Good afternoon. My name is Erica, and I will be your conference operator today. At this time, I would like to welcome everyone to the Trimble First Quarter 2019 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Mr. Michael Leyba, you may begin your conference.

Thank you, Erica. Good afternoon, everyone and thanks for joining us on the call. I'm here today with Steve Berglund, our CEO; and Rob Painter, our CFO. I would like to point out that our earnings release and the slide presentation supplementing today's call are available on our website at www.trimble.com, as well as within the webcast and we will be referring to the presentation today. In addition, we will also be posting our prepared remarks on our Investor Relations website at investor.trimble.com shortly after the completion of this call. Turning to slide 2 of the presentation, I would like to remind you that the forward-looking statements made in today's call and the subsequent question-and-answer period are subject to risks and uncertainties. Trimble's actual results may differ materially from those currently anticipated, due to a number of factors detailed in the company's Form 10-K and 10-Q or other documents filed with the Securities and Exchange Commission. The non-GAAP measures that we discuss in today's call are fully reconciled to GAAP measures in the tables from our press release. With that, please turn to slide 3 for an agenda of the call today. First, Steve will start with an overview of the quarter. After that, Rob will take us through the remainder of the slides, including an in-depth review of the quarter, our guidance, and then we will go to Q&A. I would also like to briefly mention that during the month of May, we will be attending the JPMorgan Global Technology Media and Communications Conference on May 14 in Boston, as well as the Goldman Sachs Industrials & Materials Conference on May 15 in New York. Please turn to slide 4. And I will turn the call over to Steve.

Good afternoon. We delivered in most respects, the quarter we anticipated three months ago. Compared to prior year, revenue of $805 million was up 8%. Annualized recurring revenue of $1.07 billion was up 30%. Adjusted EBITDA of 21.4% was up 60 basis points and trailing 12-month free cash flow was up 38%. We continue to expect that growth and profitability metrics will be relatively stronger in the second half of the year than the first half. The quarterly results provide further evidence of the ongoing transition of the Trimble business model towards increased software content with the growing proportion of that in the form of subscriptions. Although, the change is taking place through relatively small quarterly increments, the aggregated multiyear effect is transformational. Rob will speak more specifically to the rest of the year, but a summary view is that the Building and Infrastructure and Transportation segments both continue to operate in healthy markets. The Geospatial segment is challenged by a slower OEM demand. And Resources and Utilities is currently constrained by a U.S. agricultural market, which is suffering from trade dispute on a certain date. Although, revenue growth was at the low end of our strategic growth model, ignoring exchange rate effects we believe the fundamentals continue to support our long-term expectation of 9% to 12% of combined organic and inorganic revenue growth. This optimism is driven by our estimate of the penetration still available to us in our targeted markets, which allows us to expect higher growth than standard GDP or industry-specific growth metrics. Innovation remains our principal mechanism to achieve market penetration and above average growth. Our three points of emphasis on innovation are, to increase our reliance into platform technologies that have utility across the company, to use those platforms to create solutions that are targeted…

Thanks, Steve and good afternoon, everyone. Let's turn on slide 5 with a review of the first quarter results. Starting with the top-line, first quarter total revenue was a little less than $805 million growing 8% year-over-year. Breaking that down currency translation subtracted 2% and acquisitions added 7%. Organic growth was 3%. ARR or Annualized Recurring Revenue grew to $1.07 billion in the quarter up 30% year-over-year and up in the low-teens organically. Gross margin in the first quarter was 58% up 90 basis points, which came from a combination of M&A and organic growth. While the adjusted EBITDA margin was 21.4% in the quarter up 60 basis points year-over-year. Operating income dollars increased 8.3% to $152.9 million with operating margins of 19%. While operating income dollars increased net income was essentially flat on a year-over-year basis and earnings per share at $0.45 was also flat year-over-year. This was a result of higher interest expense and the increase in our non-GAAP tax rate from 19% to 20%. For additional context on a trailing 12-month basis, revenue was up by 15%. EBITDA margins have expanded by 220 basis points and EPS has increased to 23%. Cash flow from operations was $148 million up 78% year-over-year and up 35% on a trailing 12-month basis. Free cash flow, which represents cash flow from operations minus capital expenditures was $133 million in the quarter and was up 38% on a trailing 12-month basis. Cash flow growth in the quarter was driven by operating income growth, favorable working capital dynamics and lower acquisition expenses as compared to the first quarter of 2018. Moving to the balance sheet. Our business model continues to be asset-light. Deferred revenue was $464 million up 29% year-over-year. This correlates to the increasing recurring revenue mix in the business. Net working…

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

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

Well, I don't know that we've got, let's call it particularly great insight compared to what is already available to you. But, certainly what we're seeing is that Europe continues to remain generally strong. We look in the direction of Germany, which is being affected by China maybe more than others in terms of its export markets, and whether that will put a damper on investment. But, so far it's holding up. There's, of course, the Brexit issue that will have a specific impact on UK potentially, but then the rest of Europe. So Europe -- but, Europe seems to be comparatively robust with some puts and takes. Brazil. Brazil is a market that's been very strong for us for quite a while in agriculture, but I think we're beginning to get a sense and our belief system is strengthening that Brazil is potentially an upside market relative to the other markets. We now have a position in Transportation in Brazil with the acquisition of Veltec and then we believe that we are seeing kind of call it greater potential for construction. So I think Brazil has a possibility of entering into our dialogue more generally across the company not just in agriculture. So hoping -- Argentina of course is on the other end of that spectrum, which is comparatively troubled at that point in time. But -- and then China, okay China has something of a wait-and-see. I think that even in a diminished growth market in China there are opportunities. Now we are currently in a position where we've got specific issues with some specific OEMs in China. Okay. As we work through those, I think we're back to let's call it the long-term trend line in China. And under normal circumstances I think that we find China…

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

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

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

Well, if an infrastructure bill is passed and is truly an infrastructure bill that means roads and bridges and things like that as opposed to let's call it other extraneous spending that sometimes wanders into the infrastructure bill. I think -- I believe there would be an immediate impact for us, because I think that contractors seeing a more certain flow of projects would start to build the capability to effectively compete for those projects. In our view that leads straight back to investment and technology to be able to bid aggressively as well as control the projects. So I think that what we would see before any money actually get spent, we would see an investment by contractors, anticipating the money flow and getting ready to be competitive in the bidding process. So I would see that as the dynamic is that we would not necessarily have to wait. Yes, because when the money starts to flow, it would be enhanced, but I think there would be immediate effect in terms of anticipating and getting ready for money flow.

Thank you.

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

Yes. Hi. Good afternoon and good evening, everyone. A – Rob Painter: Hi Jerry. Q – Jerry Revich: I'm wondering if you folks can talk about the bookings growth performance on e-Builder and Viewpoint particularly with subscription bookings what was that performance like this quarter. And then, you guys spoke about SketchUp being ahead of expectations maybe touch on that as well first. A – Rob Painter: Sure. So, we shifted – Jerry, we shifted the commentary on the acquisitions, the recent acquisitions to an ARR, in terms of the disclosure going forward. I think given that both businesses are 75 -- more than 75% of recurring revenue. The real metric we think to pay attention to is this recurring -- or excuse me is the ARR that gives you the best sense of how the business is performing. The other -- but in short, to give you just a little bit of flavor of the booking they continue to be strong double-digit growth in year-over-year bookings on Viewpoint and e-Builder. And for a little more color on the SketchUp business, we went into the quarter expecting – well, this is the first quarter of the transition, official transition out of data, went it expecting a higher mix of perpetual to subscription because we do offer both. And it was the inverse. And we really saw the big uptick in the subscriptions. And so I would say it was a nice upside. It really to us at least as an early indicator what appeared to show, that it's a way to increase the size of the addressable market. Q – Jerry Revich: Okay. And then Rob, you mentioned on your ARR metric the organic growth was double-digits. Can you just say that's around the major pieces? We covered a few…

Okay. Thank you.

Your next question comes from Ann Duignan with JPMorgan.

Hi. This is Ann Duignan. Good afternoon, good evening. Steve, maybe I'll start with your comments on infrastructure spending and infrastructure projects. I think you've probably been around long enough to remember the shovel-ready program that were put in place back in 2008 or 2009 where literally all that happened both state and local governments stop spending, because the money was all coming from the federal government. And so net-net, we didn't really see any positive impact from that school of projects. So, I'm just curious why you think that this infrastructure spending bill could be different. And what's the probability of it getting signed before the next election or at all given where the funding debts are?

Yeah. Without a doubt Ann, skepticism perhaps even cynicism is appropriate here. You are right is -- the 2008/2009 version so-called shovel-ready was, yeah, a mystery act where -- when one pocket came up, the other pocket in some fashion state and federal. So I don't know for sure that -- with any certainty that this will be different. But good news is we have no upside at all built into our forecast so anything that will come out of it would be upside. I think that we have actually spent a reasonable amount of time in Washington, with trade groups and whatever. I think maybe the tone within the Department of Transportation is perhaps different this time. There is a level of seriousness there. Now whether that can be brought through the political process without getting mutated into non-recognition is an open question. So I think the outcome is still very much in doubt. I think if you listen to the rhetoric from the two sides, they're talking maybe two different things. One side is maybe talking more about highways and bridges. The other is talking about broadband, infrastructure and such. So it's not at all clear what the actual substance would be. So recognize that. And again, we're not counting on anything. We're not building on anything. Now I think in terms of relative probabilities here against the standard of three to six months ago, I think that there is maybe marginally more room for optimism. I think that -- again the meeting -- the recent meeting between the President and the Democratic political leadership in the House and Senate -- okay, that was for public consumption. There is still no agreement on funding, but okay, it is -- it does represent something. And I think if you look at the -- look particularly on the House side, I think Congressman DeFazio is very -- seems to be very much determined to get something done. Ultimately, the issue is one of funding sources and I think that still remains the great divide between the two sides. But again, I think in terms of relative activity and relative profile, I think it is much more active today than it was six months ago. So, we'll just wait and see. But if it did happen, it would be a big deal for us. But we're -- in the meantime, we're assuming basically zero impact in our forecast. So we're hunkered down, waiting for something to happen. But, I think, maybe, the probabilities are somewhat better than they were six months ago, but probably, realistically not very high.

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

I guess at least in the abstract it would probably in the short term. But, again, I think, the -- at least over time I think our view of what's actually happening is, we put the hardware on the machine. And, okay, the machine hooks into a, let's call it a network, into an information system. And then, subsequent to putting the equipment, the sensors on the machine, if you will, the capabilities on the machine, there's a subsequent software sale. So, actually, I would think over a period of time it would not really alter the equation between hardware and software. If anything, it would probably boost software faster than the hardware. I don't think we've got, let's call it, particularly intricate model of it. But, I think, the hardware feeds the software. The hardware supports the software. And ultimately, we see it more as a software play in the longer term than a hardware play.

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

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

Yes. Good afternoon. Can I just ask maybe a higher-level question? When I look at the operating profit in all four of the segments, what kind of steps out of me is that, again, OpEx must be -- must have kind of crept up in all four segments or -- what I'm trying to get at is, your gross margin -- adjusted gross margin is up 100 basis points to 58% company-wide. I assume that's kind of software creep, so that's good. But when I look at the segment profit by all four segments, it's all -- you get some incrementals. I think in Transportation, it's 19%. Maybe 25% in BIM or in -- yes, B&I. But I'm just trying to get a sense of -- is there -- within any of the four segments, is there some intended incremental spend that's kind of pulling down either the incremental or driving up the OpEx? Or is -- what we're seeing mainly just absorption on the lowest revenue quarter of the year?

Hey, Rick, it's Rob.

Yes.

There're probably a couple of things in there to unpack. I'd start by saying, really, it's largely in line with the expectations we had coming into the quarter when we look at the margins by the reporting segments. One thing to -- I'll say to note in the business model, as we become more software-centric is, R&D arguably is a proxy for cost of goods sold. And so, for software companies, we would tend to expect to see higher gross margin and -- but at the same time some higher OpEx on -- let's say, on a comparable basis versus our hardware businesses, so just one thing to note in terms of the mix that we might see going forward. You clearly saw the 100 -- or the 90 bps of improvement on the gross margins on a year-over-year basis, which would reflect that. Some of the OpEx, of course, now in B&I segment you're going to see the Viewpoint in the quarter in 2019 that you wouldn't have seen in 2018. So that would make it really difficult around a comparison that's tough to make. Otherwise, when you step through the other segments, the Transportation is as we expected. We have been spending more on R&D in that area and that's been intentional there. And then where Geospatial would have looked a little off on a model would have been a shortfall on the OEM-centric revenue within the Geospatial.

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

So there's the risk -- answer the last part first. There is still a slight drag on a year-over-year basis. The -- that business was in line with our expectations for the quarter though. So there wasn't any surprise there for us whereas we did have some surprise to the downside in the back half of last year. But the comp is a tough comp for us in that business. The thing -- one of the things to note about the federal business is that a good amount of the Fed business is program-driven. And so the timing of when a program hits and delivers can vary year-to-year quarter-to-quarter, a quarterly view only of federal business is inherently incomplete and could lead to conclusions too good or too negative one way or the other depending on the comparable. So the main thing I'd want to hear on the Fed business is it was as is expected. When you look at it on with comparable basis on a year-over-year, what would have masked in aggregate is that the field sales which is that aftermarket when we talked about 85% of our revenue is Trimble is serving the end-user. That business was strong for us and civil construction was up double-digit year-over-year as was the building construction and the BIM-centric software businesses in constant currency basis double-digit growers. So very good performance at the end-user level on both segments.

I see. Okay, very good. Thank you.

Your next question is from Gal Munda with Berenberg.

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

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

So the other question is actually just trying to look -- focus on free cash flow for a second. You made an interesting comment of the drivers of the free cash flow which doubled year-on-year. When I look at your business today now that it's more than half of it's software and you're transitioning towards subscription model is it fair to say that net working capital should decrease as a proportion of revenue going forward? In other words have lowering net working capital especially because of the deferred revenue growth expectations is that something we could continue seeing over the midterm or not just in any given quarter?

I think it is a reasonable assumption Gal that the working capital would continue to go down. Now it's already quite low. It's at 3% of revenue. So if that heads closer to 0 or negative that's possible. I don't know that that would be fundamental shift for us. I think one thing we would keep in mind we would be looking at as we move more to subscription businesses from the payment term perspective for billing annually versus quarterly that could have dynamics on the cash over time as opposed to let's say perpetual license, if I'm taking that revenue all upfront. So the way in which we bill the customers, we would pay attention to that. But the general business model does tend to be a prepayment and therefore a pickup in deferred. Q – Gal Munda: Perfect. And just the last thing to clarify on that, do you guys have any multiyear contracts? In other words would you have any unbilled deferred revenues which would be off balance sheet? Or is this not significant for you? A – Rob Painter: So the -- well actually one of the disclosures posed in the 606 shows the backlog. So there's a backlog of over $1 billion that's disclosed in the Q and it shows a breakdown over tranches of time. I think 76%, 78% of that is within 12 or so months. So there's a -- and that backlog is backlog that's contracted backlog. And as I said, contracted and unbilled backlog Q – Gal Munda: Okay, perfect. Thank you so much. A – Rob Painter: And that backlog does include some of the deferred. Q – Gal Munda: Sure.

And your next question is from Colin Rusch with Oppenheimer. Q – Kristen Owen: Hi, good evening. This is Kristen on for Colin. Thank you for taking our questions. A – Rob Painter: Hi, Kirsten. Q – Kristen Owen: So just wanted to follow up on the strong organic growth that you saw in Buildings and Infrastructure, how much of that do you attribute to some of the cross-selling opportunities that you're seeing as a result to the e-Builder and Viewpoint acquisitions? And what kind of margins are you seeing on that cross-sell business? A – Rob Painter: Well, from a incremental growth out of the cross-selling, I would say we're in very, very early innings of that opportunity for us. What we have done and I think we've probably talked a little bit about this before as we think about it both from a product aspect as well as a go-to-market aspect and of course both of those work backwards from the strategy we have of project delivery in the construction space from a product perspective to give you a little flavor of -- a couple of examples in the quarter of some integrations that we and workflows that we now have between let's say between e-Builder, Viewpoint and the traditional Trimble solutions. For example we released an integration between our estimating product and mechanical electrical plumbing space and the ERP from Viewpoint. And so what that means now is that the ERP can consume the estimate that's been established. And once you've consumed -- the ERP has consumed that estimate, now when you break that down into the project budget and you're breaking down line item codes by -- line item cost by phase code and actually also working all the way through out to the buyout lists,…

Okay. I appreciate that. Just switching to transportation and logistics. When we look a year after so the Phase 1 implementation, a lot of the operators that we've talked to that ended up with the ELD devices that didn't really do what they claim to do. So, what kind of opportunity are you seeing there? And then maybe with your existing customer relationships how would you assess your success in capturing some of that upsell business the recurring software business after you sold the hardware?

Well, we certainly have seen an element of buyer's remorse in the market and there's definitely some instances where that's created selling opportunities for our business. As you would expect on the heels of the regulation, there was a lot of capital that came into the market and not necessarily what's a good capital developing good solutions for customers. So that in some cases has created buying or let's say new opportunities for us to -- once a customer has had a taste of the technology and what it can do. And if they want to move up more from a compliance-only into more of a spool stack solution to manage the driver to manage a truck and to manage a fleet that's where we will shine as you move up in functionality. There's clearly still a lot happening in the market. It's a very dynamic market. The second phase of ELD goes into effect in December. And so it does -- I will say it remains a competitive and busy market for sure. Now, if you look at the portfolio we have kind of reiterating the comment that Steve made about the strategic and an operational alignment we have in the Transportation business. Those -- the business we have both in the back office as well as in the field mobility is under one management team right now working towards more integrated offerings of our of the respective technology suites. And so if you think about whether we call it cross-sell or upsell or integrated selling opportunities this puts us in a position to execute on that better than we've -- better opportunity than we've had at any time in the past. So, we feel good about where we sit there between the teams and the opportunity in front of us. And if there's anything else I can give you color on, I'd be happy to do so.

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

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

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

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

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

It's more the case of bounce back but there are certainly some cases where we may -- the business may move and that's -- can be the nature of the OEM business and why we favor so much the end-user businesses that we have. I know Rob you wouldn't -- I wouldn't expect you to remember this, but for others on the call, in the old reporting segments that we had, we had a segment called advanced devices and I think selling board level chipsets for example really actually going back to the 40-year history of Trimble. And so we had businesses in that old advanced devices. If we still had that reporting segmentation, it would have looked like some of the businesses in there that we were referencing on the call today. So, the short answer Rob is there's a little bit of both in that comment. Now, what I'd want you to also hear is that when we talk about the OEM businesses the OEM business are associated with our vertical market. So, say OEM business we have in transportation or in agriculture or in construction those businesses -- those OEM businesses all did well and generally in aggregate met the expectations that we had. It was more of the OEM businesses that are really more in a -- more of a component of OEM business where we saw less revenue than expected.

Okay, that's helpful. Thank you.

Thanks Rob.

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

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

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