construction productivity software that connect the office and the field together, which we think is a unique offering. And that to us is really the first place we want to think about and look. And to the extent at which we're leveraging balance sheet or P and L, because let's do the math that the movement from perpetual to a subscription offering does have a short term drag, to P and L and to cash.
That's the first place, that we want to look to that. Secondarily, as the market moves, whether that's geographies or end markets, we will pivot fast to what the market makes available or what it has available. And just maybe as a small example, but I think meaningful is I take an example like a trade show. Well, in our agriculture business in Brazil, the team, in the in the first quarter did a virtual trade show in Brazil that had over 3,000 people attended. Extraordinary ingenuity and creativity from the team and I would call that you know taking know we call taking advantage of what's available or you know and taking action around what's available to us in an environment.
Now you asked then about externally and, acquisitions, and, you know, with that pivot how we think. I would say there wouldn't be a fundamental pivot, is the short answer.
Speaker 2
Got it. That's helpful.
Speaker 9
And then maybe just kind of sticking on some of the bundled subscriptions offerings. How are those being structured where there's kind of hardware and from, like, thinking through a replacement cycle side? Like, is there a cadence built into those offerings? And maybe, like, just how we should think about
Speaker 1
that. It's a good question. So if we took an example I'll give you an example in agriculture and an example in civil construction. And an agriculture example that looks like bundling our guidance hardware with our office software, our office and field software with our correction services so you can get that you know, centimeter level accuracy on the farm that, you know, that a farmer needs. That to me is less about accounting and technology replacement.
That's really about reducing friction in the buying process. Instead of three separate transactions, it can happen as one transaction at the proverbial point of sale. If we take the civil construction example and the technology or Trimble platform as a service offering we announced at CONEXPO. That does have a technology assurance, aspect to it. And so there we could see a cadence.
Let's take an example of a GPS receiver. If we have a new GPS or really GNSS receiver available, we can use that to upgrade the kit that the customer has on-site to provide them the latest functionality. So technology assurance is a really meaningful part of the strategy. Technology continues to get better every year, not only the sensors or the hardware, but really the firmware and the software. And so for us, it's important to be able to have a continued touch point, to be able to update that, to be able to update firmware and display software.
You know, you have to have connectivity to the to the machine. And we have that through the, you know, the telematics product lines we have that will also integrate, into this, into this offering. Now if we get forensically, forensic on the accounting of it, you know, the accounting has what's called an SSP, which really breaks out, you know, the value into its parts. And so the accounting will dictate what will show up on the P and L.
Speaker 9
Got it. That's helpful. Thank you.
Speaker 0
Thank you. And That concludes our question and answer session for today. I'd like to turn the conference back over to Michael Laba for closing remarks.
Speaker 9
Thank you, everyone, for joining us
Speaker 5
on the call. We look
Speaker 3
forward to speaking to you again next quarter.
Speaker 0
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect.