Trimble Inc (TRMB) 2016 Q3 法說會逐字稿

Good afternoon, my name is Tasha and I'm your conference operator today. At this time I would like to welcome everyone to the Trimble third-quarter 2016 earnings conference call.

(Operator Instructions)

Michael Leyba, Director of Investor Relations, you may begin your conference.

Thanks, Tasha. Good afternoon, everyone, and thanks 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 a 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 that presentation today.

Turning to slide 2 of that 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 and our guidance, and then we will go to Q&A.

With that, please turn to slide 4, and I will turn the call over to Steve.

Good afternoon. Our third-quarter results were mixed. While we showed progress against last year and continue the trend of revenue growth and margin expansion, revenue was below the expectations we held at the beginning of the quarter with the largest shortfall against expectation being in geospatial, which continues to struggle with adverse market conditions.

The worldwide market remains uncertain and comparatively volatile with some regions providing [bounce] and others displaying unclear signs. The two countries which are providing most ambiguity are the US and the UK.

The US did not deliver the results we anticipated, particularly in geospatial. What is not clear is whether this is a result of the election related investment reluctance, or whether this is the beginning of a more long-lasting trend. In addition, we had a second consecutive quarter of significant decrease in UK revenue.

Some of this is exchange effect and some we're assuming is Brexit with the same question on the duration of the effect. Europe without the UK grew in the quarter and has demonstrated relatively strong growth year to date. South America was up strong double digits in the quarter across all segments with sentiment improving in Brazil and Argentina particularly in agriculture.

Asia-Pacific was also up sharply with Japan, Australia, China, and India all contributing. Given the uncertainty of the environment and the resulting uncertainty around our revenue, our organizational focus is on restoring a robust financial model and building long-term growth and a strong competitive position in those markets that can produce meaningful growth.

The key points of emphasis have been on controlling headcount, which is down at the company level even with acquisitions, and tightly monitoring and controlling our discretionary spend. In addition, we continue to tighten our strategic focus through an ongoing portfolio tune-up, which consists of disposing of non-core businesses, products, or product categories that are not contributing strategically to our bottom line.

We recently divested Gatewing, our UAV airframe business. This does not diminish our commitment to the future of UAVs and remote sensing. At the time we entered the market, airborne platforms were relatively unique and a key to selling a system. Since then, the number of airframe platforms have proliferated and no longer provide unique value.

Our judgment is that we will create more value and sustainable differentiation by focusing on software, data, and sensor integration. We will now regard the airframe as a buy element and as part of the divestiture we have entered into an advantage supply relationship. We also divested our Hydro operation within the agriculture business, which provided engineering water management services to municipalities and was not central to our main strategic priorities in agriculture.

The two significant currently non-performing businesses in the portfolio in which our emphasis is on a performance fix, are the Field Services Business, which is in the Mobile Solutions segment, and Manhattan Software, which is in the Engineering and Construction segment. The combined bottom line effect of these two businesses has been to reduce operating margin by over a point year to date.

Our relative patience with these businesses and retention within the portfolio has been based on the belief that they provide a basis of future growth, that they are strategically linked to the rest of the Trimble businesses and are relevant SaaS-centric software businesses, that they are currently on a performance improvement trajectory and that the underlying performance of the businesses is not entirely captured by GAAP accounting, and that bookings, billings, and cash flow represent additional metrics, at least until we reach steady state.

While we are emphasizing progression in short-term financial performance, we are balancing short-term considerations with the need to establish the basis for long-term growth and business model development. Part of the short-term challenge is the conversion of traditional discrete license applications over to SaaS models, which is proceeding faster than we anticipated a year ago.

While the SaaS transition does not fundamentally change market dynamics, as it is more about how value is conveyed to the user than necessarily the elements of the value, it does change the measurement and requires augmented metrics to fully understand the health of the business. In addition to the need to invest in the SaaS conversion, we're making number of discrete development investments that have beneficial implications for 2017 or 2018, but are placing some pressure on current performance.

These are all aimed at new or extended revenue streams that require investment that is beyond the sustaining engineering to simply incrementally grow current sources of revenue. One is the continuing investment in Trimble Connect in the E&C segment. We have previously discussed this important initiative to drive up interoperability through the construction continuum.

We have a unique opportunity to drive collaborative workflows from geospatial data collection that builds a digital model of the Earth through civil engineering and building construction work that turns 3-D design and engineering into physical structures.

Another discrete investment decision is in the development of our data and software capability in agriculture. In the last six months, we have created one agriculture software organization to bring more intensity, focus and financial transparency to this initiative. An early outcome of the initiative will be a major product announcement next week.

We have also been making significant new technology investments targeting driver communities and third party logistics providers and mobile solutions. These users have not been part of our historical market constituencies and represent meaningful new incremental growth opportunities. In prior quarters, the spending was referred to as an investment in new product opportunities to explain spending that was not consistent with our baseline model.

Another area of discrete spending has been in autonomy. While our ambitions in autonomy are relatively modest against those of the primary players, we do have a number of potential technology contributions to make in the field, and are making incremental investments to establish market validity.

Combined, these four development initiatives represent a drag of approximately 1.5 points on operating margins year to date and explain our recent higher than baseline R&D expenditures as a percentage of revenue.

The effects of newly acquired businesses have also impacted results during the last year. While we have been relatively light on M&A activity, software acquisitions have tended to impact us negatively because of the need to take revenue haircuts to comply with revenue recognition rules. In addition, most of the smaller acquisitions have brought cost structures that take some time to reconcile with our model.

The Engineering and Construction segment remains a dynamic story. Core civil engineering construction delivered another relatively strong quarter with double-digit growth. The underlying momentum is being enhanced by our success in advancing our construction next fleet strategy through OEM deals.

Earlier in the year, we discussed our agreements with Volvo, Hyundai, and Doosan. In the last quarter we came to announce full agreements with Vermeer and Dressta. While the incremental revenue from these deals is a plus, the greater significance is that they are placing Trimble at the center of the construction information ecosystem which we can exploit in the aftermarket over an extended period of time.

The BIM-centric building construction business slowed, at least cosmetically, in the quarter. Although it grew, it did not grow at the rates we experienced earlier in the year. However, after taking into account exchange rate effects and some one time effects that were in the 2015 comparable results, the actual slow down in baseline building construction results was relatively minor.

This business does have a disproportionate revenue weighting in the UK and recent uncertainties in the UK have therefore had a meaningful negative impact on the business.

The geospatial business remains disappointing relative to the expectations we held early in the year, largely because of the equipment overhang created by the oil and gas collapse.

Even though geospatial market conditions are a challenge, the introduction of the model SX10, a breakout optical geospatial instrument at the EnerGEO conference, has been extremely well-received, and we are currently revenue-constrained by production capacity for the product. Although it does not eliminate the market problem, it does help to mitigate it.

In the second quarter conference call, we called out Field Solutions for having a flat year-to-year revenue performance after nine quarters of revenue declines. This quarter, we can point to the first revenue increase in 11 quarters. Although there was some acquisition contribution, the core agriculture business increased and compensated for a decline in the GIS business.

The Mobile Solutions segment's third-quarter growth was led by transportation logistics. Rob will further explain the dynamics as well as our optimism about future margin improvements. Our position in transportation logistics remains quite competitively unique, and our coverage of both mobile assets as well as (technical difficulty) enterprise elements of the industry.

This was clearly demonstrated in September when we held our first combined user conference with PeopleNet and TMW. This is now the largest technology event in the transportation industry, with shippers, 3PLs, freight brokers, commercial truckload and LTL carriers, and private fleets in attendance, we had over 2,400 attendees, 350 sessions and 75 exhibitors.

The Advanced Devices segment produced strong results in the quarter, although year to date results are roughly consistent with 2015. I have three final comments before turning the call over to Rob.

First, our largest customer user conference is Trimble Dimensions, which is next week in Las Vegas. The first Dimensions was held in 2005, and this will be our eighth in the US. Attendance is likely to exceed 4,000 and attendees will be from over 80 countries. It represents an opportunity for Trimble to demonstrate the breadth of our capabilities as well as our relevance to a number of different industries.

Secondly, during the quarter we completed our reincorporation in Delaware and in the process changed our corporate name from Trimble Navigation Limited to Trimble Inc. While we're not placing undue importance of the name change since our operational and strategic trajectory remains unchanged, it does recognize the fundamental change the company has undergone since its origination and in a sense clears the decks for an unconstrained view of the future.

Third point is to put the fourth quarter in 2017 in context. We have increased the conservatism of our outlook, given the apparent increased ambiguity about the direction of the US economy, particularly as it relates to the appetite to make investments. Despite the apparently tougher environment, we do not intend to be victims to circumstances. Our Company franchise remains strong and we expect it to do comparatively well under all foreseeable scenarios.

We will postpone a more precise formulation of 2017 until the election dust has settled and policy directions are better formulated. However, our current expectation and management focus is to demonstrate revenue growth throughout 2017 and also to expand operating margins year over year throughout the year, although there will be some sequential volatility from quarter to quarter. Rob?

Thanks, Steve. Turning to slide 5, revenue for the third quarter was $584 million, in line with continued year-over-year progression throughout 2016. Top-line growth was 4% with currency translation having minimal impact at the aggregate level and acquisitions net of divestitures contributing less than 1%. Organic growth has demonstrated progression throughout the year, and the third quarter continued that trend. Nevertheless, $584 million was $3 million under our guidance range.

In looking at our results by reporting segment, Field Solutions, Mobile Solutions and Advanced Devices all met or exceeded our top-line expectations. Engineering and Construction fell short, driven by the North American geospatial market and to a lesser extent, building construction in Europe, with an offset of strong performance in our civil engineering and construction business.

Our third quarter gross margin was 56.9%, down 50 basis points on a year-over-year basis and up 100 basis points on a sequential basis. Third quarter operating margin was 19%, up 30 basis points on a year-over-year basis and up 280 basis points on a sequential basis. Many businesses experienced operating margin expansion as our business leaders executed very strongly on cost reduction initiatives.

Our net income was up 8% on a year-over-year basis and up 13% on a sequential basis, with earnings per share up 10% year over year and 14% sequentially, despite the challenging market conditions. Cash flow continues to strengthen in relation to net income, in large part due to the mix shifts we're seeing in our business and year to date cash flow from operations was $282 million.

Turning now to slide 6 and reporting segment commentary. We will start with Engineering and Construction. Revenue was $332 million, up approximately 2% with foreign currency translation having a neutral impact and acquisitions having an impact of less than 1%. From an operating margin perspective, we expanded over 300 basis points sequentially, largely driven by cost reduction and expense management.

On a year-over-year-basis, operating margins were down 30 basis points, reflecting the relative weakness in geospatial. In our engineering and construction segment, we talk about the business as the sum of three franchises: geospatial, civil engineering and construction, and building construction.

Let's start with geospatial. We were down single digits, impacted by continued headwinds in the North American positioning market. Our solutions are targeted at surveyors and geospatial service providers, nearly all of which use technology today. This market is therefore a replacement market, more so than a new penetration market, especially in North America and Europe.

On the heels of the downturn in commodities, we've seen more modest replacement of technology as many users continue to have idle equipment inventory. Looking forward, the strategic focus in our geospatial franchise is on product innovation. We launched two new major innovations at the EnerGEO trade show a few weeks ago.

Steve already mentioned the SX10, which combines optical and scanning technologies into a new class of product, and is the first of its kind to combine both 3-D scanning, imaging and surveying capabilities into a single field unit, thereby greatly expanding the capabilities and services offered by surveyors and geospatial professionals to their customers.

The second class of innovation is our TX6 and TX8, two new 3D laser scanners that offer more scanning capability at a lower cost. While our geospatial business remains challenged, our analysis shows us that over 70% of the top 100 survey and geospatial service companies in North America are Trimble customers.

Our building construction franchise was up low single digits. This was a departure from the high single digit increases we've been experiencing in this business. Here we have some puts and takes. Our architecture and design business continues to grow ahead of our own aggressive expectations, and is at a record level of user activations.

Elsewhere, the franchise did experience some negative effects of Brexit with 200 basis points coming off top-line growth based on the British pound, along with dampened macros in the UK as construction seems to be trying to establish a new norm. In addition, we continue to see an uptake in our subscription offerings, this coming slightly faster than we expected.

With the uptake of our subscription offerings, we're also seeing a corresponding decrease in our perpetual license bookings, which can have the effect of exerting pressure on the top line in the immediate time frame. We remain confident of our competitive position in building construction, and to put this into perspective I will give you an example from our mechanical, electrical, and plumbing business.

In North America, we have 21 of the top 25 mechanical contractors and 21 of the top 25 electrical contractors as customers. In the UK, we have 24 of the top 25 mechanical electrical contractors as customers.

Turning to our civil Engineering and Construction franchise, we were up double digits driven by strong sales in Asia-Pacific and Europe. Revenue was positively impacted in Asia-Pacific by a government-sponsored technology initiative for smart construction in Japan, along with strong OEM sales. European growth was led by central and northern Europe.

Steve mentioned the new OEM relationships that continue to solidify our competitive position. Where we're seeing pressure from the macros is in North America, where we were flat. This market pressure is consistent with what we're seeing from equipment OEMs, where businesses related to infrastructure have moderated.

Let's now turn to side 7 and review field solutions. Revenue was $78 million, up 6% with a neutral currency impact with a positive 6% contribution from acquisitions net of divestitures. As previously announced we acquired AGRI-TREND in the fourth quarter of 2015, which operates a network of over 150 specialists in North America that consult with farmers on agronomy, precision farming, crop marketing, and farm business management. We also acquired Telog in the fourth quarter of 2015, which is a leader in wireless IoT water infrastructure monitoring and management solutions.

Operating margins in Field Solutions were up 180 basis point year over year and down 90 basis points sequentially, driven by product mix and operating expense control. Beyond the aforementioned M&A effect for GIS business traveling in sympathy with geospatial was down, while our agriculture franchise was up organically mid-single digits, driven by strong performance in Brazil, Argentina, Canada and Russia. Performance in the US market was up as well.

While most of our business occurs in the aftermarket, OEM sales are an important component of our agriculture revenue. We've been expanding our OEM relationships and are seeing these new OEM relationships helping to drive year-over-year growth. Many OEMs seek to work with Trimble as we are in a position of favor with customers in the aftermarket using Trimble as a unifying technology. OEMs also seek to partner with us because the pace of keeping up with technology cycles exceeds that of new machine cycles.

In our definition of the end game, [signing the] connected farm ecosystem is an aftermarket play. Our OEM strategy, therefore, is a complement to our aftermarket strategy as opposed to the strategy in and of itself. Our OEM relationships provide us with an end customer access point through which we can offer additional services such as our Connected Farm software and data services.

Moving now to mobile solutions, please turn to slide 8. Revenue was $139 million, up 5% with a neutral currency impact with a minus 1% drag from acquisitions net of divestitures. Operating margins were up 240 basis points sequentially, benefiting from cost control and a growing subscriber base. Operating margins were down 140 basis points year over year, driven by product mix, for example OEM sales and large customer orders and investment in new product initiatives as Steve mentioned earlier.

Year over year, our transportation and logistics franchise experienced double-digit top-line growth. On a sequential basis operating margins expanded. As expected on a year-over-year basis, operating margins were down. Other Mobile Solutions businesses, namely field services management, experienced lower growth than transportation and logistics and diluted overall growth of the segment.

Our field services management business is undergoing a conversion from a CapEx model on the hardware to an OpEx model, which has the impact of diluting short-term growth. We remain confident that we can expand margins in Mobile Solutions, based on three factors: one, growth in the cumulative customer base; two, new SaaS solutions coming online; and three, monetizing nascent product development efforts that complement the strategy and leverage our existing customer base.

Moving to our last reporting segment overview, Advanced Devices, as shown on slide 9, had revenue of $35 million, up 15% with a neutral currency impact and a minus 4% drag from acquisitions net of divestitures. To put this growth percentage into context, on our first quarter conference call, Advanced Devices was down on a year-over-year basis and we highlighted that we expected annual growth and therefore the second quarter through the fourth quarter would be up.

This proving out and the third quarter even exceeded our expectations. A gross margin increase in the segment, coupled with OpEx reduction, resulted in an operating margin increase of 540 basis points year over year. Some notable accomplishments in the segment included the release of our Thunderbolt Grandmaster Clock and NTP Time Server, which provides solutions to customer such as telecom carriers and network operators.

In addition, we launched our M-Code GPS receiver for airborne applications. Finally, we are experiencing growth in solutions such as our combined GNSS-Inertial boards that are used in initial autonomy-related applications as well as licensing revenue in the automotive segment.

Before shifting the conversation to revenue by geography, I would like to take a minute to point out one of the line items on our P&L, namely our non-operating income and expenses, which falls below our operating income line. The specific line item called, income from equity method investments, mostly relates to our joint ventures with Caterpillar, Nikon and Hilti.

We do not account for these joint ventures in our operating results, due to the 50/50 ownership structure. Our joint ventures are closely linked to the operations of our business and have been successful businesses in their own right. Our portion of the income associated with these entities, if above the operating income line, would have added 90 basis points to operating income in the third quarter and 80 basis points year-to-date.

Let's now move to revenue by geography and go to slide 10, which shows the distribution of total company revenue by geography both for the third quarter discretely and for year-to-date. We saw some meaningful swings in the quarter that we felt were best complemented with a year-to-date perspective. One quarter rarely makes a trend line, and this would appear to be at least partially the case in the third quarter.

North America was up slightly, with the US flat and Canada up. Revenue was negatively impacted by Engineering and Construction, with growth up in our other reporting segments. Excluding the UK, our revenue from Europe was up slightly year over year and is up high single digits year-to-date.

Our revenue in the UK was down double digits year over year and is down low double digits year-to-date. Revenue in the Asia-Pacific region was up double digits driven by Engineering and Construction activity in Japan, Australia and China.

Turning to the rest of the world, specifically South America, revenue in the quarter was up high double digits driven by agriculture revenue growth in Brazil and to a lesser extent Argentina.

Moving now to revenue mix, slide 11 shows us that our software services and recurring streams represented 47% of our revenue for the trailing 12 months ending third quarter, up 1 percentage point higher than the comparable prior year period. Recurring revenue represented 28% of company revenue for the trailing 12 months, 2 percentage points higher than the prior period.

Recurring revenues were up 9% year over year on a trailing 12 month basis. SaaS offerings are a growing portion of our current and projected future revenue base. Some of our businesses are shifting from a perpetual plus maintenance model to SaaS, and in other areas, greenfield activities are being developed upfront to be SaaS offerings.

To make this more tangible, I'll illustrate with a couple of examples from our Engineering and Construction and Mobile Solutions segments. First in Mobile Solutions, we announced [Trip Insight] which will bring together capabilities from TMW, PeopleNet, and ALK and to the industry's first comprehensive Journey Management Application and will be a SaaS-offered solution.

A trip planner using TMW for load planning and dispatch work flow can work within the native TMW application, and use ALK's navigation engine and then send it to the driver in the vehicle using PeopleNet technology. This optimized plan accounts for fuel stops, hours of service rest breaks, historical traffic, and vehicle and load-specific restrictions.

Dynamic estimated time of arrivals for each stop become visible to the drivers and fleet managers, which are inclusive of real-time traffic and weather data. Also in Mobile Solutions, our TMW business continues to release additional SaaS offerings in areas of business intelligence, partner connectivity, fuel purchase optimization, along with bid management tools. TMW plans to release additional SaaS products over the next few quarters.

In Engineering and Construction, we are in a beta of a web-based version of SketchUp, which we plan to sell on a SaaS basis upon commercial launch. In aggregate, we continue to expect SaaS to be a growing portion of our revenue base and we view these as expanding beachheads into more robust customer relationships.

Let's now turn to slide 12. We ended the quarter with $276 million in cash and short-term investments, which represents an increase of $44 million from the second quarter of 2016. Our deferred revenue balance grew by 7% year over year and continues to help provide revenue visibility.

Cash flow from operations was $90 million for the quarter, up 24% year over year, benefiting from net income growth and favorable working capital dynamics in the quarter. We ended the quarter with our total debt at $670 million, $55 million less than the second quarter of 2016. We repurchased $10 million of common stock during the quarter and we continued to view stock repurchases opportunistically.

With that, let's turn to fourth quarter guidance on slide 13. We expect fourth quarter revenues to be between $562 million and $592 million. We expect fourth quarter non-GAAP EPS to be between $0.27 and $0.32.

On the revenue side, while we expect positive year-over-year growth and continued progression, we're tempering our expectations a bit, due to the macro environment, particularly related to our Engineering and Construction segment with our largest geographic area of focus being North America. We are following trends both from the construction and agriculture OEMs, we see the data on large expected crop harvest in North America and we see the AIA data on new nonresidential construction starts.

Despite these potential headwinds, we have outperformed these negative headlines throughout the year as we focus on selling ROI and productivity to our customers. One revenue item of contingent note is that we do expect to complete several major customer contracts in the fourth quarter. On the bottom line, we expect to continue to benefit from the cost reduction and expense management activities that have taken place throughout the year.

Two discrete items of note in the fourth quarter EPS guidance include: one, we anticipate a $6 million to $7 million increase in operating expense resulting from the sum of our upcoming biannual Trimble Dimensions user conference in addition to EnerGEO, which is our industry's largest geospatial conference, which took place a few weeks ago.

While a significant expenditure, we feel strongly about giving back to our customers and partners and educating the market on our latest innovations. The $6 million to $7 million represents over 100 basis points of operating margin and $0.02 of EPS. The vast majority of this expense will impact the Engineering and Construction segment.

The second item is M&A. Our guidance excludes acquisition activity, which could dilute short-term earnings. Finally, I'd like to give an update on our medium-term operating margin objectives. We maintain the objective of reaching 20% operating margins on an organic basis with an eye towards further expansion over time.

Progress towards that objective has benefits lower than we expected, primarily due to lower top-line growth and the key investments previously discussed, which we think are the right decisions for the business and shareholders. As we approach 2017, we believe we have levers that will enable us to expand operating margins while continuing to make those investments.

Specifically, we expect leverage from continued growth in our core construction, agriculture and transportation franchises. And that growth continues to be weighted towards a heavier software and subscription mix. In addition, recently executed restructuring and divestment activities will have a positive effect on operating margins and benefit us through most of the year.

Those factors combined give us confidence that we can deliver significant operating leverage throughout 2017. Growth above current levels would provide additional upside and we continue to evaluate additional portfolio optimization activities which could have an additional positive impact.

In closing, please note that we will be at the Goldman Industrials conference on November 3, Baird Industrials conference on November 9, and the Wells Fargo TMT conference on November 10. We will also be hosting an investor session at our Dimensions User Conference in Las Vegas on November 7, and we will webcast that session from our investor site.

With that, we will now take your questions.

(Operator Instructions) Jerry Revich, Goldman Sachs.

Hello, good afternoon.

Hello, Jerry.

Rob, you mentioned your deliveries in Field Solutions were ahead of the end market indicators by it looks like an 8% to 10% range? I'm wondering if you could frame for us the drivers for that performance. How much of it was new OEM partners and how much of it was new product introductions?

Can you give us a sense even if you're not willing to share the hard numbers, just to calibrate us on how sustainable that is -- the outperformance is heading into the fourth quarter?

Sure, Jerry. I would break it into two buckets. The first is geography and market penetration and the second is the OEM relationships. From a geography and market penetration perspective I can give you an example of South America or Europe, Russia, where we have been seeing positive year-over-year movement throughout the course of the year and that continued and in fact accelerated here in the third quarter.

As markets, I will use Brazil as an example, are adopting technology at an increasing rate that is favorable for us. On the OEM side, we have a couple new OEM relationships which are continuing to grow and provide a positive benefit to us in the quarter. Those are really the two main drivers of the outperformance.

Okay. Thank you. And then in Mobile Solutions, we have upcoming electronic line standards regulations by year end 2017? I am wondering if you folks can talk about -- do you have the overhead, the SG&A investment in place, to support a significant aftermarket ramp? Can you talk about the extent to which your backlog is building on the aftermarket side? Is that starting to play out yet?

Yes. That is playing out. Throughout the course of the year we've had a record amount of backlog in our -- specifically in our PeopleNet business which would be the largest beneficiary from the ELD mandate that is coming. So, yes, that's a favorable macro for us and for the business. We're seeing that play out in our backlog.

As it relates to the SG&A investment in the business, I guess I should expand that to say R&D investment as well, in the business, in order to capitalize on the opportunity. We feel quite strongly that we have made the incremental investments, really over the last 12 to 18 months, to get us to the point now to be able to capitalize on this important market opportunity.

Okay. Thank you.

Jonathan Ho, William Blair.

Hey, guys. I just wanted to start with some of your SaaS commentary. I just wanted to understand, or maybe quantify this a little bit better. Can you maybe give us a sense of how much of an impact came from, SaaS elections being higher than you anticipated on the license revenue? And where do you see that recurring revenue headed to over the long run?

So, that's a good question. Let me isolate this from what may or may not happen on the hardware side of the business. That is to say, if agriculture -- when agriculture comes back, let's say comes back strong, that would naturally impact the hardware revenue growth on the business and have an impact on the relative weight of what is called recurring versus hardware in our portfolio.

So if we call -- if we put that aside for a moment and focus on SaaS, I think of it in three buckets. We have current businesses that are converting to SaaS offerings. We have greenfield development, and then we have our ongoing organic, I call it organic growth from our existing SaaS businesses. The organic growth from existing SaaS businesses, think of that as PeopleNet.

It's been a SaaS model, will continue to be a SaaS model and that business continues to grow. Greenfield development, that looks like Trimble Connect that Steve talked about and Trip Insight, that I mentioned in my script. So new products right out of the gate will come as SaaS.

And then, current businesses that are converting to SaaS, a couple of examples to share with you. One would be in our building construction business, our Tekla Structures product has a subscription offering in addition to a perpetual license offering. So we offer both to customers, and what we're seeing is that a higher percentage of customers are starting to elect the subscription offering.

If we look at our TMW business, some of the core products are moving to SaaS or ALK, our mapping and routing engine is also undergoing a conversion up to SaaS.

So, if you add that up, I would say we're not quite ready to start putting numbers externally out there for the sum of those pieces. What I would guide you to is that they will be increasing over time. And again, leaving hardware out of the picture, I think the kind of growth I talked about in that year-over-year growth with recurring is consistent with the kind of growth we would expect to see going forward.

Got it. Can you talk little bit about how quickly some of the initiatives that you are investing in, the opportunities that you define, like autonomy. When will those turn into revenue opportunities? And do you need to make additional investments to accelerate on some of these newer growth initiatives?

Well, this is going to play out over time. So for example, there are existing revenue streams already in the general realm of autonomy. We are currently building modules -- component level, subsystem level modules, that are going into what let's call it early-stage autonomous systems. There are already revenue streams.

It's very early days and these are kind at beta level levels. Beyond that I can't say much more because a lot of these are covered by very tough NDAs. Some of the revenue is already in existence, it's just the question there is how quickly and how big can it get. Others are, let's just say -- we made references in mobile to driver user communities and to 3PLs.

Again, kind of the same stage, which is kind of beta level existence. And so I think what we would expect over the next three to six months is increased market validation with the idea that in the latter stages of 2017, maybe as soon as the second quarter, that some of these start to be worthy of discussion in terms of actual revenue contribution. So I think that really we would expect -- there are currently already revenue streams associated with this, so it's not entirely on speculation.

But I would say during 2017, we start to see evidence of more revenue, it starts to actually become more a part of the story. And then I think that the big news on most of these would tend to be more in 2018, but with some validation during 2017. Rob, anything to add?

No, I think that's a good way to characterize it.

Thank you.

Richard Eastman, Robert W. Baird.

Good afternoon, Rob and Steve. Very quickly, could you just kind of walk through the margins in mobile and E&C? Maybe my point is that in Mobile we had 240 basis points of sequential improvement in the op margins? But still maybe not quite where you would like to see them by year-end?

I think the dynamic on the Mobile side there around hardware versus software sales, I guess the question is, sequentially, does the op margin there continue to improve?

And then maybe the same question on E&C, just sequential tone? Because again, you're not getting the mix benefit in E&C and yet you alluded to more cost take-out. And I thought the 20.8% margin in the quarter was actually quite good without a beneficial mix? So just trends here and how in those two segments of the business we should think about those sequentially?

Sure, so let me start with Mobile Solutions. We would expect to see margin progression as we move forward into the fourth quarter. And the dynamics that take us towards that progression really are the same ones we have been talking about through the year as that cumulative subscriber base, customer base grows.

And that's the software portion of the revenue stream, that starts to outweigh the hardware installs that we have been working our way through, throughout the year. Of course we will continue new hardware installations on an ongoing basis, but the size of the pie, we see it playing out in a favorable way that continues to expand the margin as we move into the fourth quarter in mobile solutions.

We also do have a couple of large customer contracts that, let's say, will be implemented and fulfilled or were planned to be implemented and fulfilled in the fourth quarter, which have very high margins associated with them. So when we put those factors together, that gives us the continued conviction in mobile to be able to expand our operating margin.

If I go to E&C and the expansion of operating margin, there actually is a bit of a mix impact in E&C in the fourth quarter. That is, if you take the three primary franchises, geospatial, civil engineering, construction and building construction, building construction typically has one of its stronger quarters in the fourth quarter particularly in a couple of the larger divisions within that business.

And as that is a software centric -- highly software centric business, it does come with associated higher margins. So that for us would be part of -- or actually really the primary driver of margin progression that we would expect to see in the fourth quarter.

I see, okay. And then just one last question, a follow-up question. Steve, some of the infrastructure companies out there, Martin Marietta, Vulcan, some of these guys are expressing some solid optimism for 2017. Part of it could be election related, part of it is just fast money.

But I'm curious if you by any chance, do you share any optimism for 2017 when you look at the geospatial business, or even to some degree the North American heavy civil business, backlog, order tone, anything there?

We remain largely a book and burn business. Any optimism we may have would not be in the form of backlog, possible exception maybe being in Mobile Solutions. So they may be in a better position to judge 2017, simply because they may have more metrics to look at.

I would say is that if you look at tone, the tone of this call is somewhat more cautious than the tone of the last call simply because I think we're seeing just more uncertainty in the US. I chalk it up to, at least for the moment, as being election uncertainty in terms of it is not clear what policies will be in effect in a few months or necessarily what the likelihood for infrastructure spend is going to be.

Now if you look at what is being said, everyone is bullish on infrastructure spend. And the question is going to be whether there's a political ability to actually transform that into real spending. On the one hand, given the semantics of the moment, I guess I would be optimistic is that one thing where there seems to be bipartisan agreement is to spend more money on infrastructure which of course will benefit us.

And so I would say on that level, yes, I would be optimistic. But again, I think given the signs that we're seeing in the market, which is one of relative uncertainty compared to three months ago, I think our posture is to wait and see and get some real facts and probably talk more about what we see in three months. But for the moment, particularly in geospatial and I think other participants in our industry are reflecting the same tone.

It is just there's an awful lot of uncertainty at this point in time, and I think we need to wait for that to dissipate before we have something concrete say.

Got you. Thank you much.

James Faucette, Morgan Stanley.

I wanted to ask a question on how you think about what the right investment levels are for the hardware pieces you are retaining in it? I guess really at the root of the question is are you running OpEx levels that are sufficient for more possible product cycles?

So, you're breaking up a little bit. Are you asking about the level of hardware investment we are making?

Yes, that's right. Sorry, if I was breaking up. I'm trying to get a sense if you feel like the investment levels are appropriate right now. And if you can continue to make those investments as you need them at the OpEx levels you're targeting?

Yes, the short answer is yes; we feel the investments we're making in I would say really R&D and aggregate for the Company are in line and in sync with the opportunity that we see in the near-term ? near-, mid- and long-term.

If you break down the investment we make in our more hardware centric businesses versus our software centric businesses, you could see metrics play out such as the percent of revenue that you put in the software companies versus our more hardware oriented businesses, it plays out like you would expect. In other words, it's higher in the software businesses.

But to turn back to your question, I think probably it's important to note a couple things that I will highlight. The first is in our geospatial business, which is primarily a hardware business. So having product innovation is imperative to rejuvenating the portfolio and getting the business back into growth mode. So those product launches that I talked about are a reflection of the investment we've been making in R&D.

The second example I'd give you from our civil Engineering and Construction business, which is also predominantly a hardware business, I would look at the performance or the investment we make in our joint venture, actually plural, joint ventures with Caterpillar, which are quite significant and I think by a good order of magnitude, the largest in the industry with respect to investing in machine control technologies.

Great. I guess a bit of a follow-up to that is how are you measuring I guess perhaps the lack of impact from the FAST Act versus maybe they're just a lengthening of replacement cycles for hardware generally? I mean, any specifics or metrics that you can point to to how you've measured the impact of those kinds of programs in the past? Thanks a lot.

Yes. It's a good question. I guess I would say I wish I could provide you some magic insight into the impact of FAST Act and what it means for our business. As we said earlier in the year, we viewed it as instilling some confidence in the system that there was going to be investment there. But some of that optimism does seem to have dried up to an extent over the last few months and I would probably have to harken back to what Steve said a few minutes ago about, let's let this election dust settle and see where we come out.

Colin Rusch, Oppenheimer.

Thanks for taking my question. This is Christen on for Colin. I just wanted to talk little bit about what you're seeing in your various channels here? The ISM numbers out today suggest we are seeing a little bit of a build up in inventories? So can you just speak to what you're seeing across the various channels?

Do you mean specifically our distribution channels?

Yes. Yes.

I got you. From an inventory, let's say a load perspective in our dealer channels, I would say we're not -- we don't see our dealers being long on inventory at the moment. So if we were talking about some of the OEMs might talk about their production versus retail demand, and that is really not a dynamic that plays out for us in our business. We feel good about the, in an aggregate sense, we feel good about where the dealers are positioned with their level of inventory now and don't see them as being overly long on inventory.

Okay. Then switching gears a little bit, I wanted to talk about capital allocation. Obviously M&A has been a little bit lighter than we have traditionally seen to date. We've see you back in the market with buybacks, you have got a pretty low leverage ratio. Can you just talk about how you're setting those priorities for capital allocation, if we are bracing for this continued macro sluggishness?

Our capital allocation approach really remains the same. As we talked about, our cash flow does continue to be strong. Our first priority really is in continuing to invest in our business. Whether that is organic, let's say primarily organic investment in the business and in addition, M&A activity.

So as you noted, as you've seen the acquisition activity has been light this year, but I would say we expect to see some more activity there in the not too distant future. So we balance that investment whether it is organic or inorganic along with the opportunity to do opportunistic share repurchases and really, if I look at our CapEx level in Trimble, it's generally quite light.

So that's usually not a huge factor for us in the capital allocation equation. To your last point, about if we were to see the economy take a turn for the worse and given, like you said, our leverage ratio, I think we're in quite a nice position to weather a storm, if there was one to come.

Great. Thank you very much.

Brett Wong, Piper Jaffray.

Good afternoon, thanks for taking my questions. First I was wondering if we could talk about the margin a little bit. Just wondering if you can quantify how much margin expansion you continue to see from the internal initiatives which is ongoing cost reduction, portfolio rationalization as we look into 2017?

Rob, you spoke about the 20% adjusted operating margin still as a target. Any idea on timing in that? Obviously look through 2017, but is that mid-2017 and 2017, just any idea there is helpful?

So on the op margin at 20% as we move into 2017, I think it's best to anchor with Steve's commentary that we will hold off for the election dust to settle before let's say painting a view forward into 2017 relative to the timing, our view on timing of that margin.

And I would really say now let's back up from that and look at a couple of the factors. We would be looking at our revenue growth assumptions as well as our level of investment in our operating expenses and therefore the ability to generate operating leverage on that revenue growth.

So really I think at a high level, think about revenue growth in three different scenarios. There's a level of revenue growth consistent with what we have seen this year year-to-date, maybe a slight step up from that. Call that a mid assumption. Then you would have a level of revenue growth that would be below that and a level above that. In all scenarios, achieving operating leverage is really foundational to the strategy of the Company.

The level of operating leverage which you can achieve does correlate highly or at least reasonably highly to that, which tranche of revenue growth is going to be available for us in the market. That's kind of our mental framework at a high level for how we'll think about planning the business as we go into 2017.

I hope here in the next ?- well I guess really weeks that we will start to have little bit more insight into the market that will give us a more definitive view that we can talk about with respect to 2017. Brett, did that answer your question or do you have something else?

No, that's helpful. Just one more question. Wondering, on the ag side, you spoke about regional growth and strength. But can you talk about it in a little more in detail in terms of adoption or ramp of new offerings? Specifically looking at here in North America and if you've seen strength from farmers adopting some of those new technologies? Or new offerings, I should say?

So, I mostly talked about geographic growth and growth with OEMs in the business. Really a third one that I should have talked about, I should have talked about it earlier, would be in the area of those new product offerings. What I'm getting at there is the software portion of the ag business.

So if you think about maybe in a simpler high level sense, we create the digital prescription for the farm and we do that on our Agri-data platform, so with our software. And then that goes to the physical out in the field, right -- to the tractor, to the implement. That is the strategy played out, is to create that prescription and then get it to the equipment in the field and then to be able to create a feedback loop that enables ongoing analytics.

The software business is continuing to, let's say, perform to our expectations. Those expectations will only get bigger over time, and we're encouraged with what we're seeing in that business so far. As Steve mentioned, bringing all our software entities in agriculture -- into one team, under one leader we think creates the organizational context in order to execute upon the strategy.

Great, thanks so much.

Eli Lustgarten, Longbow Securities.

Thank you, good afternoon everyone. I want to get a clarification question until I understand it? You mentioned in your prepared remarks and it came up in a question about a bunch of big contracts in mobile that are going to be looking to ship, it sounds like, in this quarter. I wonder if you can quantify that.

I'm really talking about -- thinking of 2017, and 2017 has a big hardware electronic device ramp up also. I'm just wondering as we look out, whether in that business -- it's not even forecast -- but are we thinking more that you might have better top line but you shouldn't expect margin improvement in the mobile side because of the increased hardware mix coming next year in the absence of these big contracts?

I want you to give us some sense of how big these contracts are that are ending or magnitude of it also?

Sure, in terms of order of magnitude and what I was referring to and guidance with discrete number of contracts, think in terms of low millions, low single-digit millions on the dollar. So that is kind of the order of magnitude we're talking about. Then, for further color on that, our offerings in mobile solutions cover the fleet, enterprises, mobility, applications and the deals I am referring to are on the enterprise side.

So in other words, it's really quite centric to our TMW business doing the, think of it as the ERP for the transportation company. And those can be larger deals with larger implementation cycles. And those implementations would come due here in the quarter so that we could be able to recognize that revenue. You need the customer signoff in order to do that and then getting that is a part of the guidance that we provided. So that answers the first part of your question.

Second part related to, if we move into next year and what ELD will mean to the business and what it could mean to the hardware margins -- it's a good question from a modeling perspective. Yes of course, there is dynamic amount of hardware demand that we see, and what that will do to the margins in the business.

And, one of the things -- the put and take of the ELD mandate -- the very favorable thing, the advantage here is that its providing tailwinds to our business. The reality is it is also providing tailwinds to new entrants into the market. That hardware space of the business is a competitive space and would naturally then provide some, let's say at least challenge, to the hardware margins or at least throttles your ability to price on the hardware.

So we are conscious of how that will play out during the year and I think that ultimately see what the demand is for which level of product we have. Because we have solutions that are actually quite simple that would be -- or on the simple side, which would be cheaper. And then we have the higher end, let's call it, the fully capable, most capable solution sets, that are at the high-end of the spectrum.

So there is a mix within the offering we have that will guide where the margins go. We don't know exactly how that is going to play out yet, but we know the dynamics and levers available.

It wouldn't be unreasonable to think of maybe more top line and margins don't expand as much because of hardware mix? Is that a fair scenario?

Yes, that is a possible scenario.

Another question, as part of your Ag offering, you now have a partnership with Deere? Can you talk about what you're doing with Deere? Is there a materiality to that stuff, are used providing software because there is a lot of aftermarket on their product? How does that work? Caterpillar is a fabulous deal that you have, but I've been trying to understand what you have with Deere who is a competitor at the same time.

Fundamentally, it's about interoperability of data. We talked about creating the prescription for the farmer with our Ag software and the ability to get that out to the field and to the equipment. That could be equipment that is operating Trimble technology on it or could be equipment that has John Deere equipment on it. Whether it is a farmer or construction company, mixed fleets are a reality in the marketplace. So having this is an important relationship.

Is it a hardware supplier or software supplier or both? I'm just trying to understand what --

It's really software. It's APIs.

Eli, probably the other point of distinction here is there two different sorts of relationships available. One on agriculture which is obviously pretty limited just because the stance there is mostly competitive. On the construction side there is a much wider opportunity for collaboration.

One final question. The Caterpillar dealers love your product or something. Are we looking at ramping up or an expansion requirement in that part of the business as the Caterpillar dealers continue to fall in love with your JV and your controllers?

Given that we have two joint ventures with Caterpillar, I would prefer to say absolutely nothing (laughter). It's a joint message to put out there.

Not a problem. Thank you.

Jon Fisher, Dougherty & Company

I have two questions. The first one given your cautious tone and concerns on the North American, particularly US market, and given how well Europe ex-UK, Latin America, and Asia performed in Q3, what is your confidence in the sustainability of the non-North American geography performance? Should we be concerned about those markets rolling over, whether it's Q4 or early part of 2017?

And then the second question is the Manhattan software acquisition? Why does that continue to still be an issue? And, if I remember correctly, that was a UK centric acquisition, I believe? How much of the issues in the UK are actually directly related to Manhattan Software? Thank you.

Let me maybe tackle the first and let Rob handle the second. Again, there's a scenario for every -- there are any number of scenarios we could create for what's going to happen with the world. Does Brexit freeze up Europe, and all this?

Does Brazil in particular carry through with a kind of reform minded regimen and all of that? There are a lot of uncertainty out there. I would basically say that if you look at Russia, if you look at Australia, if you look at Brazil, if you look at a lot of these economies that we are pointing to as recovering -- I guess I would throw Spain, Iceland, Ireland into that category as well, basically these are bouncing off of a very rough foundation. Some of this goes back to 2009. So I would say we have been through the kind of, I guess I could characterize it as a cyclical downturn. We hit bottom. We had bottom pretty hard particularly in places like, well, any of those in fact.

I think that this is -- these recoveries are not exactly rocket ships at this point in time. I think they are comparatively modest recoveries that are grounded in fundamentals and not necessarily speculative bubbles or anything else. So, I would say, with the conditionality that there are a lot of moving parts out there at this point of time and a lot of things can happen to the downside, I would say I would look at these pretty favorably as being potentially lasting for years and pretty sustainable.

So I would say, the central questions at this point in time are US, simply because we're seeing the uncertainty come into the markets that really was not there three or six months ago. And, the UK specifically around Brexit. And frankly, the UK, early part of the year was very strong and then it was really the second and third quarters where we saw a screeching halt.

That leads us to believe that was very much Brexit, directly or indirectly centered. I will let Rob take a try on the Manhattan question.

Let me answer the -- address the Manhattan question. I'll try to do a fast version because I think we're over time. To put our areas of emphasis in Manhattan into context, I think you have to one, have to understand the underlying business model. There is a few product lines in Manhattan Software, the biggest two of which are integrated workplace management solutions as well as space management.

And we saw that integrated workplace management solution was called IWMS. We're selling a solution that's got a seven-figure price tag, typically, and it has a long implementation cycle. It's typically weighted toward implementation by our own professional services resources.

So when we put that context into public company GAAP accounting, we, myself included, underestimated the impact of that. That has us accordingly focused on three topics. The first is operational improvements, so we've moved clients to a world-class hosting facility and we're increasing utilization of our professional services resources.

One of the ways we will increase utilization of these resources is by increasing the product configurability, versus the customization of the solution. So the more it is configurable, the faster you can recognize revenue and the easier it is to engage with a network of implementation partners. The balancing act is we have some of the biggest logos in the world as customers, and they have demanding requirements.

The second is completing a couple of discrete large implementations. Those provide us with great logos and they have also been long-standing engagements to complete. So the faster we can get through those implementations, then that's the quicker we can get to our existing backlog.

And then the third area is that of managing the business model. We can continue to build a backlog, we are continuing to build a backlog. The business of backlog we think is healthy in the business so that we can continue to have a business that grows over time. The second is in the area of cost reduction. We have made cost reductions in that business so that we can operate within the framework of what our short-term realities and then we also look at complementary metrics for the business, so whether that is cash flow billings or revenues to take a full scope view of the business. And to your question about how much of that is UK impacted. There would be a minor impact but I would not call it a fundamental impact as that business is a global business.

Thank you very much.

That is the last question. I would like to turn the conference back over to Michael Leyba.

Thank you, Tasha. And thank you everyone for attending today's call. We look forward to speaking to you again next quarter.

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