Trimble Inc (TRMB) 2017 Q4 法說會逐字稿

Good afternoon. My name is Jesse, and I'll be your conference operator today. At this time, I would like to welcome everyone to Trimble Fourth Quarter and Full Year 2017 Earnings Conference Call. (Operator Instructions) Thank you.

Michael Leyba, you may begin your conference.

Thanks, Jesse. 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 an agenda of the call today.

First, Steve will start with an overview of the quarter and the year. After that, Rob will take us through the remainder of the slides, including an in-depth review of the quarter, the year 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. Today, I will let Rob provide the bulk of the narrative on the fourth quarter as well as the commentary on tax reform and 606 effects. I will focus on interpreting the total year, the trends that are taking us into 2018 and our current strategic assessment, with an emphasis on last week's announcement of the acquisition of e-Builder.

We left the year having now delivered 7 consecutive quarters of accelerating growth. Although we over-delivered for the full year against our own original expectations, the results were consistent with the profile we anticipated at the beginning of 2017. That expectation was bifurcated, with the first half of the year expected to demonstrate steady progression and the second half demonstrating a meaningful step-up in performance. In reality, that was what happened.

Reported revenue in the first half grew at a rate of 7% and, on the second half, at a rate of 18%. Excluding acquisition, divestiture and [earned] exchange rate effects, the growth was approximately 8% in the first half and 12% in the second half.

The second half of 2017 provides us with the most positive platform we have had in over 10 years as we enter 2018. Every segment and every significant region grew during 2017 and all are anticipated to continue to grow into 2018. Although there is always the potential for significant negative stochastic shocks, perhaps most notably in U.S. trade policy, there is also the possibly of significant positive surprises such as a U.S. infrastructure bill. Overall, we currently expect the second half for 2017 to provide the template for 2018 performance.

In addition to the underlying support provided by the general macroeconomic environment, we are optimistic about strong multiyear secular trends that are specific to our markets. These market trends are augmented, in turn, by our own targeted initiatives that enable us to capture an advantaged position in these markets. 2017, where we were able to step up these initiatives. At the same time we, were continuing to improve operational results.

We anticipate maintaining the same balance of aggressive strategic initiative and improving financial performance into 2018. This intensified strategic focus is not a departure in a new direction but more of a doubling down on our historical trajectory. Trimble has, throughout its history, always been at the forefront of the digitization of mature industries. The speed of digitization has recently stepped up as a result of access to new enabling technologies, including increased bandwidth availability, cloud ubiquity and sensor proliferation. Trimble is positioned both because of its history and its innovation to provide a unique contribution to the digital transportation of the vertical markets we address.

Let me describe 4 characteristics that make us unique. First, we have chosen not to be constrained to simply providing individual point solutions. Instead, our emphasis has been on utilizing technology to integrate the individual elements of traditional workflows into more comprehensive solutions. By holistically emerging -- engaging the workflows, we can eliminate many of the historical points of process friction that destroy productivity and add costs. This creates network effect benefits and promotes strong C-suite engagement with owners and contractors.

Second, our historical strength in field and mobile applications has been augmented by growing enterprise-level capabilities. This has eliminated the historical distinction between field and back-office and enabled seamless, real-time, enterprise-wide decision-making and actions.

Third, we are equally comfortable in both the hardware and software universes. We are, therefore, well positioned to craft elegant solutions that connect the physical and digital worlds, with sensors informing a digital model, which then interprets the data and guides physical operations on machines using tools.

Fourth, at Trimble's core is the belief that value is maximized by closely integrating deep domain knowledge with technological innovation. While the majority of the functionality we bring to a vertical market may be based on common product platforms, we have always recognized the challenges specific to each vertical market and extend our solutions beyond a generic one-size-fits-all definition.

These underlying cross-company characteristics provide the foundation for value creation in our markets. Although they are applicable across the company, I will focus on mapping them onto our largest markets: construction, agriculture and transportation.

Construction is a multitrillion dollar market, which is undergoing a productivity revolution. Trimble participates in both the horizontal, infrastructure-centric construction market as well as the vertical construction market, which is more focused on buildings and structures.

We have the opportunity to play a key role in the unfolding construction revolution by providing tangible benefits across the entire design, build, operate work flow through the application of a conceptual framework we call the constructible model. Let me recite some of these benefits.

The most visible example of the impact of technology on the construction site is the use of precise positioning technology to improve task productivity, typically, by automating machine operations or labor-intensive tasks, such as layout. These point solutions represent the first -- represented the first wave of technology exploitation on the construction site and date back decades. Although the technology has long historical routes, it is not yet close to mature. In 2017, Trimble released the latest generation of machine control automation, which represents another step towards complete machine autonomy.

The application of technology in construction is also enabling disintermediation and revamp of traditional work processes. For example, BIM and improved project management capabilities enable the off-site fabrication of structural elements, which are then delivered to the construction site just in time for assembly. This example is consistent with an overall technology-enabled trend that is allowing the construction site to increasingly take on the characteristics of factory floor.

Technology is also enabling an attack on the largest and, perhaps, least visible source of waste in construction, which is rework. Rework is caused by factors such as imperfect design, poor collaboration, ambiguous or unaligned information and inadequate discipline in executing to a design. New tools, which integrate and align a digital concept to perfection with physical work operations, can now highlight and prevent the causes of rework in the course of a project.

Although the concept of the enterprise has meaning within the construction industry, the conceptual heart of the industry is really more about project delivery. Success or failure in the industry is determined by the ability to manage the elements of the project to achieve on-time schedules, on-budget costs and quality expectations. The achievement of break-out results, which would be the reduction of project costs by over 20% from historical standards, requires a holistic solution that integrates all the interdependent elements of the project.

To illustrate the interdependencies, let me use a simple example. A crew installing HVAC duct may achieve dramatic productivity improvements of more than 50% on that task through the use of smart layout tools. Although the result is impressive, the standalone point solution benefit will be completely lost if that same crew cannot access the space for its next operation because a plumbing crew is already operating in that physical space and if the HVAC crews require to wait for it to be vacated, resulting in nonproductive downtime. Emerging project management tools are increasingly able to recognize these interdependencies and squeeze out additional productivity. Bringing together, these holistic answers is Trimble's strategic focus in construction.

Agriculture is also undergoing a transformative set of changes. Just as in construction, precise positioning has enabled transformative innovation in agriculture. The earliest application was machine guidance, which has enabled lower input cost, improved yields and a higher labor and machine utilization. The next waves of innovation build on this foundation and lead in 2 different directions: one, in the direction of machine autonomy; and the other, towards variable rate applications. Trimble is positioned to play a future leading role in both.

The march towards full autonomy will be incremental and will take the form of ever-increasing levels of automation. The concept of variable rate is about developing an optimized prescription for the field and the crop that maximizes yield with minimum input and then to efficiently apply that prescription in the field. Both autonomy and variable rate requires sophisticated solutions that incorporate data collection, analytics, decision-making, software intelligence and hardware performance.

Many of the Trimble advantages in construction apply as well in agriculture. Our holistic view of the workflow, our integration of the field and enterprise, our comfort in both the digital and physical worlds and our domain understanding make us a unique contributor. Trimble's strategic focus in the agriculture has been to augment our historically strong guidance focus, which positions us well in the pursuit of autonomy, with the additional elements required to be a central presence in variable rate.

Transportation shares many of the same themes as construction and agriculture. It breaks down relatively clearly into 2 elements: one is managing a mobile asset, the truck; and the second is managing the enterprise, which incorporates the business processes. Trimble is unique in its transportation industry in having a strong position in both elements, the mobile operations through our PeopleNet business and the enterprise through TMW and ALK. Since the acquisition of PeopleNet and TMW, we have successfully aligned the solution sets to provide transportation companies with the choice to complete workflow functionality.

Our strategic focus in transportation is to continue to build up a functionality of the comprehensive solution, to expand internationally, to play a first-mover role in the implementation of both blockchain and the cloud and to solve the remaining breakout operational challenges in the industry. One of the remaining core breakout challenges in transportation is that of relatively low capacity utilization. We are addressing that by providing improved transparency into shipments, with the intention of better aligning demand and capacity. Our principal focus -- our company focus is still on execution in the sense of producing reliable results over time. At the same time, we are currently in a position of both strategic opportunity and a relatively strong strategic position, which is the outcome of both organic development and selective acquisition. 2017 was a year of aggressive strategic development with major product announcements, 8 announced acquisitions and significant channel development initiatives.

2018 is continuing that trend with the announcement of the e-Builder acquisition. e-Builder represents a strong product organizational and financial platform from which to meet the construction industry's need for improved project delivery tools. It represents significant upside for Trimble. e-Builder has historically been focused on providing North American owners with program management capability. With Trimble's organizational reach, we will bring the e-Builder product immediately to large contractors and also extend its market reach internationally. In the near future, we will bring a revamped product to smaller contractors.

Let me turn the call over to Rob. Before I do that, let me provide an introduction to Johan Wibergh, who is appointed to the Trimble Board of Directors last week. Johan is currently the Group Technology Officer and CIO for Vodafone. Besides a strong -- broad technology perspective, Johan will provide specific deep insight into emerging technologies, which are integral to Trimble's future, including the cloud, cybersecurity and connectivity. In addition, he brings significant insight to the practicalities operating across a wide range of international environments.

Rob?

Thanks, Steve. Good afternoon, everyone. I have 3 main topics to cover this afternoon: first, a recap of Q4 2017 and, to a lesser extent, overall 2017; second, I'll discreetly address topics of the U.S. Tax Cuts and Jobs Act and our ASC606 implementation; third, I will cover Q1 guidance, where I will stick to our practice of guiding the quarter and not the year.

Let's start on Slide 5 with our review of the fourth quarter results. Top line and bottom line results came in ahead of plan, meeting or significantly exceeding expectations in all reporting segments. Fourth quarter total revenue was $708 million, up 21% year-over-year. Within that, the currency translation added approximately 2%, and the net effect of acquisitions and divestitures added about 5%. Organic growth was approximately 14%, which resulted in our seventh quarter in a row of accelerating organic growth. Notably, the rate of organic growth increased in all segments. In short, our construction businesses are healthy, our Transportation segment continued its growth trajectory largely as a result of the first phase of the electronic logging device mandate that went into effect in December. Agriculture end markets continue to improve, and our Geospatial segment continues to benefit from new product introductions, improving end markets such as oil and gas as well as a couple of large contract completions.

Fourth quarter non-GAAP gross margins were 56%, down 90 basis points year-over-year, driven mostly by acquisitions but also impacted by strong hardware sales in the quarter. Operating income dollars increased 18% to $126.3 million, while the operating margin percentage dropped to 17.8%, largely due to acquisition effects. On an organic basis, operating margins expanded year-over-year and were just under 19%.

Fourth quarter non-GAAP net income was up approximately 24%, and non-GAAP earnings per share in the fourth quarter were $0.39, up $0.08 or 26% year-over-year. Our non-GAAP tax rate declined from 24% to 23% year-over-year, reflecting geographic income mix.

Next, on Slide 6. Full year total revenue was $2.65 billion, up 12.4% year-over-year, with organic growth at about 10%. Full year non-GAAP net income was about $380 million, up 26% from prior year. Non-GAAP earnings per share for the full year were $1.48, up $0.29 or 24%.

Turning to tax. Please note that on a GAAP basis, net income for both the fourth quarter and the year were negatively impacted by additional tax expense of $85 million on the sum of accumulated foreign subsidiary earnings and deferred tax impacts, a result of the U.S. Tax Cuts and Jobs Act being enacted. As this tax legislation was passed late in the fourth quarter of 2017, we expect to see ongoing IRS guidance and accounting interpretation over the next 12 months. The accounting of the transition tax, deferred tax remeasurements and other items associated with the tax legislation are provisional due to the forthcoming guidance and our own ongoing analysis.

Slide 7 has an overview of our current assessment of the impact. Our non-GAAP tax rate going into 2018 is currently expected to drop from 23% to 20%. This rate could be impacted in the future by forthcoming IRS and accounting guidance regarding the tax legislation. We do not anticipate any fundamental changes to our businesses as a discrete result of the change in tax legislation. Our capital allocation policies remain consistent, albeit further enhanced by the ability to bring cash back onshore for more efficient capital deployment. For example, we will fund approximately $250 million of the e-Builder acquisition from this cash repatriation, whereas previously, that would have required incremental debt.

Turning to Slide 8. We finished the year with $537 million of cash and short-term investments, and our gross debt level at the end of the fourth quarter was $914 million. Deferred revenue increased 10% to $313 million. Operating cash flow for the year was relatively flat year-over-year, given the inventory investments we are making in this environment of growth and tightening capacity on some key components. We also repurchased $288 million of stock for the year, representing approximately 7.4 million shares.

Turning now to a review of the reporting segments. Let's start with Transportation on Slide 9. Revenue was up 24% year-over-year, with currency translation adding about 1% and acquisitions adding about 4%. Over the past 2 years, Transportation has been our fastest-growing segment on an organic basis. Our mobility business benefited in the quarter from the first phase of ELD regulations in North America going into effect on the 18th of December, along with other product and market adjacencies such as video and OEM sales. Our enterprise business in routing, navigation and transportation management also continued to experience SaaS revenue growth. Our business in Europe and India continue to expand, further validating our execution model. Operating income margins decreased by 80 basis points on a year-over-year basis as a result of product mix and targeted investment in certain high-opportunity customer areas. To put a little more color on the product mix, the telematics aspect of the business that benefited from ELD is delivered by a solution with an onboard computer and an ongoing SaaS subscription. The hardware or onboard computer has comparatively low margins. Therefore, the comparatively high installation volume during the fourth quarter drove lower gross margins in the quarter.

Next, let's turn to Resources and Utilities on Slide 10. Segment revenue was up 38% year-over-year, with currency translation adding about 2% and acquisitions providing a positive effect of about 23%, which primarily reflects the acquisition of Müller, with a smaller impact from recent forestry acquisitions. In Agriculture, we continue to experience healthy growth in markets such as Europe, Russia and Brazil, reflecting penetration-related growth opportunities. In the United States, we experienced another quarter of growth in our aftermarket business and also saw growth across our key OEM partners. We continue to see double-digit growth in our correction services business and our forestry business. Operating margins contracted 480 basis points on a year-over-year basis to 24.9%, impacted primarily by Müller and the 3 acquisitions we made in the forestry space. Please note that organic operating margins were up year-over-year. As we enter 2018, we expect our recent acquisitions in Resources and Utilities to be accretive to EPS. Within the next few years, we expect these acquisitions to be accretive to company operating margins. Given the historically high margins in this reporting segment, we continue to expect modest dilution of operating margins at the reporting

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Moving to Geospatial on Slide 11. Revenue is up approximately 11% year-over-year, with currency translation adding approximately 2% and divestitures subtracting about 1%. Organic revenue was up in the segment for the fourth quarter in a row. Within the segment, our optical and GNSS equipment posted growth, including growth in the North American market, where we achieved our best growth since the second quarter of 2014. Our Geospatial business continues to benefit from new product introductions, including a recently launched mechanical total station product line for our emerging markets as well as end market diversification. Furthermore, we experienced strong sales of our inertial-based technologies to automotive companies for development of their autonomous technology programs. Operating margins in the segment were 20.5%, up 100 basis points year-over-year, primarily due to revenue growth and gross margin expansion and partially offset by an increase in operating expenses.

Let's next turn to the Buildings and Infrastructure reporting segment on Slide 12. Segment revenue was up more than 18% year-over-year, with currency translation adding about 3% and no acquisition impact in the quarter. Both the building construction business and the civil engineering construction business were up double digits for the quarter, reflecting continued strength that we saw throughout the year. The impact of growth in operating leverage enabled us to expand operating margins 350 basis points to 21.3%. As Steve mentioned, we are very excited about the future contributions to our construction business from the acquisition of e-Builder. A description of which is detailed on Slide 13.

From a financial standpoint, e-Builder reported approximately $53 million of revenue in 2017, with over 20% revenue growth rates and over 65% subscription revenue. In the first year, the impact of acquisition accounting, in addition to incremental interest expense for the acquisition, is expected to be $0.02 to $0.03 dilutive to earnings per share in 2018. After these accounting effects cycle through, we expect e-Builder to continue its strong growth profile, with operating margins similar to the rest of the Buildings and Infrastructure reporting segment in 2019. To finance the acquisition, we executed a $300 million credit facility.

Next, Slide 14. Our revenue mix by region is listed. North America was up 17% year-over-year, where each of the 4 reporting segments grew on a year-over-year basis. Europe was up 36% in the fourth quarter, reflective of the addition of Müller, which derives a majority of its revenue in Europe. Growth was relatively broad-based and led by markets, including Germany, U.K., France, Finland and Russia. Currency translation contributed about 7% to this growth rate, with organic growth in the low teens. Asia Pacific revenue was up 14% in the quarter and continue to be led by growth in Japan, Australia, India and [Kurbia]. Each of our reporting segments had growth in the region. Lastly, Rest of World was up 16%, with notable increases in markets such as Brazil and the Middle East.

Moving out to Slide 15 and our revenue mix. Software services and recurring revenue streams continue to grow in absolute dollar terms and represent approximately $1.25 billion or 47% of revenue over the trailing 12 months. Recurring revenue represents approximately $750 million or 28% of revenue over the trailing 12 months. The steady percentages of revenue mix reflect broad-based growth in revenue, including strong hardware revenue growth within the Geospatial, Agriculture, Civil Construction and Transportation business.

Let's turn to Slide 16. We did not close any new acquisitions in the fourth quarter. However, in January, we announced both e-Builder and Stabiplan, both are in the Buildings and Infrastructure reporting segment.

Let's now move to guidance and go to Slide 17. Steve addressed reviews looking forward into the year. For the first quarter, we expect revenue to be between $700 million and $730 million and non-GAAP EPS to be between $0.36 and $0.40 per share. Three comments to provide context to guidance. First, with respect to top line growth, the midpoint of the range implies more than 16% year-over-year revenue growth, of which approximately $40 million or over 6% is from acquisitions. In Q1, we expect solid organic growth, albeit lighter than the trend of the last few quarters, primarily a result of transportation companies catching their breath to implement the new ELD technology.

Second, in terms of profitability, the midpoint of our guidance assumes a Q1 2018 non-GAAP operating margin that is similar to the Q1 2017 operating margin of 17.8%. To break that down, we expect organic operating margins to be in the 19% range, offset by margin dilution from recent acquisitions. Margins would be even higher were it not for the temporary cost associated with the ASC606 and tax reform work. Our guidance also includes a lighter contribution versus prior quarters in nonoperating income, which falls below the operating income line. Interest expense will step up in Q1 as a result of our increased leverage, and we are also making a targeted investment in one of our joint ventures in the first half.

Third, our guidance reflects revenue recognition under ASC605 accounting. We are moving to the new ASC606 guidelines in Q1, meaning that we will report Q1 under 606, even though we are guiding under 605 accounting. We have elected to adopt 606 using the full retrospective method, which will restate 2016 for the total year and 2017 by quarter under 606. What this means is that you will be able to see apples-to-apples comparables of our Q1 results under 606 accounting versus Q1 2017 results under 606 accounting. It is our intention to publish these recast 2016 and 2017 financials before our next earnings call. As such, during the Q1 earnings call, we will focus the conversation on top line and bottom line progression from Q1 2017 to Q1 2018, both of which will be reported under 606 accounting. While we continue to assess all impacts of the new guidance, we currently expect for 2018, on an annual basis, that the 606 accounting will not have a material impact. However, it is anticipated that the timing of a portion of the revenue may shift between quarters, primarily due to the accounting for software term licenses and custom professional service contracts. The majority of our revenue, which is related to hardware, software perpetual license, SaaS and other service and support offerings, are expected to remain substantially unchanged.

So to summarize the guidance takeaway. As Steve said, we largely expected the continuation of the trends from the second half of 2017 into 2018. Overall, we currently expect full year revenue growth in the low to mid-teens. From a profitability perspective, over the course of the year, we expect to drive the company towards an operating leverage model, consistent with the performance of the overall business in 2017, that is, in the 25% range or better, leading to full year operating margin expansion.

With that, let's now take your questions.

(Operator Instructions) Your first question comes from Richard Eastman with Baird.

Steve, could you kind of speak a little bit to e-Builder and how it better positions you, perhaps, in the construction space? Could you just maybe kind of speak to it strategically?

Yes. Well, I think, again, the framework here, I think the beginning point is really to look at the workflow really from kind of predesigned design into the actual site preparation and then [cable] project management and, ultimately, I suppose, into the operate phase. And so the -- we have something to say right across the workflow. And kind of the key point in the script was really to emphasize the fact that it is holistic, that it is about bringing comprehensive solutions that touch each of these different elements of the workflow. I think e-Builder represents a significant addition to our capability, really focused on managing the project. Now their relative focus is on owners, more so than general -- they've chosen focus on owners more so than general contractors. But I think it gives us -- first of all, a bigger representation with owners, gives us a strong software platform that will include their contribution as well as our software products, for example, [Prolines] and Prolog, that will give us a more comprehensive set of answers to managing the project. It will give us a stronger representation in the owner and gives us a project -- a stronger project -- product platform to bring to the market. So I think it is definitely an extension of what we're doing today but gives us kind of emphatically more presence in terms of the project management, which, again, I think, is the central consideration in terms of this workflow managing the project.

Okay. And then just maybe a slightly bigger picture question, but I think, Rob, you kind of spoke -- on the last slide, you kind of spoke to 2018 kind of revenue maybe range. That -- again, quick math says that maybe the core growth then for Trimble would be around 10%. And maybe the question is in the 4 segments. Does -- did any of those decelerate? I guess, maybe Transportation & Logistics, is it a better assumption there to be mid-single digit, thinking the 4 groups in the 4 core growth rates that would be likely in '18?

Deceleration, you mean from '18 versus full year '17, right?

Yes. From '17, right, decelerating into '18, just given the strength we've seen there. But if you were to line up the 4 business groups against, say, a 10% core growth rate, could you just kind of give a little bit of color on either side of 10% for the 4 business groups?

Sure, yes. That's pretty straightforward. If you look at the 4 reporting segments, where we generally have characterized them, and I'll stay consistent with that is that Geospatial is the most mature of the 4 reporting segments. So when I think about the overall company growth profile, I would tend to have a lower expectation for Geospatial amongst the -- versus the other 3 segments. When we look at the other 3 segments, our assertion remains the same, is that we see secular -- strong secular trends in each of these markets, really, Construction, Agriculture and Transportation; large, global industries that are underserved and underpenetrated by technology, and that's what drives the secular play and which, in our view, on an, let's call it, ongoing basis, gives us conviction that these businesses, call it, mid-to-high single-digit growth opportunity. And obviously, in (inaudible) mid-to-high singles, we put

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so that would be how I characterize the -- our views on the growth opportunities for those businesses. And then to compare '18 growth versus 2017 growth, the one -- yes, of the 4 reporting segments, Transportation would be the one that I would look at for a modest amount of deceleration -- growth deceleration versus the other 3.

Given the comp. Okay. All right. Very good.

Your next question comes from Jerry Revich with Goldman Sachs. (Operator Instructions) Your next question comes from Colin Rusch from Oppenheimer. Your next question comes from Jonathan Ho with William Blair.

Can you hear me?

Yes.

We can hear you.

Okay. Yes. I just want to make sure that the connection was still there. So just wanted to give -- get some thoughts at a high level around penetration. And as you've seen your customers start to scale their fleets, how should we be thinking about some of the Darwinian effects that you've talked about in the past maybe play out when we look at penetration of things like machine control and just technology more broadly?

Yes. So I think it varies from industry to industry. Certainly, it would be my, call it, personal view. I don't know if there's compelling evidence one way or the other here, but I think there's a growing sense within the construction industry that it is Darwinian is that contractors either have the choice of investing in technology to stay competitive or they run the risk of becoming increasingly irrelevant and ultimately disappearing. So I think that with kind of the revival around the world, and particularly, I think the argument would be strongest in the U.S., followed by Europe, but as markets revive, I think the level of kind of -- the scale or the quality of competition is changing. And increasingly, if it is possible to get 10%, 20%, 25% project cost improvements through the use of technologies, I think it is increasingly becoming Darwinian. Now at the same time, strong markets also lead to, perhaps, a level of complacency. So this will take some time to play out because right now, many of the contractors out there have backlogs that extend out a year or 2. And so there, shall we say, isn't kind of the cutting edge. So I think the improving economies cut both ways in that sense. Agriculture, I think, will be -- is ultimately -- probably plays out in the same way but on a slower time or a longer time horizon simply because farmers don't face the same kind of binary world that contractors do -- contractors either win deals or lose deals. Farmers live in kind of more of an analog universe. I think transportation is the same, probably in some ways, more developed than the other markets from a penetration standpoint. Large operators in the U.S. have adopted, at least, the fundamentals of technology, although the technology keeps advancing, and there's more and more scope for operators to improve their basic operations. So I would say I think -- and I think the theme of, at least, my remarks earlier in the call were that I think that the general rate of technological change is now accelerating, driven both by capabilities from the technology but also, I think, from kind of competitive forces. So I would say is -- over the next few years, I think the penetration rate will accelerate and hopefully will be reflected in our growth rates.

Got it. And then in your commentary around gross margins, on a reported basis, they seem to be down but up organically. Can you give us a little bit more color on what's happening there and how we should think about that leverage? Some of your required deferred write-downs start to come back in 2018.

Well, looking into 2018 and deferred write-downs, it would be premature to look at how that's going to impact margins, and we'll report against that at the end of the

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with respect to the margin profile in the fourth quarter of the -- you're talking about gross margin. So if you think about the -- in the beat we had on revenue, there was a good amount of it driven in the Transportation business specifically from the ELD surge in demand at the end of the quarter. That demand for ELD is really driving hardware first because it's a model that has an onboard computer, which is hardware and then the SaaS subscription that's associated with that. We make higher margin on the SaaS, we make low margin on the hardware. We sold more hardware units than we anticipate -- expected and anticipated in the fourth

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in December. And so that specific line of hardware, just using an example but one that definitely moved the needle, has a lower gross margin

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and that played out by the time you added up

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Your next question comes from Jerry Revich with Goldman Sachs.

Rob, I wonder if you can help me on the Müller integration. I know it's early, but what's the operating plan in terms of when your global distribution, particularly your distribution in the U.S., you expect to offer the Müller product range? And can you also update us on, excluding acquisition accounting, how is the market performance in this business versus the overall segment? And what's the organic growth that you're seeing flowing through on the Müller business within your results? If you can comment.

So the acquisition, thus far, is exceeding the expectations we had in our own deal model. So we feel very good about where we are thus far. I'd say financially, with the deal, I think from a people perspective, the teams are coming together very nicely. And so that has met or exceeded our expectations as cultures and the values line up well in the organizations. As it relates to the nature of the business that Müller -- I'll call it the business mix Müller has versus our traditional guidance-centric business, Müller has a European centricity, where we have historically had a North American centricity. Müller's had an OEM centricity, where Trimble's had -- the guidance business has an aftermarket centricity. And so the strategy then is, how do we bring more of the Müller technology into the aftermarket and into North America? And how do we leverage the OEM relationships in the European business that Müller has for the rest of the -- I'll say the rest of the Trimble portfolio? We're in early days on that aspect of, let's call it, the channel and product integration, but we feel really quite encouraged by the, I'll say, the level of quality and thought and the plans that we have, the -- and I'll say the energy that we have from the channel to actually execute upon this offering. So it's as much about having the right product and technology as it is about getting the go-to-market right. So I would say, stay tuned to see how this is really playing out, but we feel quite confident in what we're doing here with the combined organizations.

Okay. And separately, for the Transportation business, can you talk about the way you see the puts and takes for 2018 for the business in terms of what's the magnitude of headwind from some slowdown, as you put it, as the truckers catch their breath from ELD mandate? What's the magnitude of that headwind for your hardware business? And then as we enter 2018, can you just talk about, directionally, how much the subscription revenue business within P&L is up year-over-year, how much of a tailwind that adds just to frame that issue for us?

Sure. One of the questions I'd been asked most over the course of the last year is, would we see some kind of cliff of demand after the 18th of December when the mandate went into effect? And I think it's -- I hope I've been consistent about characterizing it as emphatically not a cliff of demand, no, we expected to see a change in slope of the demand, but we still will see demand. And it comes for a few reasons. One of which is that if you actually technically break it down, there's a thing called AOBRD, automatic onboard recording device. So if you actually have -- if you're AOBRD-compliant, you actually have another 2 years to be full ELD-compliant. So there's a 2 step, call it, wave here. So we were through wave 1 of 2, and so there will still be demand over the next couple of years as customers -- as companies move from AOBRD compliance into full ELD compliance. So that will generate a certain amount of demand itself. The second aspect of where we would see continued growth, and we do expect to see continued growth in the segment this year, is we have an installed base. Now think about the adjacent product offerings that we have, and we've talked about video as one of those examples. Now if you think about a customer -- if it's a customer who went more for the, okay, more the compliance-centric aspect of ELD, the Trimble business is ultimately about fleet productivity and full fleet management. There's a whole upsell opportunity that our teams will be pursuing within the customer base -- for that element of the customer base that may have just gone lower on adoption to compliance only or compliance solution. A third aspect would be, if you take the broader view of our portfolio in Transportation, mobility is just one aspect of the portfolio that we have, and it is the one that's benefited the most, clearly, from ELD. But remember, we have an enterprise business in Transportation as well, and with the enterprise business is that's doing the back-office systems, it's the ERP, it's the order to cash systems, it's the scheduling, it's the dispatch, it's the routing, and the mapping and the navigation. We believe that capital budgets will be redeploying from an ELD centricity that they've had over the last year into the enterprise side of their -- of the trucking companies' business. And we're starting to see that reflect from the bookings that we're picking up in the enterprise side of our business. So you add those factors together and you would have our thesis for where we see continued good growth in the Transportation business on a year-over-year basis, albeit I would expect at this point that it would be slightly less than -- or moderately less than what we saw last year on a year-over-year basis.

Your next question comes from James Faucette with Morgan Stanley.

It's Yuuji Anderson on for James. Was curious to hear more about acquisitions for 2018. I think at the beginning of last year, you gave some color on expected acquisitions for the full year. Just wondering what it looks like for 2018, excluding the 2 acquisitions that you've already made. Should we expect things to be about the same or maybe things start decelerating? And if so, how should we think about capital allocation plans? And should we expect that to go more aggressively toward debt paydowns or share repurchases?

Yes. I think I've got really no choice but to be relatively opaque on the subject since we really can't be talking about kind of future plans here, too much speculation involved. I would, in general, say that looking at 2017, we made -- we announced 8 acquisitions in 2017, which, against recent standards for us, was a comparatively aggressive year. I think, well, year-to-date, we've announced the 2 that Rob mentioned, e-Builder being the larger one. And I think that it's probably -- if you're going to kind of land somewhere, just kind of giving a very general direction, I would say 2018, given the nature of the markets, given the changes that are occurring in the markets and given the changes occurring in the markets that we're addressing that are pretty strategic and kind of represent a -- something of a strategic inflection point maybe pretty much across-the-board, I would say is that, as I think we're clearly indicating here, we're being pretty aggressive strategically in terms of looking to be a central player in construction, in agriculture and in transportation. And I think that, yes, our fundamental priority is to do it organically. But I think that we're looking to acquisition to supplement it. So I would say, if we're going to land somewhere provisionally, I will say 2018 looking like 2017, is probably a pretty good approximation of what's called the current mental state of Trimble. I don't necessarily see it -- us slacking off in 2018 from the 2017 levels. We'll see about whether we accelerate it, but I will say kind of the same mentality that took us through 2017 exists in 2018. And jumping in for Rob, here is -- I think our priorities are use our cash flow to serve the business in terms of providing growth platforms for the business. And if we have excess cash beyond the needs that, that implies, it would be to -- probably a focus on share buybacks, simply to return the excess cash into a form that's useful to the shareholder.

Your next question comes from Alexander Frankiewicz with Berenberg Capital Markets.

I just had a couple of quick questions. First, on SketchUp, I was wondering if you can give some more color on number of users, market share in that segment and if you plan on going to subscription or SaaS offering with SketchUp.

So in the SketchUp business, we have many millions of user activations every year. So for us, it's a unique customer base that we measure a user base and customer base that's measured in millions, not, let's say, in thousands. What I think would be good to point out, and we put it on one of the slides, is that we had a release of SketchUp Free. This -- in the fourth quarter. And what SketchUp Free is -- in addition, we had a 2018 SketchUp launch. But what SketchUp Free is, is it's a web-based version of SketchUp. So it's traditionally sold on a kind of perpetual license basis. But this is actually a Web-enabled version of SaaS. And we believe it's strategically very important because that enables us to extend the reach of the technology, the reach of the platform. And so think about how that can be

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in a series of other products and solutions with that form of technology delivery. The benefit of that form of technology delivery as well is it allows us to go SaaS with the model. And it is our intention from a free version of SketchUp into a paid version of that Web-enabled delivered product to go

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so it is very much a part of our plan. That would be measured in a number of quarters to have there not weeks, but that is the direction of SketchUp.

And then also, just in general, on construction software offerings. How many of the new customers and growth are net new versus cross-selling from hardware accounts?

Within the -- so if we take it within the Buildings and Infrastructure segment, we have -- we'll tend to describe it as Trimble buildings or vertical construction and horizontal construction, which really represents civil engineering in construction. We sell both point solutions as well as suites of products. The strong majority of our sales are sold through point solutions. However, when you really go back to this -- our strategy of connecting the physical and the digital worlds, we're creating the digital model that ends up on the blade of a dozer or

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it's the software and the hardware. You can't have one without the other. It's -- if you're in the vertical construction business, and we make the constructible model, the digital model, and then we can take that out to the field to our layout devices where you can actually lay out the points, whether it's a footer or whether it's where the hangers are going to go on an MEP installation, it's connecting that digital with the physical. And so many of our solutions do come with, let's say, a bundled offering. But the strong majority are sold, I'll call them, individually at this point.

Your next question is from Brett Wong with Piper Jaffray.

I wanted to just dig into e-Builder for a quick second. It seems like the multiple is a little higher than what you historically have paid, especially even when you look at some software M&A back in the day. So I was just wondering, what about e-Builder drove the decision to kind of pay up compared to normal and at least on a multiple standpoint? And is that kind of a consistent multiple that you're seeing for other offerings or similar offerings in the space?

Brett, this is Rob. So I'd look at 3 things. I'd look at the strategy, the business model and the competitive environment. And if I start with the business model, it's a SaaS business. So 2/3 of the revenue is SaaS. The rest is mostly the

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so that SaaS revenue stream is attractive, and the reality of competitive environment is that it does have

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revenue stream than you would see with perpetual software or you would see with hardware. Also, about -- with the business model is it's a company with -- last year, with over 20% EBITDA margins, growing over 20%, things growing at 5%. So that rule of 40% you hear about in software companies or SaaS software companies achieving that, and, of course, that will then come into play into a valuation. When you look at the strategy, and I think that's probably really the place I should have started and that's what Steve covered in his commentary, is that we think it helps us achieve a leading position in project delivery and helps us execute on an owner-driven strategy and construction. And think about -- let's say, let's take a building, the construction of a building. Who has the most to gain or lose by that construction being done on time and on budget? It's the owner. And if you look at the lifetime cost of actually occupying a building, 80 -- about 80% of it occurs after you're actually in the building itself. And so design and engineering and execution and build and the whole operational phase means a great deal to the owner over that life cycle, and that strategically is what we -- is one of the things we saw very important and compelling about this business. And then the last I would say is it was certainly a competitive process. This is a great team and a great business.

That's really helpful, Rob. And switching gears to the resource industry or segment, you talked a little bit about some of the strong growth in some of the international markets, but just wondering how North American market's been. And obviously, it hasn't been growing as much. You said everything grew a little bit, but a little more color there would be helpful. And then if you just -- a little outlook for 2018, if you're seeing any uptick in kind of the North American demand would be helpful, too.

Sure. So we did grow in North America. So -- well, I -- yes, I have been focusing lately on talking about Brazil, Russia, Europe and the CIS countries, Asia Pacific, where we have been growing faster than North America. We did grow in North America. We grew in our aftermarket business in North America. Our OEM business also grew in the North America -- North American market. And as you know, the commodity prices remained -- or certainly remained challenged, but we seem to see that the farmers are adjusting to what appears to be a new normal. We see capital being deployed, in other words, machinery being bought. I think the tax change, I think that bodes well going forward in a market where the accelerated depreciation, I think it's the [Section 179], goes further into law. And not only will it cover new equipment, but it actually expands to cover used equipment. And we think that the purchase of equipment versus, let's say, the leasing of equipment has a more favorable dynamic when it comes to the adoption of technology on the machine. So we add up those factors and what we've been seeing in North America, we would anticipate coming into 2018. I still think 2018 in North America, I would tend to -- I believe it'll -- while we believe we'll grow, I think the growth still outside of North America would exceed that of North America.

Your next question comes from the line of Colin Rusch.

Could you talk about the magnitude of the opportunity in autonomy within the transportation space? And then if you can give us some color just on pacing around that, how much leverage you're getting from the experience with mining and agriculture and how that might mix in with ELD opportunity.

Yes. So maybe without being -- again, perhaps being a little bit opaque here because I think it's an evolving scenario for us. So I think that, first of all, this is truly a, I think, a cross-Trimble set of opportunities. The capabilities in Construction, Agriculture and Transportation, I think, really represent something of a unified whole from a technology perspective, and we can apply that accumulated technology base to various vertical markets. I would say, in the shorter term, the greater opportunity is probably -- for Trimble, particularly in an end-user sense, is probably more in the off-road construction and agriculture. I think that's the place where we can maybe have the more persuasive influence. I think in transportation, there are any number of opportunities for us. I think driving a truck -- tractor trailer across open road in Colorado is one thing. I think there is a whole set of complexities about the final mile that make the application quite difficult and kind of looking at it holistically. I think in transportation, long-haul trucking, it would be aspects such as the final mile where we may have something particular to say there. But we're engaged with OEMs. We're engaged kind of with end users in transportation. I think the other thing not necessarily -- taking the right -- wider realm of transportation, including passenger vehicles in it, again, a place where Trimble has an opportunity to play in that mass-market is really in terms of providing precision location. I think in the last 18 to 24 months, there's a greater appreciation that it is not just about relative position but also absolute position in terms of where that passenger vehicle is, what lane specifically is that vehicle in. When we start to talk to that level of precision, Trimble, through its position augmentation services, space-based augmentation services, has something of value to provide into the application. So right now, it's a relatively broad-based kind of category for us in terms of autonomy that includes Construction, includes Agriculture, includes a couple of aspects to Transportation. Our view is not -- that this isn't it about a specific endpoint. I think our general corporate view is that this is really a continuum. There are a number of stopping points before we really arrive at a complete autonomy, as in no operator, no driver sort of autonomy. But that is really a step -- a series of steps of increasing automation, and that's really the way -- that's our construct and that's how we're approaching it. And I think it's the -- generally, the healthiest way for us to approach it as a company.

Okay. I'll probably take some follow-ups off-line. And then could you talk a little bit about pricing dynamics within the software market for construction? Are you seeing any meaningful price pressure at this point? And is the e-Builder acquisition, in part, defensive in any capacity?

No. First of all, I would describe e-Builder as basically looking to the market of the future. And I would see this as opportunity. And really, there are no particular defensive aspects to the e-Builder transaction. I would say is I don't think that there are any, what I would call, notable pricing pressures in construction software at this point in time. I think in some cases, there is a tendency to bundle, okay, which kind of a line item level might represent some pricing pressure. But in general, I think the -- this is more about opportunity and upside and a value sell more so than kind of pricing pressure, as in a discrete sale. So I think it's more about selling value and, okay, pricing for value more so than, let's call it, pricing pressure for kind of a line item and an invoice.

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

Thank you, Jesse, 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.