Trimble - Earnings Call - Q2 2020
August 5, 2020
Transcript
Speaker 0
Ladies and gentlemen, thank you for standing by, and welcome to Trimble's Second Quarter 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. I would now like to hand the call over to your speaker for today, Mr. Rob Painter, Chief Executive Officer.
Please go ahead, sir.
Speaker 1
Good afternoon, everyone. Before I get started, a quick reminder that our presentation is available on our website and we ask that you please refer to the Safe Harbor at the back. Despite difficult circumstances in the second quarter, our team rose to the occasion. I'm deeply grateful for the ingenuity and commitment to outcomes demonstrated by my colleagues and our worldwide network of partners over these last few months. What I said on our call in May remains true today.
That is, 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. Our belief in our long term strategy remains undiminished. Slide two lists the five key messages we want to convey today. First, our resilience, the quality of our strategy and the strength of our financial model enabled us to outperform our own expectations in the second quarter. ARR at $1,210,000,000 adjusted EBITDA margins at 25.7% and deferred revenue at $531,000,000 were clear highlights.
Our shift to a more hardware connected, software centric and recurring revenue business model is paying off. Second, the decisive financial and strategic actions we took in March have put us in a position to restore employee pay as of August and senior executive pay shortly thereafter. I thank all of my colleagues for their professionalism and demonstrated commitment. These last few months have strengthened our culture. Third, we take our responsibility to address racial injustice and climate change seriously.
Speaking personally, I have a heightened sense of awareness that has strengthened my resolve to leverage our platform to lead Trimble to a different place. We have been public in our stance against racial injustice. We established a diversity, equity and inclusion working group representing both senior leadership in Trimble as well as advocates appointed from within the organization. We have also donated money through our Trimble Foundation to causes that align with our values and we remain humbled to know that we have a lot more to do. With respect to climate change, we are pleased to have named Leah Lambertson, our head of operations to our larger role where she now has additional responsibility as Head of Sustainability for Trimble.
Fourth, we reiterate our focus to execute on our Connect and Scale 2025 strategy. We will balance cost containment and investment in innovation during the downturn. We are connecting the industry life cycles we serve such as construction, agriculture, utilities and the transportation supply chain. By reporting segment in a context of unprecedented conditions we were satisfied with our progress in the quarter in three of our four segments. While we remain convinced of both the long term market opportunity of our supply chain strategy as well as the viability of our strategy, we are currently performing below our potential in our transportation segment.
Earlier in the year, I set expectations of demonstrable financial recovery in the 2021. Given the environment and circumstances we now believe the recovery will take longer than anticipated. In addition to the difficult macro and pandemic effects which have suppressed the demand there are three discrete topics that impact our near term results in transportation. First, our acquisition of Cubic's as we announced in February remains strategically important but it is currently dilutive. Cubic's takes us to the shipper market which is key to our connected supply chain strategy.
Second, we continue to execute a subscription business model transition in our enterprise business and in our mobility business we launched a hardware as a service offering. We have high conviction on these model transitions. Third, we continue to work through our ELD product delivery commitments in our mobility business and are offering incentive programs to customers to upgrade older technology. Overall, we will take near term actions to enhance our competitive position and will measure the success of our actions by delivering profitable ARR growth, enterprise bookings and by growing the size and transaction volume in the shipper community. We are pleased that in our other three segments, Building and Infrastructure delivered solid ARR growth offset by expected disruptions in our hardware sales and new perpetual software bookings.
While we see projects coming back online, we also see uncertainty into 2021 for new projects and we are closely the impact of stimulus measures. Geospatial did an exceptional job managing expenses and finding available revenue opportunities in the quarter. In Resources and Utilities, it was led by growth in our Utilities business and Positioning Services business and by relatively positive performance in the aftermarket agriculture business. Our fifth and last point, while short term market uncertainty remains high, our long term market conviction remains strong. We see green shoots in many of our markets and we believe the second quarter will mark the bottom of our revenue decline.
Nevertheless, uncertainty prevails and we do not believe it would be prudent to provide guidance for the balance of the year. I will turn the call over to David to take us through the numbers.
Speaker 2
Thank you, Rob. Let's start on Slide three with a review of second quarter results. Second quarter revenue was $735,000,000 down 14% on a year over year basis. Currency translation subtracted 1% and acquisitions and divestitures added 2% for a total organic revenue decrease of 15%. Gross margin in the second quarter was 58.9%, up 200 basis points year over year driven primarily by improved revenue mix.
The introduction of higher margin new products and lower discounting also had a positive impact. Adjusted EBITDA margin was 25.7%, up two fifty basis points year over year driven both by improvements in gross margin and strong cost control. Operating income margins also expanded two sixty basis points to 23.1%. Net income dollars decreased by 2% on a year over year basis, while earnings per share fell by $01 to $0.52 per share. Moving to Slide four, our second quarter cash flow from operations was $147,000,000 demonstrating the strong cash flow generation of our business.
Operating cash flow exceeded net income in the quarter. Free cash flow was $135,000,000 We paid down over 140,000,000 debt in the quarter and the net debt to adjusted EBITDA ratio fell to 2.2 times. At the end of the quarter, we had $1,200,000,000 available on our revolving credit facility and approximately $200,000,000 in cash. In addition, we have no scheduled principal payments on our debt until July 2022. Our access to liquidity therefore remains strong.
Given our strong and improving capital structure, we are open to acquisition opportunities that will accelerate the implementation of our strategy. We anticipate continued prioritization of debt reduction in the allocation of free cash flow, but will consider a modest return to share repurchases. Now turning to Slide five that highlights some of the key metrics we are following. First, I want to note that we have redefined our ARR metric. ARR now includes the annualized revenue of term licenses.
Under GAAP, the revenue from term licenses is recognized upfront rather than ratably. And for that reason, licenses are excluded from the recurring revenue line that we report each quarter. The term licenses are renewable and recurring in nature and therefore share the fundamental economic characteristics of subscriptions. So we believe that including term licenses in our ARR definition provides a more complete picture of our recurring business. Note that with this change, we have restated the ARR measure in prior periods and that information is available in the financial summary document on our Investor Relations website.
ARR was 1,210,000,000 in the second quarter and grew 6% versus prior year. Organic growth of ARR was 3%. Net working capital, inclusive of deferred revenue, represents approximately 1% of revenue on a trailing twelve months basis, demonstrating the working capital efficiency of our business. Through this period of proactive cost management, we've continued to invest in key growth initiatives. One indicator of our investment posture can be seen in our R and D spending.
Our trailing twelve months R and D is nearly 15% of revenue and we believe our focus on innovation will enable us to emerge from this recession stronger than we entered it. Finally, I'll note progress against two metrics that point to the health of our business going forward. Deferred revenue is up 17% versus the end of the second quarter a year ago and our backlog ended the second quarter at $1,200,000,000 also up from the level of a year ago. As a reminder, backlog represents contractual commitments that will be recognized as revenue in the future. Most of the backlog represents the unrecognized value of subscription and maintenance agreements, but it also includes over $200,000,000 from non recurring revenue businesses.
We expect the substantial majority of that backlog to convert to revenue in the next twelve months. Both of these metrics give us enhanced visibility into our revenue trends in the coming quarters. Moving to Slide six, I'll elaborate a bit on Rob's earlier comments about the increasing diversity and resilience of our revenue base. Recurring revenues made up 39% of total Trimble revenue in the quarter and grew by over 4% even in an extraordinarily difficult economic environment. Of our major sources of recurring revenue, only transportation saw a decline in the quarter for reasons Rob mentioned earlier.
Our other major sources of recurring revenue, including Viewpoint, e Builder, building construction software and positioning services collectively saw recurring revenue growth of greater than 10% in the second quarter. These offerings are essential to the continued operation of our customers' businesses even in the toughest of times. By contrast, our non recurring revenues, including hardware, perpetual software and professional services experienced meaningful year on year declines in the second quarter. These businesses were adversely impacted by project suspensions, OEM factory shutdowns and restricted access to our clients' facilities. While many of these restrictions eased late in the second quarter, our overall non recurring business remains meaningfully below year ago levels as we enter the third quarter.
Looking at geography, the results in the quarter were largely correlated with impacts from COVID in terms of shutdowns and the pace of reopening. The COVID related dynamics in North America and Europe were similar with business conditions very poor in April and improving through the quarter. North America was down 17% and Europe was down 13% with a significant difference being North America's higher weighting in the transportation segment. Asia Pacific was the best performer in the quarter, up 1%. Rest of World was down 19% driven principally by difficult business conditions in Brazil and the weakening of the Brazilian currency.
Turning now to Slide seven, we take a deeper look at each of the reporting segments. Buildings and Infrastructure revenue was down 12% on an organic basis. Recurring revenue growth was particularly strong in Viewpoint, e Builder and SketchUp. Hardware, perpetual software license and professional services revenues were down greater than 20% in the quarter. Segment margins expanded 400 basis points due to higher margin revenue mix and cost reductions.
Geospatial revenue was down 11% on an organic basis with non recurring revenue down in the mid teens and recurring revenue experiencing growth. Margins were up six eighty basis points. Resources and utilities revenue was down 13% on an organic basis. Growth from the utilities business, including CityWorks helped offset some of the decline in agricultural revenue. Margin expansion of four forty basis points was driven by improved revenue mix and cost reductions.
Transportation revenue was down 24% on an organic basis and margins declined seven ten basis points. The adverse trends in the Transportation segment were driven by the factors Rob mentioned earlier. Turning to Slide eight and the outlook for the third quarter, we continue to face significant uncertainty in the demand trends in our core markets driven by the risk of COVID related restrictions and the broader impact of the pandemic on the economy. Therefore, we lack the visibility in the business that is needed to put forth a guidance range. However, I can provide some color on trends that we are seeing in our business and the markets we serve.
Overall, we expect that revenue in the third quarter will be down on a year over year basis, albeit at a rate of decline more moderate than we experienced in the second quarter. We anticipate that revenues in the Resources and Utilities segment will grow in the third quarter versus prior year due to the relative resilience of these end markets, the fact that we are comparing against the tough 2019 and the addition of Cityworks. We project the revenue in both the Buildings and Infrastructure and Geospatial segments will be below prior year. The Transportation segment will experience the greatest revenue declines in the third quarter driven by the same factors which adversely impacted second quarter performance. Looking at our trends by revenue type, we anticipate continued growth in recurring revenues due to the resilience of these offerings and the ongoing conversions to subscriptions across our software businesses.
By contrast, our non recurring revenues are likely to decline in the third quarter, albeit at a slower rate than we experienced in the second quarter. We expect gross margins to continue their expansion on a year over year basis due to increased software mix, although we don't expect the gross margins will remain as strong as we experienced in quarter. Turning to operating expense, note that spending in the second quarter was extraordinarily low across our business. We anticipate that operating expense will be higher in the third quarter than in the second quarter. We estimate that revenue and margin dynamics will result in year over year decremental margins in the mid-30s.
I will add here that we remain committed to maintaining healthy operating margins going into 2021. Our view is that 2021 will be characterized by only slow and gradual economic recovery. We continue to evaluate our business portfolio and look to exit those businesses which are peripheral to our strategy or don't meet our financial objectives. In terms of cash, we expect cash flow to be down on a year over year basis in the second half due to the drop in revenue and EBITDA. Nevertheless, we continue to expect operating cash flow will exceed non GAAP net income for the full year and we expect slightly lower capital expenditures for the year.
Now I'll turn it back to Rob.
Speaker 1
Let me close by talking about key elements of Connect and Scale 2025 and our progress in the quarter which I will describe in four elements. First, connecting solutions across our industry lifecycles. Two examples here. In transportation we announced further integration with Cubic's between shippers and the Trimble carrier network. In construction, we press released the win with SNCF in France to manage railway construction assets and building construction data.
Second, delivering breakout innovation that connects the physical and digital worlds. We launched a couple of analytics offerings in our construction business leveraging our content and project job site data to enable customers to optimize project delivery. Near and dear to me, the government of Nepal completed fieldwork for measuring Mt. Everest Tight using Trimble GNSS equipment. Third, accelerating our business model transformation.
In transportation we began offering hardware as part of subscription bundles. In our utilities business we announced an IoT solutions as a service offering for remote monitoring of water and wastewater infrastructure. And here in the third quarter we will introduce our machine control platform as a service initiative which we announced earlier in the year at CONEXPO. Fourth, we are taking actions that enable us to efficiently and effectively scale our business. We divested a small seismic business in the quarter.
We have shrunk our real estate office footprint by 30 offices year to date and we have increased our spend and focus on our digital fulfillment systems initiative. With that, I would like to thank everyone for taking the time to be with us today and a special thank you to our global Trimble colleagues. Operator, let's please go to Q and A.
Speaker 0
Okay. And at this time to ask a question, you will need to press star one on your telephone keypad. To withdraw your question, press the pound key. Just a reminder, we will limit the Q and A to one question and one follow-up only. We'll pause for just a moment to compile the Q and A roster.
And your first question comes from the line of Ann Duignan from JPMorgan. Your line is open.
Speaker 3
Yes. Hi, good afternoon everybody. Just a couple of clarifications. You ran through the Q3 guidance so quickly, find myself scrambling. Could you restate what you said about your expectations for ARR into Q3 versus non recurring revenue?
And then putting all the pieces together, given lower gross margin, lower higher operating expense, would you expect adjusted earnings to be down quarter over quarter in Q3?
Speaker 2
Hi, Ann. It's David Barnes. So yes, we expect ARR to continue to grow in the back half of the year and in the third quarter because those businesses are resilient and the conversions continue. Nonrecurring revenues will be down. So that results in the total being down lower than but not as down as much as in Q2.
Gross margins probably won't come in in q three as good as q two. Operating expense will go up a little bit. So Anne, we're not certainly signaling increasing dollars operating profit.
Speaker 3
And why would you expect gross margins to be down in Q3 if ARR is going to continue to grow?
Speaker 2
Well, gross margins will be up year on year for a lot of reasons, none big, but many cumulative, as you've seen, Q2 was a very high gross margin period. So we do think gross margins will be above prior year, but probably not higher than Q2.
Speaker 3
Okay. And then just, as a follow-up on the transportation side, could you just dig into that segment a little bit more and tell us what you think is are cyclical issues versus are there any structural issues that we need to be concerned about? I mean, ELD has been a weight on transportation for a while now. How should we think about that maybe beyond this year and into 2021?
Speaker 1
Ann, this is Rob. So when I think about the macro of the end markets we serve, would say transportation, specifically North America transportation is certainly the most challenged at the moment. There is, I think as you know, supply demand imbalance, which is creating pricing pressure on the carriers. And that actually started in 2019 and was playing through to the beginning of the year. I think the market probably expected balance to come back there on the pricing side, and then and then the pandemic set that set that back.
So I look at the the macro backdrop in transportation, and I I put at least half of the delta to the to that macro backdrop. And that also includes, you know, trucking companies idling some assets. And so if you're idling some assets that could have adverse, you know, impact on on our units serving those trucking companies, at least in the near term. So let's say a view forward for some quarters or the couple quarters or the maybe the next year. So that exists that backdrop.
And then just to reiterate a couple points from the prepared remarks. In our enterprise business, so the back office software or transportation management system, we are intentionally engaging in a model transition, so moving from perpetual to a subscription offering. And that is emphatically the right thing to do for the business, for the market, for the customers, and as we all know, has short term negative impacts to the P and L. So we're offering we are offering both models and we're seeing, almost two thirds, actually it's above two thirds of our new bookings, are coming from subscription, offering. So the more we're driving that subscription offering, the subscription bookings, that does create a near term a near term drag.
And then the last bit I talked about was the Cubic's acquisition, which takes us to the shipper side of the transportation market, which was when we announced it in February, we did, announce it as a dilutive, deal. So that that hangs heavier in in a market that is down. So those are the majority factors. And then, yes, we also talked about ELD itself and continuing to to to work our customers through through the migration. And now Canada ELD comes after The US.
Speaker 3
And the ELD issue should be resolved by end of this year, and then I'll leave it there. Thank you.
Speaker 1
Yes. Think it'd be fair to say that from the end of this year and I mean, it'll probably bleed into the beginning of next year as well, working those working through our product commitments.
Speaker 3
Okay. Thank you. In the interest of time, I'll leave it there. Thanks.
Speaker 1
Thanks, Ann.
Speaker 0
And your next question comes from the line of Jerry Revich from Goldman Sachs. Your line is open.
Speaker 4
Hi, good afternoon, everyone.
Speaker 1
Hey, Jerry.
Speaker 4
I'm wondering if you could just update us on the performance of e Builder and Viewpoint since you folks ownership, can you just talk about the growth in logos that you folks have delivered? What kind of win rate for new logos has the team delivered? Can you just frame the performance for us over the past year plus and especially over the past quarter?
Speaker 1
Yes. And for those who may not know, Viewpoint and e Builder, two acquisitions from a couple years ago that are in our buildings and infrastructure space, they continue to perform very well. So very pleased with the respective management teams and what they're delivering since they've been a part of Trimble. To give you a bit of quantitative, to overlay that qualitative, in the second quarter ARR grew in the mid teens for both of those businesses. So I would say that's emphatic demonstration, of the, of the strategy working and the business model working.
When we look at new logos that those businesses have driven in the last, in the last couple of years. If we look at e Builder, about two thirds of the ARR growth has been through new logos. So it that's also a good sign, of driving new growth, since being part of Trimble. And then on the viewpoint side, it's been about one third no new logo and two thirds from existing customers. And that makes sense because we are transitioning the model there to a subscription model, whereas e Builder was already a subscription subscription model.
And then to connect the dots to that, if you look at new logo wins, it's around our RFP type win ratios. They're around 50%. And then the majority of times when we don't get a deal, it's it's from a no decision. So hopefully, gives you some color, Jerry.
Speaker 4
I appreciate it, Rob. And then what stood out was the growth in deferred revenue this quarter. Was that because bookings were stronger Can you talk about that? Or was there any acquisition impact in the quarter?
Speaker 2
Yes. There is some acquisition impact in there, Jerry, but the bigger portion of that is the ARR growth and the health of the recurring businesses, both subscriptions and maintenance and support.
Speaker 4
Okay. And then it was nice to hear about two thirds of the transportation back office customers signing up for the subscription offerings. Can you talk about growth in the addressable market that you're seeing? Obviously, not a lot of orders in April, but I'm wondering any conclusions that we could draw from what's going on in June, July in terms of how much the subscription offering is helping you folks expand the tail, so to speak.
Speaker 1
Yeah. It's a good question. What we can see and what we've learned from other businesses where we've made the transition is it certainly does expand the, addressable market. I I'll use our SketchUp business and construction as an example, and we had another quarter of over 50% year on year unit growth. And that to to me is a tremendous sign of, and a clear sign of expanding the addressable market.
If we look at transportation, the fundamentals there would be taking us predominantly from the larger carriers into the medium sized carriers who are not, you know, going to want to have a, you know, call it a custom, implementation. So they're gonna want more of a standard, configuration out of the out of the box offering. So there's a logic to it. And so we we do see ourselves reaching a set of customers that we weren't reaching before. But I also say that the largest subscription booking we've had in the last, I think it was three quarters, was from a very large, very large carrier.
So it does seem to be attractive to both to both segments.
Speaker 4
Appreciate the discussion. Thanks.
Speaker 5
Thanks, Jerry.
Speaker 0
And your next question comes from the line of Jason Celino from KeyBanc Capital. Your line is open.
Speaker 6
Hi. Thanks for taking my questions. You know, to build off the, you know, subscription offerings, it sounds like you also announced another as a service offering for your utility segment. But for those two new announcements you made, you know, what's been kind of the feedback from customers? And then for those particular products, you know, how should we think of pace of kind of that transition?
Speaker 1
Sure. I'd say it's pretty early days to to give a a quantitative view of how they were are performing in the market. I can say, qualitatively, you know, they were customer driven initiatives, that we that we made to, you know, to make the move to the subscription, the subscription offering. And I use them as an example to show really across the board at Trimble that we're looking to the business model conversion. I mean, one in a down market, you know, we all know moving from CapEx to OpEx has a financial advantage.
We talked on the last question about the expansion of the addressable market that we believe that we can see through this. And then there's the pursuit of our the connect part of the connect and scale strategy. So being able to connect, the data, being able to connect stakeholders across the industry continuum. Really believe in the pursuit of the strategy that to connect the data, which is really where we think there's huge optionality going forward as you connect the data, you know, a business model transition and as an enabler to be able to get data back to back to the cloud. And so there's both strategic and financial reasons that have us very motivated and committed, to this.
And so I, yeah, I was wanting to show examples from parts of the company you don't often hear us, talking about or or elements such as hardware of of changing the business model that we haven't talked about before, as signals of just how serious we are, about this. So time will tell, on, on customer pickup, and so we can certainly come back to that in the future calls.
Speaker 6
Okay. Great. And one one quick follow-up if I can. You know, a lot of other software companies have been talking about their customers accelerating different digital investments. You know, was the strength in Viewpoint and e Builder this quarter due to that?
Or, you know, why couldn't the construction end market see this also?
Speaker 1
I have to say you're very faint. It's hard to hear you, so I missed the question.
Speaker 6
Okay. Let me to speak a little louder. You know, lot of other software companies are talking about customers accelerating different digital investments. What's the strength in the quarter from Viewpoint and e e Builder due to that? And then, you know, why couldn't the construction end market see that also?
Speaker 1
Gotcha. Well, for sure at a secular level, we believe there's an acceleration of, of digital. And it's and, you know, you look at what we do at Trimble, the connection of the physics solutions that connect the physical and the digital worlds and really the in essence, we're digitizing markets such as construction, agriculture, transportation. So we believe at a secular level, that we're in the right that we're in the right place. But we've seen some of the I'll use Viewpoint as an example, some of the, acceleration in that ARR and in the bookings we had, this quarter were customers who had on prem, on prem software, weren't able to get connectivity they wanted.
And so we actually did some lift and lift and shifts, during the quarter to, to help our customers, and that has a side benefit, of course, once they've seen how the software operates in the cloud. We've seen them by and large wanna stick to that delivery delivery method. Now, in the short term, we have the disruptions of being able to actually access, customers. And so, you know, I would separate the very near term from the mid to long term in terms of the digitization, secular. So long term I think it's there.
In the short term, new logos have certainly been harder to reach from the new bookings, that we've had. And again, that has a certain logic to it. And we saw new bookings trends in the quarter, in the second quarter move from quite negative at the beginning of the quarter and progressively move better through until the end of the quarter and here into July. So hopefully, it gives you a little bit of color of how we see it on both sides.
Speaker 6
Great. That's very helpful. Thank you.
Speaker 0
And your next question comes from the line of Rob Wertheimer from Melius Research. Your line is open.
Speaker 7
Thank you, operator. Hi, guys. So I'm just following on your last answer there. I think your your your through the quarter progress on new logos or new customers was construction related. Transportation obviously had a tough quarter.
Could you talk about the non hardware side through the quarter there and whether there's any of that similar digital push you know, really taking off?
Speaker 1
And you mean specifically in transportation, Rob?
Speaker 7
Correct.
Speaker 1
In our in the enterprise business, we saw bookings progress better throughout the quarter. Well, look at that software oriented, of course, in enterprise business. I would say a bright spot there. I think if we look at the how we kind of elevate back a second. When we look at some of the macros, which I know you know well, whether it's a truckload line haul indices or shipment, indexes or class eight unit sales, those were Those were all pretty negative in the quarter, maybe even historically negative.
Now by the end of the quarter in June, it looks like those indices may have bottomed. We saw spot rates increase if you look, you know, compare April to July, Class eight orders were up in June. And so if we see that freight demand coming back then, you know, let's we feel like the market's got at least an incrementally better backdrop than it did in the first couple months of Q2.
Speaker 7
Okay. And if I can ask it, maybe it's a different one, but you took a really prudent approach to this economy, which is highly uncertain. How is your appetite if an acquisition appears? I mean, do you feel like that just is on hold because who knows how the world works out over the next year or so? Or is Trimble actively looking?
I mean, what's your current feeling on willingness to do that? Thanks.
Speaker 1
Sure. Well, from a financial perspective, a financial strength perspective, you look at the net debt to EBITDA, and we're in a strong and healthy position. Know that the working capital was less than 1% of revenue in the quarter, producing strong cash flow over 500,000,000 of deferred revenue, on the books. So we have the financial wherewithal, to pursue an acquisition. If I move to the that's a financial answer.
From a strategic perspective, it really is a function of not pursuing acquisitions for the sake of acquisitions, but really in the pursuit of executing the strategies. And so what we I would signal is that we have an openness to it, but but it's also not meant to be a signal that, you know, you're about to hear something meaningful or or big. Given what we the commentary we had in the last call about pulling back on acquisitions and buyback, we just wanted to be transparent that, hey, given where we see ourselves now and we saw Q2 as the trough of revenue decline that we would be open. And so we are open in the context of particularly I'd say in the construction space number one in the overall in in the overall segment. Secondarily would be, I'd probably say, in the agriculture space, but there's not actually really too many deals, I would say, to be done in that in that space.
Speaker 7
Thank you.
Speaker 0
And your next question comes from Colin Rusch from Oppenheimer. Your line is open.
Speaker 8
Thanks so much, guys. Can you give some more granular sense of what you're seeing in, like, in construction? You know, really love to get a sense of, public projects versus private projects as well as buildings versus infrastructure. You know, we've seen some softening in June and July. Just love to get the color on that from you guys as you move into 3Q.
Speaker 1
Sure. Hi, Colin. So if we look at I would break it down by type of, projects on one dimension and the other, current and future. And the punch line is we see current work coming back online and much of it never went offline. And went offline has by and large come back online.
And then from a future perspective, we see customers with some concern about the 2021 pipeline and we're all watching to see what happens with infrastructure, what happens with the FAST Act, will that get renewed in September, will be continuing resolution that pushes that out, will there be a backstop on state DOT funding? Or there's a number of factors that are impacting the view on the future that hopefully get resolved here shortly. If I then look at the type of construction, let's take residential, non residential, and civil. I would say non residential, the data would show that's been hit the hardest. And if we look at civil, that's been impacted by about half of what the non res numbers have been, impacted by.
And so when we look at the segments that we serve across the value chain and construction, if we looked at a market such as architecture and design, we would look at the ABI data. And ABI data would tell us that the numbers of the June stabilized after the April, May decline. So that does look more positive. Now multi residential has looked more positive than commercial industrial, which again, that also makes sense. And I would note that in our SketchUp business, we grew units over 50% year over year, so it didn't play into whatever the number was, that didn't play into our business.
And if we look at general contractors in that segment, we can see from our own systems because we can see how, our customers are at a meta at a macro or meta level, we can see how the systems are being used, and we can see that current activity is solid, and we can see that project backlogs, are currently are currently down. And then if we look at owners and occupiers of of that we serve or occupiers of buildings, where where we serve occupiers of buildings, they're looking to be more efficient with their space management. And that fits nicely with one of the technologies, that we have to help you manage space more efficiently. So that historically is a business that's grown the most during down markets. In our e Builder business, we've seen verticals such as data centers or government have been, good.
And of course markets like retail, are not good. So, you know, the the it differs within the segments. And then civil, again, we're watching to see what happens with the project starts, and with the project bids. And that's, an answer in The US. But if, you know, you go around the world, you see places or places like in The UK, HS two is, has come back, or was greenlighted and is is and is back to work, and we've seen, some good performance in a few other markets outside the The US as well.
Speaker 8
That's incredibly helpful. Thank you. So just a follow-up, just briefly. On customer engagement through the the pandemic response. You know, are you seeing more of your non software customers showing interest in discussing, some of the enterprise solutions?
You know, just trying to get a sense of that that migration and and how much of that is is it more of a push effort and how much is a pull effort from the customers?
Speaker 1
Well, like, one indicator is, you know, for especially when we have our our, SaaS businesses, we can measure the intensity of the usage of the software. And at the beginning of the quarter in Q2, not surprisingly, we saw large dips from late March and April. And then we saw and we've seen since then quite intensive usage. That's important for us. It also plays through, by the way, through the net retention we've seen in ratio and and a number of the software businesses.
And hey, I think maybe the work at home is positively impacting the usage of the system because we have remote access to be able to continue to do the work. In terms of engaging new customers, I mean, like most companies or all companies, we're certainly shifting the nature of digital engagement and and how we reach customers. You know, we're all learning new ways of of sales and marketing. And I'd say, so far, we've seen some really nice pockets of success. I'll give you one example in Brazil, we did a virtual trade show a few months ago that had 3,000 attendees and we would never get 3,000 attendees in an in person demonstration and we did it for a couple thousand dollars.
I mean, it's an incredible, ROI, from a ability to digitally engage. I will say on some of the hardware solutions, there are aspects of seeing as believing and the ability to be out there in field, is important. Now there we luckily have a worldwide network of dealer partners, and our hardware predominant businesses. And they have been up and running, and really while it's still difficult, let's say to operate in the restricted environment, that's fundamentally different than if we were having if that was all direct sales and we had to be on airplanes to do it because we wouldn't be able to be out there. So having that channel in the hardware businesses is proving at the moment to be yet again very positive for us.
Speaker 7
Thank you so much.
Speaker 0
And your next question comes from Richard Eastman from Baird. Your line is open.
Speaker 5
Yes, thank you. Thanks for the question. Rob, could we just talk for a second about the op profit in B and I and Geospatial? What I'm kind of looking at is in B and I, the op profit was up $25,000,000 quarter to quarter on flat sales, so from Q1 to Q2. And Geospatial was kind of plus $8,000,000 profit on flat sales in Geospatial.
And is that could you just perhaps suggest to us or give us some feel for what the cost takeout or just cost control did sequentially versus the mix there?
Speaker 1
Well, if we look at the cost and David can add on to this. As you know, we did the pay reductions in the quarter. But actually if we look at the fundamental drivers of the cost delta in the business, we saw travel and entertainment was the largest drop not surprisingly. And that was across the board. Saw things like healthcare expenses go significantly down, not surprising people weren't going to the doctor.
So those played in to the overall numbers. So now if we're looking specifically within the reporting segments, okay, so there's some nuances there. And I think you're asking Rick about in D and I compared to Geospatial OpEx, the sequential down Q1 to Q2?
Speaker 5
Yes. I just you know what, again, I'm just looking at the dollar increase in our profit versus the revenue being flat quarter to quarter. And it's pretty substantial in the B and I business, 25,000,000 more in profit on flat sales from Q1 to Q2. And obviously, there would be a cost component to that. But again, quite frankly, I'm just thinking for modeling purposes as we move forward, we have more of a software recurring revenue mix there, I would think, over year certainly, but sequentially it's a rather significant increase in our profit.
Speaker 1
Yes, and there's an element that's going to play through with the gross margins being higher, so on even on flat revenue. That's going to be a help in both of the businesses. And then after and there's about an 800 delta in the gross margins between those segments. And then from a OpEx point of view, David, do you want to add to that?
Speaker 2
Yes, I'll just add to what Rob said. So we obviously for the whole company, margins went up Q1 to Q2 and up year on year. And that's more pronounced in buildings and infrastructure where the hardware pieces of the business were weaker and the software were stronger for all the factors But Rob that phenomenon occurred in Geospatial as well. We had a really positive revenue mix. What you're seeing on the operating margin line in those two segments is the positive confluence of improved gross margins year on year and meaningful reductions in operating expenditure across every category.
People no one went to the doctor. Travel basically was zero, as I'm sure is true in any of your companies. And and really across the board, operating expense was low. So as we indicated, you know, the operating expense levels and as you think forward and after q two, it they can't be sustained at at that low level. So they will gradually go up, albeit not to the pre pandemic levels.
Speaker 5
Okay. And then just a second question on the BIM business. Could you just characterize how Europe performed in the BIM business in the quarter?
Speaker 1
Really quite similar to the rest of the world. Wouldn't say there's anything that particularly stood out in Europe. And we do have a bit more of a Nordic and a UK concentration. Nordic did better, not surprisingly.
Speaker 5
Okay. Very good. Thank you.
Speaker 0
And your next question comes from Andrew Bigasberry from Berenberg. Your line is open.
Speaker 9
Thank you. Just wanted to ask a question again on transportation, particularly the weakness. Could you maybe elaborate if any of that was due to competition? We know that Sampara has been particularly aggressive. I'm just wondering if that played a role in the weak in the in the in the downtick in revenues.
Speaker 1
Well, I would the way I'd characterize characterize it is go back that there's the element of the macro impact. But let's at least half of where we see the delta. But let's talk a little bit about the nature of the market right now. And so the ELD mandate certainly attracted a lot of capital to the industry. And I would say not all of that capital was smart capital.
And we've seen some early shakeout in the market with some of the technology providers, whether they've exited the market or there's been reductions in force from some companies. So now you apply that and you look at the customers themselves and if you've got a pricing imbalance that's pinching carriers at the moment, that is going to increase some of the competitive pressure. And the nature of how we've seen some of the competition in the market shift is really I'll give you an example. A product example is the bundling of the hardware with the software. And by and large, that is now, how the market has moved, because you have a have companies, hey, like ourselves, but I'll say, other companies, younger companies, wanting to get the long tail subscription growth.
And so that is certainly I've been talking about this for a few calls, has certainly negatively impacted the competitive environment, the hardware margins, and it has that wrapping it now into the subscription. And so one of our announcements was, that I had in the press release was moving, hardware as a subscription offering. So we do have that available to our customers. And, you know, in in aggregate, that does have some net, impact on the cash flow of the, of the business because instead of taking that hardware revenue upfront, we'll wrap it into the subscription over time. Now on a cumulative base, I'll also be fine over time to have cumulative cash flow growth.
That's, you know, that's that's ultimately even a better measure than ARR, cumulative cash flow.
Speaker 9
That's helpful. And just to follow-up on your on your on the hardware as a service. Can you tell us what the duration is of the of the subscription on average?
Speaker 1
Typically, three years. I mean, you can have one year or three years, but we typically are aiming for three years.
Speaker 9
Great. Thank you.
Speaker 0
And your last question comes from Rich Valera from Needham and Company. Your line is open.
Speaker 10
Thank you. One more question on Transportation, if I could. So Rob, the quarter over quarter decline in transportation was obviously pretty severe and abrupt about $20,000,000 down quarter over quarter. And from what I'm hearing, it sounds like you're expecting a gradual recovery perhaps just a little bit in Q3. And I would assume that looking out over the next several quarters, that's the way to think about it, that we're not likely to get back any of that revenue in chunks to the upside and that we should think about this as more of a gradual recovery perhaps from the what I would think is the trough in Q2.
Speaker 1
That's a good way to think about it. Yes.
Speaker 10
Great. And then just one more if I could on the OpEx, which you have talked about. So that was so OpEx was down a very impressive, almost $20,000,000 I guess, quarter over quarter, Q1 to Q2. And I understand that's not sustainable. But any color at all on how much of that we kind of think we give back in Q2?
I mean, we give back half that, onethree of it? Any color on that at all would appreciated. Yes.
Speaker 2
This is David. That depends a little bit on how the market evolves and the virus and everything. I think it's safe to say OpEx will be up but nowhere near by the amount that it was down in the second quarter. Many of the factors that constrained OpEx on travel and a number of discretionary spending areas will continue to be meaningfully down. So it'll be up, I'd say up modestly from q two to q three.
Speaker 1
And in addition, we would also see some FX.
Speaker 2
That's right. The US dollar has weakened considerably. So just the FX rates, a lot of our cost is outside The US, so that will put upward pressure on OpEx.
Speaker 10
Got it. Okay. Thank you, gentlemen. Appreciate it.
Speaker 0
And we don't have any further questions at this time. I will now turn it over to Mr. Michael Lebo, Director of Investor Relations.
Speaker 2
Thank you, everyone, for joining us on the call.
Speaker 1
We look forward to speaking
Speaker 2
to you again next quarter.