Trimble Inc (TRMB) 2017 Q2 法說會逐字稿

Good afternoon. My name is Amanda, and I will be your conference operator today. At this time, I would like to welcome everyone to the Trimble Second Quarter 2017 Earnings Conference Call. (Operator Instructions) Thank you. Mr. Michael Leyba, Director of Investor Relations, you may begin your conference.

Thanks, Amanda. 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.

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 the 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 second quarter results reflected acceleration in our progress -- progression of the last 1.5 years and generated the best organic revenue growth since the second quarter of 2014. The reported revenue growth was 8.6% for the quarter, and underlying organic growth was up over 9% without M&A and year-to-year exchange effects. This rebound has taken place without a recovery in agricultural and oil prices and reflects the portfolio changes, which have lessened our exposure to these 2 effects. In addition to top line buoyancy, the quarter also demonstrated continuing control of the model with operating leverage of 42% for the quarter and 50% for the last 6 -- sorry, last 12 months.

A better-than-expected performance provides validation of our earlier commentary for second half revenue growth, which is for strong single-digit organic growth with 5 or more points of additional inorganic growth. The international market outlook remains generally favorable with some regional markets continuing to run hot. South American growth continues to be very robust, driven by agricultural demand in Brazil and Argentina. Although European geospatial revenue was down, the remaining segments in aggregate grew double digits in the region in spite of year-to-year currency headwinds. Asia Pacific's revenue growth slowed in the quarter from the prior quarter, although Buildings and Infrastructure was up double digits. The Middle East continues to be generally difficult, with Geospatial down in the quarter and Building and Infrastructure up double digits.

North American growth accelerated in the quarter on strength of transportation revenues, although Mexico continues to face challenges, presumably at least in part because of U.S. induced policy uncertainty. The environment in the U.S. remains relatively uncertain while awaiting policy outcomes on infrastructure spend, tax reform and trade policy. Any positive news in these categories would represent a potential net upside to the forecast.

Expectations across the company's segments remain generally upbeat, both in terms of short- and long-term revenue potential and competitive positioning. Second quarter performance in the Buildings and Infrastructure segment exceeded our expectations and provided strong operating leverage with much of the revenue strength in the civil engineering business.

This relative strength has been highlighted by the recent announcements of new OEM deals with Sumitomo, Komatsu and Yutong. While our current corporate focus remains the end user, OEMs are an important element of our strategy as they provide machine platforms, which can be integrated into our information ecosystem.

The Resources and Utilities segment reflected healthy performance, particularly against the standard of the last 2 to 3 years, which have been dominated by the commodity pricing cycle. Agriculture, Positioning Services and Forestry all provided upside momentum in the quarter. The Agriculture business produced its best quarter since 2014 based in part on improvement in the North American market and continued strong growth in Brazil and Argentina and OEM performance.

The M?ller acquisition early in the third quarter provides significant leverage and will be a central element in our variable rate application strategy, which is the next evolutionary step in using the combination of position and agricultural data to provide tangible benefits in the field. M?ller's historical focus has been on bringing intelligence into the farm implement and enabling it to operate seamlessly with other elements of the machine and information system. We anticipate that with the growing importance of the implement, the tractor will no longer automatically hold an exclusive central position as the source of intelligence and control within the total precision farming solution.

M?ller provides Trimble with 2 additional advantages: First, it brings with it a lengthy list of existing OEM relationships; and second, its existing strong European presence is complementary in that it provides a platform to bring existing Trimble products more aggressively into Europe as well as allowing Trimble to take M?ller products worldwide.

The other notable actions within Resources and Utilities during the quarter were the revamp of Brazilian agricultural distribution, which is focused on improving market penetration. The acquisition of BOS in Forestry and the acquisition of NM Group to augment our position in electrical utilities.

Transportation segment revenue was strong during the quarter and is expected to continue to remain healthy for the rest of the year. North American growth continues to be robust and was supplemented by growth in Europe and India. The U.S. ELD mandate, which has driven significant activity in the U.S., has been a recent topic in Congress with some resulting uncertainty on the circumstances of the mandate implementation. Whatever the resolution, we do not expect it to materially impact our 2017 results. We did recently supplement our ability to effectively meet the needs of the mandate as well as generally improve our electronic volume capability for smaller fleets with the acquisition of ISE.

Reported Geospatial segment revenue grew year-to-year for the first time since 2014. The SX10 product, our scanning total station, which was released in the fourth quarter, has redefined the product category and is a market hit without an effective competitive response. We left the quarter with significant backlog for the product and are continuing to ramp up manufacturing to meet the demand.

Businesses within the segment are also benefiting from increased investments in autonomy, which require both precise positioning and better maps. This trend has benefited our Applanix business, which has demonstrated significant revenue and profit growth year-to-year.

Before I turn the call over to Rob, let me define our current context. The quarter's results confirm that we have transitioned out of the 2- to 3-year period, which was dominated by declines in the price of oil and agricultural commodities and the resulting impact on demand in our Agriculture and Geospatial businesses, both of which are significant and profitable elements of the portfolio. We have now successfully reestablished a new normal for Trimble without reliance on a meaningful recovery in commodity price points.

The return to a level of normalcy has reinforced confidence for both the rest of 2017 as well as the multi-year strategic outlook. We believe that our markets continue to provide us with rich opportunities consisting of substantial unsolved problems, which can be solved through innovation.

Let me provide one representative -- reference point in the Transportation segment on which we expect to have more to say. Our historical emphasis in Transportation has been on managing the truck and the fleet. Recently, we have placed some additional emphasis on the driver community. Perhaps most significant unsolved and as yet, inadequately addressed problem in the industry relates to demand in capacity management and the current level of utilization of long-haul trucking assets. The key missing element that prevents the participants in the industry from achieving better collaboration is effective visibility in the individual shipments. Trimble's existing set of transportation assets provides us with many of the information elements to solve this problem, and our ambition is to build up these elevenths to achieve the complete solution. Beyond the cases like this in Transportation, we have parallel unsolved problem opportunities in other segments in which we anticipate playing a defining role.

Our improved financial model allows us to place increased emphasis on discrete organic growth initiatives, some of which we have described in prior calls. We believe these actions create a robust growth platform that will produce into 2018 and beyond. We also continue to believe that we have the ability to capture significant network effects and create complete solution sets in our vertical markets through targeted profitable acquisitions, which will augment our core organic growth efforts.

Let me turn the call over to Rob.

Thanks, Steve, and good afternoon, everyone. Let's start on Slide 5. Our second quarter results came in ahead of expectations with top line and bottom line results meeting or exceeding expectations in all of our reporting segments. Second quarter total revenue was $662 million, up 8.6% year-over-year. Within that, currency translation subtracted approximately 1%, and the net effect of acquisitions and divestitures was approximately neutral for total subtractions of approximately 1% (sic) [0]. Organic growth was over 9%.

Second quarter non-GAAP gross margins were 55.7%, down 20 basis points based on product mix on a year-over-year basis. The non-GAAP operating income margin of 18.3% represented a year-over-year improvement of 210 basis points, exceeding our expectations and reflecting the effects of revenue growth, cost control and operating leverage. Second quarter non-GAAP net income was up 30%, and non-GAAP earnings per share in the second quarter were $0.38, up $0.09 or 31% year-over-year.

Turning to the balance sheet and cash flows, please turn to Slide 6. Deferred revenue increased 8% to $341 million. Operating cash flow increased 80% to $146 million, reflecting increases in net income and timing of working capital requirements. Net working capital, defined as accounts receivable plus inventory minus payables, accrued compensation and deferred revenue, now stands at 3% of revenue on a trailing 12-month basis. We finished the quarter with $486 million of cash and short-term investments, and our gross debt level at the end of the second quarter was $612 million, leaving us ample flexibility from a capital allocation perspective. Finally, our non-GAAP tax rate declined from 24% to 23% year-over-year, reflecting geographic income mix.

Turning now to review the reporting segments. As a reminder, we resegmented our reporting in the first quarter. I'll provide some of that overview throughout the second quarter commentary.

Let's start with Buildings and Infrastructure on Slide 7. Segment revenue was up approximately 10% year-over-year with currency translation subtracting over 1% and acquisitions and divestitures providing a positive effect of less than 1%. The buildings aspect of the segment largely reflects design, build and operate activities in vertical building construction and real estate management. The infrastructure aspect reflects our work in civil engineering were largely horizontal construction.

The building construction business was up single digits for the quarter against the relatively strong comp from the second quarter of 2016. Within buildings construction, we saw growth across our architecture and design, mechanical, electrical and plumbing and structural engineering businesses. Our civil engineering and construction business grew double digits in the quarter with especially strong growth outside of North America in markets such as Japan and China.

The impact of growth and cost control enabled us to expand operating margins 340 basis points to 22.6%. It is worth noting that a meaningful amount of additional financial performance comes from our 50-50 joint ventures with Nikon, Hilti and Caterpillar, which fell below the line in non-operating income and are, therefore, not represented in segment results. Equity income in the quarter was almost $10 million, the majority of which correlates to our JVs in the Buildings and Infrastructure reporting segment. On a trailing 12-month basis, equity income represents approximately $23 million.

Moving to the Geospatial segment on Slide 8. Revenue was up approximately 1% year-over-year with currency translation subtracting less than 1% and acquisitions and divestitures subtracting over 3% percent for total subtractions of about 4%. Total revenue was up in the segment for the first time in 10 quarters, and organic revenue was positive for the second quarter in a row.

Within the segment, our core Trimble-branded business for optical and GNSS equipment posted growth, including growth in the North American market. Although the level of oil and gas activity in North America remains well below the levels seen in prior years, small increases in activity, along with construction activity in general has helped bring stabilization and signs of growth to our Geospatial business. These revenue trends, in combination with cost control, enabled us to expand operating margins by 90 basis points year-over-year to 18.3%.

Next, turning to Resources and Utilities on Slide 9. Segment revenue was up 12% year-over-year with currency translation subtracting approximately 1%, and acquisitions and divestitures providing a positive effect of about 2%. In Resources and Utilities, our Agricultural business represents the majority of the segment. Our Agriculture business includes hardware, such as manual and automatic guidance, variable rate flow controls and pivot irrigation. Our software solutions span from food traceability to agronomic services to farm management. Overall, we continue to experience healthy growth in markets such as Europe, Russia and Brazil, which reflect both penetration and currency dynamics.

In the United States, we were encouraged by another quarter of positive growth. Farmers appear to be motivated to look at precision ag solutions despite continued tough macro conditions.

We also continue to see growth across our key OEM partners. And [gentle] to agriculture, our correction services business posted double-digit growth in the quarter. Trimble correction services provides a range of accuracies specific to the application needs of our customers, whether that be sub-inch or sub-meter. The majority of our correction services customers are farmers who need this accuracy for their work. These services provide recurring and growing revenue streams and leverage some of Trimble's unique technology that we have developed over decades. The sum of growth, cost control and gross margin expansion allowed us to expand margins 120 basis points to 31.4% on a year-over-year basis.

Turning to the Transportation reporting segment on Slide 10. Revenue was up over 13% year-over-year with currency translation subtracting less than 1% and acquisitions adding approximately 1%. Our Transportation business is dominated by what we refer to as transportation and logistics, which provides mobility, enterprise and mapping, routing and navigating solutions for the trucking industry. Mobility covers on-vehicle technologies and is the part of the business that has been benefiting from the forthcoming ELD regulations in North America, along with other growth initiatives such as video and OEM sales.

Enterprise covers ERP-centric solutions for mid- to large asset-based and non-asset-based carriers. And mapping routing and navigation covers trucking industry-specific solutions for these technologies. Growth in the segment was largely concentrated in North America as the majority of the business is in North America today. We also saw growth in Europe and India. Revenue growth in combination with cost control enabled the expansion of operating margins, which increased 190 basis points to 16.1%. We expect strong operating margin expansion for the remainder of the year in this segment.

Next, Slide 11. By geography, our revenue mix for the quarter was 55% from North America, 24% from Europe, 14% from Asia Pacific and 7% from rest of world. North America was up 10% year-over-year. Within North America, revenue in the U.S. and Canada were up with a positive inflection during the second quarter, in particular in the U.S., while revenue in Mexico was down. All 4 segments experienced growth in North America with strong growth in Transportation.

Europe was up 6% in the second quarter, and excluding currency translation, would have been a few points higher. Growth is relatively broad based and led by markets including Germany, France, Finland and Norway. Russia continued to improve, and the U.K. grew even after negative currency effects.

Asia-Pacific revenue was up 2% in the quarter with some offsetting influences. Growth was strong in Buildings and Infrastructure with Japan, Australia and India leading the way. The Geospatial segment was down slightly, due primarily to the timing of sales in our component business. And the Resources and Utilities segment was down primarily due to timing of orders within our Agriculture business in Australia.

Lastly, rest of world was up 19%, driven primarily by strong growth in the Resources and Utilities segment in Brazil and Argentina and offset by markets such as the Middle East.

Moving now to Slide 12 in our revenue mix. Software, services and recurring revenue streams continue to grow in absolute dollar terms across the company. As a percentage of total company revenue, software, services and recurring streams represented 48% of our revenue for the trailing 12 months, flat as a percentage of revenue with respect to the comparable prior period, while recurring revenue represented 29% of company revenue for the last 12 months, 100 basis points higher than the comparable prior period. We view the relatively steady percentages on our revenue mix as a positive dynamic based on the reinvigorated growth in hardware in areas such as agriculture, civil construction and transportation. This combined hardware revenue comes in at slightly a lower level of margins on the -- than their respected segment averages, which bridges the 20 basis point decline in company gross margins. We have no concern here.

Turning to Slide 13. We have stepped up our acquisition activity of late. With the strategic foundations we have in place, we see the opportunity to capture network effects and build stronger franchises in our existing verticals through targeted, accretive acquisitions. This slide provides the summary of those acquisitions, the timing and the strategic rationale. As Steve mentioned, we closed the M?ller acquisition at the beginning of July. So while that acquisition does not show up in our second quarter results, it will have a material impact on our third quarter financials.

Let's now move to third quarter guidance on Slide 14. We expect our third quarter revenue to be between $645 million and $675 million and non-GAAP EPS to be between $0.34 and $0.38 per share. Two comments on the top line growth: First, the midpoint of the range implies 13% year-over-year revenue growth, which includes approximately $30 million or 5 percentage points from acquisitions in our Resources and Utilities and Transportation reporting segments; Second, after a long period of negative FX effects on the top line, we also expect to see neutral to slightly positive top line effects assuming current rates.

Three comments on profitability: First, as a baseline, we expect the non-GAAP organic operating margins to be in the same range as last year's 19%, which was a strong quarter driven by the resumption of growth paired with significant cost reduction; Second, we expect recent acquisitions to dilute overall company operating margins by more than 100 basis points in the quarter and to be slightly dilutive to EPS. The M&A margin and EPS drag is expected to be temporary as it is caused primarily by the first quarter of the M?ller acquisition occurring during a seasonal low period in addition to cumulative accounting effects from our recent acquisition. Third, on our first quarter call, we discussed our expected spend to comply with the ASC606 revenue recognition changes that go into effect in 2018. Our work is progressing, yet the pattern of spend is proving to be more back-end loaded in the year than linear. This spending will drop off significantly in 2018.

Next, as a reminder, we provide guidance only for closed acquisitions. While our short-term optics can be skewed by accounting impacts, we are confident that we are creating significant near-term and long-term shareholder value through our acquisitions, which are helping us both strengthen our competitive position and capture unique market opportunities.

Let me close by looking out further into the fourth quarter. We anticipate the continuation of revenue growth and a rebound in operating leverage above our normal 25% threshold. While we expect the incremental spend on the ASC606 compliance to extend a few more quarters, we have visibility to our recently acquired companies transitioning to profitability in the fourth quarter due to positive shifts in seasonality, and we, therefore, expect continued year-over-year operating margin expansion as we enter 2018.

Let's now take your questions.

(Operator Instructions) Your first question comes from the line of Jonathan Ho from William Blair.

I just wanted to start with the opportunity that you maybe see with Sumitomo, Komatsu and maybe if you could just give us a sense of magnitude as well as timing for those relationships.

Yes. So I really don't want to kind of disclose more than what -- that, which was in the press releases. It would be inappropriate. So I want to say pretty centered on what we've already said. So I don't think we're able to really speak to dollars and such. I think the more important aspect at least at this point in time, so the dollars are going to be incremental here in the next 12 months but not to the point where they're going to significantly move the needle for the company. But I think that these announcements, together with those announcements in the past 6 to 9 months or so, combined with those that haven't been press released kind of do represent maybe a strategic picture of starting to evolve an information ecosystem that involves many, if not, most of the machine manufacturers, around kind of, let's call it, a Trimble-centered information scheme whereby -- which, really, we've been talking about for many years in terms of the mixed fleet solutions so that it -- the solution for the contractor, in this case, is not centered around any particular manufacturer of equipment but really, is able to absorb all the different colors of machines into one information scheme. So I would say is -- the numbers being generated out of the OEM relationship are nice, not needle moving, and the greater significance over time is the fact that it provides a basis to sell aftermarket information solutions into the mixed fleet environment. Rob, do you have any other clarification?

I mean, what I would add is what you see with Sumitomo is that the relationship's on -- for factory fit for excavators. Yutong is dynamic compaction, and the Komatsu deal is a cloud-to-cloud based collaboration. So it also demonstrates, let's say, a breadth and depth of relationships in types of machines and capabilities.

Got it. And then just as a follow-up, in terms of the macro environment, can you maybe give us a little bit more color in terms of whether we maybe hit an inflection point here and where the macro could serve as potentially more of a tailwind? I know you've said that you can execute in a neutral environment. But do you feel like it's going to potentially be a benefit going forward just given what you've seen?

Well, I think, yes, in general, it's all relative, of course. So against the standard here of last several years, I think there are more positive points of light, if you will, to point at internationally. I think we talked in terms of kind of generally being better or upbeat with the probable exception of the Middle East. I think the U.S. is still something of the mystery factor here, which is it's positive but still with a fair amount of uncertainty around the edges just in terms of what policy -- what the policy standard is going to be. So I would say, yes, again, against the relative standard over the last several years, I would say that -- I would tend to say generally more upbeat, and yes, we can call it a trend -- an inflection point. But I'm not sure what's -- I wouldn't want to necessarily forecast the slope of -- after the inflection point.

Your next question comes from the line of Jerry Revich from Goldman Sachs.

I'm wondering if you could talk about, in heavy civil, when do you expect a greater machine controls product to be fully available across SITECH dealers globally and for the dealers, where it's been rolled out. What's been the customer take rate of that product compared to dozers, which have obviously been in the market longer?

Yes. Let's start with the latter, yes. From a take rate perspective, we're very early in the game. So excavators being the largest machine count population provides the backdrop for what we believe is a very attractive machine opportunity. So it's still very, very early, let's say, in the game with the new Earthworks product line for excavators. From a global rollout perspective, we're reasonably far along with that. In the coming quarters, we'll be fully distributed as well as have additional firmware capabilities that will come into the product line shortly. So I think we're in a good position there.

And sorry, Rob, just to clarify. So this year, by the end of the year, you're going to be fully rolled out globally?

Yes, were close enough to full.

And then you had spoken about the transportation telematics solution gaining traction in Europe. Can you talk about whether that's penetration rates rising? Or is that you folks gaining share? And just flesh out for us how much momentum, you think, that has behind the better performance this quarter that you pointed out in the slide deck?

I'd start with, I'd say, execution from the business team in Europe. We acquired a couple companies over the last few years, and we think that we've got a differentiated offering on the back of this acquisition. And they've just been performing pretty well, would really be the essence of it. So I call it more of a -- I'd probably call it 50-50 penetration and market share gain.

(Operator Instructions) Your next question comes from the line of Paul Coster from JPMorgan.

A couple of quick ones. The -- you highlighted recent acquisitions. You haven't done that recently. Is it reflecting sort of renewed vigor around that strategy? And are you sort of also making a statement here that you really sort of focus on these smaller tuck-in acquisitions rather than transformative larger acquisitions at this time?

Yes. So I think the -- if you're detecting a change in tone, there probably is one kind of during the period of 2015, and then to 2016, I think that we did kind of consciously return to a let's mind the knitting and let's just make sure that we've got our operational house in order. Let's clean up the portfolio, to some extent, just to make sure that it is central to a strategic concept. So I think, without making a big deal of it one way or the other, I think we did kind of focused more on operations than looking to the outside world. So I think that with the progression that we've shown for really now 1.5 years, I think we're comfortable that we have control of ourselves operationally and have really started to study the strategic equations out there. So I think that acquisition, let's call it focused and careful acquisition is maybe more visibly part of the strategy or the strategic statement than it would have been a year ago. As far as relative size of acquisitions, I think, again, it is ultimately constrained by what is available in terms of assets. If we're staying focused on the strategy, what is available in terms of size is somewhat limited just given the markets that we're in. There are some big possibilities out there that may or may not make sense for us. So I would not necessarily characterize it so much in terms of size. Certainly, this year, the characteristic, by and large, has been in the tuck-ins, but I wouldn't necessarily want to constrain ourselves to kind of that particular definition. If you look to the past, look to PeopleNet, TMW, Tekla, which -- all of which have been relatively transformative for us. So I think that if we came across assets of that quality and that have that kind of transformative capability or capacity for us, we wouldn't shy away from them. So I'm not sure that I'm necessarily categorically answering your question, but I think it'll -- the answer is that it depends.

It's helpful. It feels like Trimble's back on a prior path and a good path as well. The other thing is, obviously, there's an element of uncertainty around Hexagon at the moment, not around their business it seems but around their leadership, and a strategic outcome might be interesting there. Are you seeing any change in behavior in any of the OEMs in Europe that you kind of compete with and go up against Hexagon?

Well, in terms of the implication of the question, I'm going to choose not to infer anything from it. But I think that we are definitely seeing success with OEMs. I think we're seeing relative success versus the competition. I would not -- I would just say that we're winning on the merits and leave it at that.

Okay. And then my last question is -- and maybe, Rob, you can help me out here. Are you able to identify the software revenues in the quarter that were unattached, unrelated to hardware, unrelated to the T&L service -- subscription service, in other words, pure licensing of the software platform?

You mean on a dollar basis or a growth basis?

Or as a percentage basis, whatever makes sense for you if it's even possible.

Yes. Off the top of my head, I don't have that available because of what -- just by the dynamics of it, if you take a business -- well, actually, I guess, if you took the delta between the total software services and recurring and just the recurring line, you'd be at around 20% -- yes, 19%, 20%. And that would be -- is generally a straight-up software sale. When you get into the recurring, we'd look at business like on the mobility side and the fleet management side, where there is the onboard computer that attaches to a subscription, so I would call that a total solution. But 20% plus or minus is the ballpark.

Your next question comes from the line of Colin Rusch from Oppenheimer.

This is Kristen on for Colin. Just a couple for us. Clearly, we've seen things stalling out in Washington as far as the major infrastructure spending bill. But what we've seen is some action at the state level, particularly with gas tax increases. I think we've seen 6 states increase that this year. Can you maybe detail for us what impact that's had for Trimble and what the timing of that flow of funds has been for you guys?

Yes. So I think what you'll get from us is a relatively generalized answer that probably does not lead to dollars and cents impact on Trimble. So we would agree that, okay, there -- the states have put increased emphasis on solving their own problems and not waiting for the federal government to provide the funding for their discrete examples across the company -- country where that's happening. At the same time, I wouldn't totally discount the possibilities at the federal level. Yes, right now, it is stalled. But I would say that there is a strong sentiment both within the Department of Transportation as well as Congress that if there is an infrastructure spending bill, I think there is a strong motivation to spend it smarter than has been the case historically. And I think there's a strong appetite for including kind of a technology element in whatever is spent just to make sure that it is being spent efficiently with the minimum amount of waste. But I would say is, yes, the number -- not a huge number, not the majority, but a meaningful number of states are stepping up their level of activity. We, as a result, as a company, are spending more time engaged both in Washington and at the state level in terms of both understanding where things are going but then also trying to influence the spending towards, let's call it, smart spending with a greater technology component. Now I think we would -- we really don't have the ability to kind of forecast what sort of dollars and cents impact it would have on us. But I would say if -- again, just looking at the trend line, it's probably more positive today than it would have been 6 months ago or -- well, 6 months ago, it was maybe euphoric because of the view that there was going to be $1 trillion spent. So the environment was euphoric with no data behind it. So maybe there's been a downtick there, but probably with more real activity going on. But I would say we're probably in kind of an upwards cycle just in terms of kind of the willingness for the states to engage on the issue.

Okay, that's helpful. And then I wanted to follow up on the OEM question. I understand it's still too early to talk about any real needle-moving activity with Komatsu or Sumitomo. But you do have a relationship that is about a year old now I think with Paccar. Is there anything that you could speak to, to quantify the benefits that you've seen or the take rates that you've seen in the aftermarket from that relationship?

Sure. So the -- as I think we've previously discussed, the Paccar OEM relationship in our Transportation reporting segment, that's the first OEM relationship we've had in that business unlike Agriculture or the heavy civil business where we've had long histories of OEM relationships. It's one that has been -- we feel it's been successful thus far. The rollout has actually exceeded our original expectations in terms of what's coming out of the factory. That's part 1 of 2. So part 1 of 2 is what comes out of the factory, and then the second part is driving, let's call it, aftermarket upsell subscriptions. And that part of the business has been, I would say, close to our expectations. And I think we're still early. We wouldn't -- it'd be too early to call something a success or a failure in terms of driving the aftermarket adoption. But like, to give you an anecdote of example where we see a positive benefit of this is, if you're a trucking company and you're -- and you bought a, let's say, a Paccar truck and let's say, it's got a Cummins engine that comes with that truck, and if I -- if the rest of my fleet already has PeopleNet technology -- Trimble PeopleNet technology, on day one immediately able to integrate that in with a bigger fleet management solution I have. If you're a customer that doesn't have any technology and now you have a piece of -- let's say, have a truck that's enabled with technology, that's a, let's call it, a warm lead to talk to that customer about working with them on the rest of their fleet. And then the final example is if they have competitive product there and then start to realize the benefit of having a mixed fleet that can connect and that drives sales opportunities for us. And we've -- we see in the segment that we focus on that we've been gaining share in these mid- to large-sized trucking fleets, and this -- we believe this is one of many things that's helping us there.

Great. And if I could just fit one more in. If I look at your 3Q guidance and back out that, I think you said 5 points for M&A, that's still a little bit higher than typical seasonality for you guys. Is that something -- are you expecting something specific to come through in 3Q? Or is there anything that we should be looking at?

Well, I would first say look at it or think about it on a year-over-year basis as opposed to a sequential basis. And so on a year-over-year basis, put that number in context of what we've been posting in the last few quarters, and it falls in line.

Your next question comes from the line of Brett Wong from Piper Jaffray.

A little bit of a follow-on to kind of the last questions around growth as you look out through the rest of the year and maybe even some comments for '18. But obviously, some acceleration as you've talked about. Do you need macro improvements? Steve talked about some commodity price aspects, grain prices or energy in order to continue to see kind of similar organic growth profiles as you move through the rest of the year and in 2018?

The answer would be no. We've -- we haven't built the model on expectation of, let's say, the U.S. infrastructure bill kicking in anytime soon. And I know you know ag well and commodity prices, where they are, so don't -- haven't built a plan assuming some kind of sudden turn there in the bushel price on corn or soy for that matter. So we've built the model, really, assuming the, let's call it, the world as it is today.

Okay. And then just wanted to talk about the margin as you look at the third quarter guide. Incremental margin looks lighter than what you've kind of experienced over the past few quarters. Wondering what you can talk to about that.

Sure, yes. So I try to be careful in the guidance to separate out the organic element versus the inorganic. And I think you're zeroing in on the organic element and trying to understand what that leverage looks like, the operating performance as well as the leverage within the organic. So that's the part I'll speak to. And there, I'd say, a couple of things to keep in mind is from a, let's just call it, a straight comp perspective, it was the second half last year, specifically Q3, where we really started to see the benefits of the cost control -- cost cutting and cost control and revenue growth kick in that started driving the leverage. So from a comp perspective, we start to run into that this quarter, whereas for the last 4 quarters, they were against lower baseline. So that's -- so the, let's call it, the starting point is a little bit harder to get to another 40-plus percent kind of operating leverage quarter. But second then, in addition to that, one of the examples from the script was the ASC606 compliance expenses, which are incremental to what we had last year, and that hurts us a bit from being able to achieve some leverage. So there's meaningful number of points of levers that are -- we'll lose in the quarter based on the work we're doing on the 606 work. Now that will go away here in a few quarters, so it's not a structural long-term change.

And then just one last one from me. Within ag, what other M&A opportunities do you see in order to build out kind of complementary product offerings like you did with M?ller?

If we think about it from we can take a hardware or a software services distinction on one hand and then maybe geography on another axis, from a capabilities perspective, as you know, M?ller gets us to the implement, which is, we think, critical in the manifestation of precision ag. But to the extent that there's complementary, let's say, technologies around the implement, that's [venturous] to us. Now I'll classify that hardware centric for the moment, but we also would, I would think, quickly say there's not really much out in the market, which fits that profile. And then on the software side, software/services side, that's a -- we see that as an important part of the portfolio. What we have today is very North American centric. So as we think about the business, obviously, being a global business, now that's an area where we would look for opportunities that can be geographically centric because those workflow can differ from country to country. You may need to acquire in order to be able to serve the workflow needs of a given geography. And from a capability perspective, let's just say if I stay in North America or go back to North America, we could look at the value chain where we have capabilities today and look to either strengthen or fill gaps in that continuum.

Your next question comes from the line of Rich Valera from Needham.

Rob, just comparing the third quarter implied margins versus the second quarter. I mean, you basically have flattish top line revenue, but EPS would be down, I guess, a couple of cents at the midpoint. And just wondering what would be the pressure quarter-over-quarter, Q3 versus Q2? You mentioned some of the 606 work. Is it also some incremental M&A in there that doesn't have the initial margins that they would at that sort of -- on a going run rate?

Yes. So the way to think about it is, if you -- and sort of I try to bridge here, it's in my script, is at a -- so help me -- so tell me if it's not answering your question. The -- from a baseline -- I'll start year-over-year, baseline perspective and if I look at the organic operating margin, so exclude the acquisitions, we would see operating income, that would -- the midpoint would bridge somewhere close to 19% on the operating income line. It's the acquisitions which become dilutive to the operating margins. So there's some accounting effects, but there's also some seasonality effects. And so the sum of that on the inorganic side, add that to the organic, and I talked about the 606, some of the compliance spend we have there, bridges to the EPS.

Got it. So those are presumably all transient effects, the acquisition and 606...

Correct.

At some point in time. Any more you want to say about the kind of longer-term model targets if you have them? Or any color at all on how we should think about '18 versus '17 from a margin perspective at this point?

Well, from a margin perspective, as we go into '18, I would say consistent with the model that we talk about, which is that of generating operating leverage on the revenue growth. So as you play that -- if you were to -- we play that forward and look out into 2018 and let's start organic and then leave out any, let's say, new acquisitions that may or may not happen, so we would look to step up the operating income performance of the company and then the environment as it is now. We see revenue growth available. So as the revenue growth is available and we're able to generate operating leverage in a, call it, mid-20s plus percent, then you'll see natural step-ups in the operating margins of the company.

Got it. And I apologize. I did miss the prepared remarks. I was on another call. But -- so the Resources and Utilities segment had a real strong quarter with 12% growth there, presumably, a good part of that coming from ag. Is there any color you can add there? Sort of what drove that and how sustainable that is? How much of that was easy comps, acquisitions? I think acquisitions were actually fairly minor part of it from your chart here. But any color you can give on the sustainability of that strength in the Resource and Utilities segment?

Yes. A couple comments there. So -- and I would not start with easy comp as a baseline for it. And it's driven twofold: first, from the Agriculture business; and second, from our Trimble correction services business. So from an agricultural perspective, we've seen the continuation of good growth outside the U.S. or outside North America. So the Brazils, Russia, CIS countries, Asia Pacific have posted -- they continue to post good growth. Let's say, the continuation of what we've been seeing and then what we saw in the U.S. was 1/4 of growth in the U.S. and the work -- we are going on at least a couple quarters now of posting growth in -- positive growth in the U.S. And so that's obviously -- you add that dynamic into the equation on top of the international that we've already been seeing, and you get a good story. And then on top of that, we've had growth with OEM partners, which I would call, let's say, separate and distinct from geographic growth I was just describing. So that would be the ag side of the picture. And then the complementary side is on our correction services business, so that's the farmer who needs ubiquitous sub-inch or sub-meter coverage, positional accuracy. There's a -- to do that, you're subscribing to correction services. A good deal of those correction services subscribers we have are farmers. In fact, the vast majority of them are farmers who need that accuracy for their work. And that business was up double-digit year-over-year and is a strong, profitable SaaS business.

Great. And just one more if I could on that. You still primarily selling guidance as the main product here. I mean, I guess, there have been some concerns going way back about penetration within kind of the ag guidance market. Just curious if that's -- I'm presuming that's still predominantly what you're selling on the ag side. Just wanted to clarify that.

Yes. So in Q2, it would still be, let's say, the dominant element of the hardware revenue that we have. We also have variable rate flow controls, water management systems, irrigation systems as well as pivot irrigation. The fundamental change, as we go forward, would be M?ller coming into the Trimble family as we get into the precision ag and the -- and really, the variable rate flow controls with the electronic control units that M?ller has. So think about it as, if guidance is very tractor centric, what comes with M?ller is very implement centric. That's the thing behind the tractor. And that's important both strategically but to your point, on penetration also, let's say, balances or diversifies the sources of hardware revenue that we have.

Got it. Just one more follow-up if I could. You mentioned irrigation, and I know that was a product area that you had tried to launch going back last year and had some sort of fits and starts with the initial launch of irrigation. Is it fair to say now you've kind of got the irrigation product in the field and kind of selling the way you wanted it? Has that gotten -- kind of come along to where you wanted it?

So good memory. Actually, the answer on irrigation is our news in that realm is the OEM agreement with Valley. And Valley will be where we expect to see the irrigation -- the pivot irrigation business really move. Valley being one of the largest providers in the world of pivot irrigation systems, for us, solves -- or addresses, I should say, addresses a go-to-market challenge/opportunity. So that's really the move we've made in the irrigation -- pivot irrigation side of the business.

Your next question comes from the line of James Faucette from Morgan Stanley.

Just a couple of follow-up questions to some of those that have already been asked. First, I guess, maybe for you, Steve. Can you help us understand the financial impact from OEM agreements in Building and Infrastructure? But specifically, I'm wondering, how should we think about the mix? Are these the type of agreements where we should expect a traditional tight mix of -- between hardware and software? Or is it going to move things around meaningfully one way or another? And then, I guess, also from a longer-term perspective, as you're thinking about -- and you've made mention of doing acquisitions that continue to build out portfolio on where you see a lot of opportunities and the like. How important is it that you look abroad for a lot of these technology type acquisitions? Or do you think that -- and I wonder that for ability to access the markets that they're in. Or do you think that you could still get good leverage from buying wherever you find the best deal into different markets? So I guess, I'm just worrying about -- a little bit about political concerns, et cetera.

Sure. Yes. So again, I think we're taking relatively great pains to try to qualify the OEM opportunity in Building and Infrastructure, which is not so much as an end onto itself but a means to an end. And so I think that if you really look at the next year or 2 or 3, for that matter, the dollar revenue coming directly from the OEMs is not going to be a topic of great -- a great deal of conversation on our part. It's more of the strategic leverage that we're getting, really, in the aftermarket. So we really are seeing the OEMs as a means to access the aftermarket, is install a box -- there are different models here, but in a simplistic way is think about installing a box on the machine in the factory that already has a Trimble layer of intelligence on it. It goes to the aftermarket ends up in the hands of a contractor who may have 3, 4, 5 different machine types, different colors, different manufacturers. And the concept would be our distribution goes and visits that contractor and effectively sell software, potentially other services on top of the capability represented in the box. So hopefully, if this all works right, is the relatively larger part of the value add will take place in the aftermarket, will be in the form of software and services more so than the value implicit in the box in the factory. So again, the revenue is nice, but we ultimately expect the larger part of the revenue to come from the aftermarket and to see the box being installed in the factory, kind of maybe a literal box or a virtual box being installed in the factory, being a kind of a means to an end relative to the end being the aftermarket revenue. As far as the question on acquisitions in terms of kind of the -- where we go looking for them, I think that, one, we take a fair amount of pride in being an international company. I think we do view the international market kind of holistically, and so we would not think in terms of domestic or foreign or domestic and abroad. So I think that we have demonstrated a fair amount of capability of arbitraging kind of technology sources from around the world, whether it be India or we've got a strong Nordic presence, we have a strong German presence. We have capability in a lot of places around the world. So I think that we would be, in a sense, indifferent relative to the nationality associated with acquisitions and would simply look for the best fit, the best value creation capability. And at least at the moment, we're not particularly consumed by kind of geopolitical considerations. That may come, but aside from the obvious places to avoid, we're not really including that very directly into our calculation on acquisitions.

Your next question comes from the line of Rob Mason from Baird.

Wanted to see if you could provide an update on the field service and facility management businesses, how those are tracking relative to what you need to see from those year-to-date and whether they grew in the quarter -- second quarter?

Yes. On the facilities management or we call it the real estate and workplace solutions business, the business had a nice second quarter, is the punchline so was in line and in fact, exceeded our expectations both in terms of top line, bottom line but also importantly, in the bookings because the bookings is what's going to show up later as revenues. So from an operational perspective as well, the business has materially improved. And one of the things that we have talked about in prior -- I think it was actually probably in the last call -- was the need to get through a few of discrete implementations, in other words, get sign off from customers on some of the discrete implementations, which have been, say, long in the making that potentially gate us from moving to the next customers. And we've progressed nicely on that front. So that's the summary on the real estate and workplace solutions business. And then our on FSM business or the field services management business, we continue to make a, let's call it, a somewhat of a strategic pivot in that business. One of the models of that, I think, has served the company well over many years is that of being very centered -- very centric to vertical -- serving vertical markets more so than they being a horizontal provider of technology. And that's a pivot that continues to be underway in our Field Services Management business. The obvious verticals, given the nature of Trimble, is those in construction and agriculture markets. And so a good deal and emphasis continues to ride on that.

So is it fair to say that the real estate business is now certainly more on a growth trajectory, more consistent with the overall buildings portfolio?

Yes. I mean, it's getting -- I got to say it's getting close to that. It's not -- it doesn't have the growth -- top line growth profile of the rest of buildings. Some of that's very much on purpose because we've really worked to address the bottom line in the business. I mean, it's a business that has a long -- reasonably long sales cycle and long implementation cycle. So you could -- if you're not careful, you could get in the position of, let's say, if you were only going after the recognized revenue in the short term, you could do that and it'd be at the expense of the bottom line. So you have to get that balanced with the business model like that. So we put, I'd say, the emphasis on focus on getting the bottom line correct, which has a bit of expense on -- or a bit -- comes with a bit of, let's say, price, so to speak, on the recognized revenue that would show up with it being on a lower revenue growth than the rest of the portfolio. But going back to what I said on the bookings, very importantly, that the bookings do continue to grow and are trending in the right direction. And that's what will get us the revenue that come in line with the growth that we expect out of the rest of that buildings portfolio.

Okay. The -- just one last question on the -- you've commented a couple of times on the assumption the inorganic margin would have some pressure in the third quarter. Outside of the seasonality at M?ller, is -- do you see that pressure continuing? Or is -- past the third quarter on the inorganic part of your business?

I mean, there are potential accounting implications, so just, I'll speak in a more general sense, the one that most people are familiar with would be the purchase accounting effects or deferred revenue haircut that you often see in software acquisitions. And more and more of our deals are software oriented than not. The second effect -- and I wouldn't call this a purchase accounting effect that can happen on a, let's call it, a software acquisition that we've made. If we bought a company that's a private company, they may have had a way of recognizing revenue, let's say, on a professional services contract in the past. That would have been, let's say, call it, on a -- they may perhaps recognize that on a, I'd say, time and materials or as performed basis. But in GAAP accounting, if -- it's generally going to take you to the point of having completed the contract. And so as we bring companies in that are private into a public context, you often have to shift the contracts or shift the nature of how you -- look, first, you have to recognize the revenue under U.S. GAAP. And if the company had, had a prior practice that was different. That can cause a shift in the ability to actually recognize a revenue, which is completely separate from collecting the cash and getting the work done. It can really just be accounting effects, which, to me, is mutually exclusive from a deferred revenue haircut on purchase accounting.

And that's in reference to acquisitions in-house, not theoretical?

Correct. And those are ones that will then fix themselves quickly. They play pretty quickly, and then you're back on the trajectory.

There are no further questions at this time. I turn the call back over to the presenters.

Thank you, Amanda, and thank you, everyone, for attending today's call. We look forward to speaking to you next quarter.

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