Trimble Inc. (TRMB) Q1 2015 Earnings Report, Transcript and Summary

Good afternoon. My name is Caitlin, and I will be your conference operator today. At this time, I would like to welcome everyone to the Trimble's First Quarter 2015 Earnings Call. [Operator Instructions] Jim Todd, you may begin your conference.

Good afternoon. I'm here today with Steve Berglund, our CEO; and Francois Delepine, our CFO. Before we begin, I'd like to remind you that the forward-looking statements made in today's call and the subsequent Q&A 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-Ks and 10-Qs or other documents filed with the Securities and Exchange Commission. During this call, we will refer to a press release which is available, along with additional financial information, on our website at www.trimble.com. The non-GAAP measures discussed in the call are reconciled to GAAP measures in the tables to our press release. Now let me turn the call over to Steve.

Good afternoon. First quarter results were consistent with the narrative from the fourth quarterly call, although we fell outside of our revenue guidance in the quarter. Three months ago, we expected the first half of the year to be a challenge, which is turning out to be true. We also expect the second half results to demonstrate meaningful improvement, which continues to be our expectation. In this case, the definition of improvement would be a return to high single-digit revenue growth and a return to an operating margin converging on 20%. We had a revenue surprise in the quarter, which is emphatically not part of our historical culture. We are addressing the issue with a series of organizational actions I will explain later. As anticipated, the weakness in agriculture continued, although we believe our ability to forecast the business is better than it was in the second half of last year. We obviously need to be wary of market volatility, particularly among the agricultural OEMs, but we think we are seeing some signs of stabilization. We are currently forecasting our agriculture revenue in the second quarter to be down from last year. But absent the OEM inventory effects of 2014, we see agriculture being closer to flat year-to-year on the second half of the year and into the first part of 2016. Even if they course our -- agricultural machine sales are down by another 15% in the second half. The dollar further strengthened against the rate we had used to setting guidance which pushed revenue down. It had a differential impact on earnings at the segment level, although the earnings impact at the consolidated level was relatively small. The weather in the Northern and Eastern U.S. in the first quarter had a significant effect on those regions' construction and geospatial sales and postponed the typical search we see in the final 4 to 6 weeks of the first quarter. Against total company revenue, this is not particularly material and that it represents about 1% to 2% of revenue, but the exchange rate effect and the weather effect, in combination, pushed us out of the revenue guidance range. The primary driver, which drove our revenue down in the quarter, was a nonanticipated drop in geospatial sales primarily in North America. Some of this was the impact of weather in the Northern and Eastern U.S. and some was exchange rates. Given that the drop was centered in North America, there is no macroeconomic rationale that explains the drop. In addition, market share data shows us to be either in stable or improving market position. The decrease is centered in the oil-producing regions and the oil price decline appears to be the causal factor. Last quarter, we described the primary expected impact on us of the oil price shock to be approximately 1% of total company revenue or $25 million per year. This judgment appears to remain valid. What we did not adequately anticipate were the secondary effects. The oil bust has put a damper on the oil-producing regional economies and has caused a generalized pull-back of investment activity. This has played out, in our case, by a sharp reduction in inventory in the channel in certain regions. Although the market may normalize later in the year, we have added more conservatism to our geospatial expectations. Construction, the other large component of E&C was also impacted in the quarter by exchange rates, weather and regionalized secondary effects of the oil price, although the oil price effects are much less severe than in geospatial. The heavy civil component of construction also continues to be negatively impacted by the mediocre international economic environment, most particularly by Australia. The fundamentals remain strong, and we expect to regain traction as we work through these short-term issues. The Mobile Solutions segment performance showed improvement in the quarter, and we expect even better performance in the second half, largely based on the Transportation & Logistics business. At the moment, this segment is the best-performing element of Trimble. Europe, both North and South, is showing more buoyancy than we have seen in some time aside from the exchange translation effects. An offsetting factor is the trend for Russia, which continues to deteriorate, and the negative outlook for Brazil. If the European trend develops, this would be meaningful for us since Europe constitutes over 1/4 of our revenue and has not been a significant constructive part of our story for years. It is too early to be conclusive since there are competing European positives and negatives, the ongoing Greek crisis being the primary negative and lower energy costs and a traded damaged euro being the positives. Last quarter, I described the need for improved performance from specific elements of our business portfolio. These are agriculture in the Field Solutions segment; the real estate and workplace solutions business, which includes Manhattan Software and E&C; and construction supply and Field Services management, which are in Mobile Solutions. Beyond the obvious impact of agriculture, the combined effects of these businesses currently represent meaningful trades and current results, and create potential future opportunities. We believe all of these are growth businesses and add to the Trimble franchise, and expect to see all of them demonstrate meaningful progress in 2015. Manhattan Software should show a lift later in the year as we resolve the initial post-acquisition revenue recognition accounting challenges. The construction supply business is anticipating growing strength during the year based on the improving economy in the U.S. and a stronger product portfolio. Field Solutions and the Mobile Solutions segment is looking at a strong orders pipeline, which leads to a trend of improvement in the second half of the year and a stronger 2016. Although we stumbled in the quarter against our expectations, we have a number of recent examples of strategic process -- progress that foreshadow future revenue. Let me identify 3 of them. All 3 of these announcements are based on capabilities that have been assembled over the last several years through a combination of internal development and selective technology focused to acquisitions that have created strong franchise effects. The first is the public announcement of our win of our Beijing new airport project for what the customers calling a construction information system. Beijing's new airport project is designed with a target of 72 million travelers and 620,000 flights in 2025, and represents one of the most challenging and highest profiled projects to be awarded in 2015. The project has an explicit objective of establishing a new standard in digital construction of large strategic projects. Trimble won with a web-based construction workflow management solution that allows construction operations to be monitored real time. This project should provide meaningful leverage as a reference account and highlights that Trimble has a competitively unique portfolio of capabilities centered on the constructible model that can move the needle on construction site operations. We also announced during the quarter a new multiyear alliance with Paccar, the manufacturer of trucks, including the Kenworth and Peterbilt brands. This will significantly boost our T&L subscriber base in the Mobile Solutions segment and have a meaningful impact on revenue later in 2015 and throughout 2016. It involves installing Trimble hardware in the factory in every Kenworth and Peterbilt truck with an MX engine. Trimble will provide remote diagnostic services for a monthly recurring fee. This opportunity is attractive in its own right. But beyond the base point capability, it provides a significant platform for us to upsell additional fleet management solutions. Just as we talked about the next fleet problem with construction machines, the same problem exists in transportation. The Paccar platform gives us a head start in solving transportation's next-fleet challenge. This win can be attributed to the synergistic effects of Trimble's unique ability to bring together the elements of mobility, enterprise and analytics into one bundle. Another event that has longer-term meaning related to the announcement yesterday that Microsoft and Trimble are working together to develop a new generation of tools integrated with Windows HoloLens holographic platform on Windows 10, which is intended to improve quality, collaboration and efficiency in the design, construction and the operation of buildings and structures. Proof of concept for the solution was demonstrated yesterday at Microsoft's Build Developer Conference in San Francisco. Augmented reality, which Microsoft calls mixed reality, is becoming real and can have a major impact on how work gets done. The ability to juxtapose models' information and virtual collaboration in the context of the real world and do this in a natural comfortable way is all new. The technology is applicable in many of Trimble's markets, but the initial focus will be in construction and geospatial. We contemplate things like facilities managers who can see all of the building model elements and status as they walk through a building or the office designer who can take a workstation out of Trimble's 3D warehouse and digitalize it right in the workspace where it will be used. In Microsoft's published video, you can see SketchUp in use with HoloLens and an integration with Trimble's V10 imagery capture product. A link to the video is available on Trimble's website. While the demonstrations yesterday highlighted Trimble's technology capabilities and were not a product announcement, they did represent Trimble leadership and what will be an important applied technology and our intention to be a leader in the commercial development of that technology. Although we expect some natural lift in the second half of the year, we are not satisfied with our current management performance and are taking actions to improve it. We have therefore launched a number of changes to improve our ability to deliver against expectations, maintain margins and execute strategically. In the last 3 months, we have taken significant cost reduction steps by reducing headcount by over 115 with accompanying steps to reduce other costs. The magnitude of the recent cuts is over $15 million annualized. Our business model supports the expectation that we can operate with an aggregate 20% non-GAAP operating margin, and we will take actions to regain that model. In the last 3 months, we also undertook a significant reorganization. This includes changes at multiple levels of the organization, including senior executives. This change in roles and alignments is intended to improve both our short term and strategic execution with a singular focus on making the numbers. The organizational changes have concentrated more authority with individuals who have a history of execution. The realignment also recognizes the changing nature of Trimble, which is rapidly becoming more focused on software and solutions, away from hardware, and therefore requires different skills and capabilities within the management group. Although we have had a plan of organizational change, the current challenges helped motivated us to accelerate the process. Our focus is on aligning individuals within the right structure to enable effective execution of a market strategy that remains as robust as ever in terms of producing growth. At the senior management levels, let me identify both recent and pending changes, all of these are direct reports to me. Peter Large, who is responsible for Trimble's distribution channel strategy development, departed in December. Last week, we announced that Chris Gibson, a long-term Trimble sector head focused on the geospatial businesses, will take over the significantly expanded role with specific mandates to accelerate our development in emerging geographical regions, professional services and key accounts. Bryn Fosburgh, who has led the sector focused on the construction businesses, will add the geospatial business to his portfolio. Mark Harrington, who leads the sector that includes agriculture, will retire as planned in the middle part of the year. We have launched a search for a successor that will include both internal and external candidates. During the last month, Mike Scarpa has joined us as Chief Human Resource Officer. He comes with experience at HARMAN electronics, ABB and GE. His primary focus will be on developing the skills and organizational processes consistent with a more complex environment. We continue to expect to establish an inflection point at midyear and to reestablish and up into the right revenue trend in the second half of the year after 3 quarters of failing to produce growth. We believe our forecast is sober and possibly conservative, although it needs to be quantified by the possibility of any new shocks from the environment. Let me identify the discrete elements of the analysis for the second half. First, at current exchange rates, we will start out 4% to 5% in the hole from a revenue perspective. Second, the acquisitions already enhanced should produce 4% of growth. Third, we are assuming our agricultural sales to be basically flat in the second half of 2015 year-to-year. We believe this is an objective view after 18 months of declines in our agriculture revenue. It does not assume any kind of recovery in commodity prices or the equipment market. If we can achieve stability in our base business, we can then start to reintroduce the concept of incremental growth in 2016 through the development of new product categories. Fourth, we are anticipating strong growth in the Mobile Solutions segment in the second half, much of which is already in backlog. For the rest of the company, we are forecasting relatively modest organic growth at least until we better understand the full secondary effects of the oil price impact. The combination of these effects leads to a view of the year that is consistent directionally with the outlook we described last quarter. Exchange rates and the full effect of the oil price shock have added additional headwinds, but the signs from Europe and a sense of the stabilization in agriculture may offset some of that. We have stumbled recently on short-term results, but the 3-year view on potential remains unchanged. We simply need to execute. Let me turn the call over to Francois.

Thank you, Steve. Good afternoon, everyone. Before getting to the numbers, please note that unless otherwise indicated, the operating results I will discuss will be on a non-GAAP basis. The reconciliation from GAAP to non-GAAP numbers is in our earnings press release along with the financial data by segment. Unless otherwise indicated, growth rates are meant to be year-over-year growth rates. So now let's first cover the first quarter results. Q1 total revenue was $583 million down 4% year-over-year. Currency translation added approximately 4% year-over-year unfavorable effect roughly offset by growth from acquisitions. Relative to our original expectations for the quarter, the shortfall in revenue came primarily from FX deterioration during the quarter, combined with softness in our E&C segment, largely driven by weather and oil and gas weakness. We estimate that this weather and oil and gas weakness added 3% to 4% year-on-year unfavorable effect. Our Field Solutions segment was also soft, as expected, with agriculture showing some signs of stabilization. Now looking at our revenue by segment. Engineering and Construction segment revenue was down 3%. Currency translation added approximately 5% unfavorable revenue effect year-over-year, roughly offset by growth from acquisitions. While some of the portfolio did well, our results in E&C, in particular in geospatial and to a lesser extent in heavy civil, were severely impacted by weather and oil and gas weakness. More specifically, Trimble Buildings growth was strong. Geospatial revenue was unexpectedly down in the mid-teens, impacted primarily by FX, weather and weakness in certain regions with significant oil and gas exposure. Heavy Civil was down single digits impacted by FX, lower sales in Canada, also largely attributable to oil and gas, as well as continued weakness in Australia. Overall, the estimated effect of weather and oil and gas was approximately 7% to 8% unfavorable on the E&C segment. The divestment of a distributor also added unfavorable impact on the E&C segment of approximately 1% year-over-year. Field Solutions segment revenue was down 17% year-over-year, due primarily to weakness in the agriculture business. Agriculture was down in the mid-teens but showed signs of stabilization in the market that remains quite difficult. The agriculture weakness was widespread, but continue to be more pronounced in OEM factory installed. Currency translation had approximately 5% unfavorable year-over-year impact in the Field Solutions segment. Acquisition had a minor positive impact. GIS was also down significantly year-over-year in that segment. Mobile Solutions segment revenue was up 8% year-over-year and would have been up double digits without the 3% negative FX impact. The Transportation & Logistics business growth was strong in the mid-teens. Segment results were also modestly impacted by the divestiture in Q4 of a nonstrategic business. Advanced Devices went up 3% in the first quarter. Now looking at our revenue by geography: 53.1% of Q1 revenue was from North America, 25.2% from Europe, 15.2% from Asia-Pacific and 6.5% from rest of the world. North America was down 4% year-over-year. The largest impact in North America was the agriculture weakness in the U.S. with the Field Solutions segment down over 20% year-over-year. E&C was down single digits in North America, driven primarily by weakness in regions with significant exposure to oil and gas and, in particular, Canada. Europe was down 5% year-over-year, primarily impacted by currency. However, we're seeing improving trends within Europe in constant currency terms. Currency had approximately 14% unfavorable impact year-over-year. And adjusted for this impact, Europe grew approximately 9%. E&C, Field Solutions and Mobile Solutions in Europe all grew year-over-year in constant currency terms, with the positive shift in particular for our agriculture business. Russia, as expected, continued to be down significantly overall. Asia-Pacific was up 1% year-over-year. China continued with solid growth. India growth accelerated albeit of a relatively low numbers. On the flip side, Australia remained weak and was down significantly year-over-year. Currency also had an approximately 2% unfavorable impact year-over-year on Asia-Pacific. Rest of the world was down 10% year-over-year. The Middle East and Africa were down due to a challenging comp from first quarter 2014. South America was up, positively impacted by a rebound in agriculture results. The impact of currency on the rest of the world was minor. Now turning to revenue by type. We're continuing to see a shift in our portfolio towards a more significant mix of software recurring revenue and services. In Q1, product revenue was 69% of total, service revenue was 17% of the total and subscription revenue was 14% of total. Product revenue, which includes both hardware and software licenses, was down 9% year-over-year. Within that number, however, software license revenue grew. Service revenue, which includes maintenance support, the extended warranties and professional services, was up 8% year-over-year, with growth driven primarily by Gehry Technologies, Manhattan and Amtech, which were acquired in the second half of 2014. Subscription revenue, which includes SaaS and other subscription services, was up 18% year-over-year. The subscription revenue strengths reflect the combination of organic growth and the impact of acquisitions. The majority of our service and subscription revenue is recurring in nature, and recurring revenue overall was also up significantly year-over-year. Non-GAAP gross margins decreased to 56.8% in the first quarter compared to 57.6% in the first quarter of 2014. FX had a negative impact as some of our products sold at foreign currencies are sourced in U.S. dollars. Product mix also had a negative impact to gross margins, particularly in E&C, where the positive impact of higher subscription revenues were negated by unfavorable mix in the product revenue category and an increase in professional services. Q1 non-GAAP operating income was $96.8 million or 16.6% of revenue, as compared to 21.2% of revenue in the prior year. Total company operating income percentage was negatively impacted by a number of factors. The major impacts were lower revenue in E&C and agriculture and, to a lesser extent, recent acquisitions. The impact of currency translation in company operating margins was small. We have a large cost base in Europe and other countries, which mitigates the impact on operating income. As we discussed last quarter, recent acquisitions are performing to business expectations and the negative impacts of acquisition accounting will dissipate after the first half of 2015. The non-GAAP tax rate for Q1 2015 was 24%, which we currently expect to see for the remainder of 2015. Q1 net income of $72.7 million was down 29% as compared to Q1 '14. Diluted earnings per share were $0.28, down 28% as compared to Q1 '14. As Steve mentioned, we've been taking steps to reduce expenses which should materialize mostly in the second half. Q1 operating cash flow was $107 million and up 29% from Q1 '14. Strong cash flow performance relative to net income resulted from lower working capital. Turning to the balance sheet. We finished the first quarter 2015 with $146 million in cash. Account receivable was $383 million with day sales outstanding of 60 days, and ending inventory was $276 million. Deferred revenue increased to a record $282 million, an increase of 22% year-over-year. The increase in deferred revenue primarily reflects changes in the mix of our revenue towards more software and subscription offerings and include the impact of acquisitions. That decreased by $75 million in the quarter ending at $663 million versus $738 million at the end of the fourth quarter 2014. Our debt-to-equity ratio and leverage ratio, the gross debt to trailing 12-month EBITDA, remained at comfortable levels in the quarter at 0.3x and 1.35x, respectively. During the first quarter, we repurchased 478,000 shares of Trimble common stock for a total of $12.6 million. We repurchased a total of 3.7 million shares for $110 million over the trailing 12 months. From a capital allocation standpoint, our first priorities remain to fund the business both internally and through acquisitions. With a combination of strong operating cash flows, our near-term acquisition pipeline and a comfortable leverage ratio, at this point we expect to be more active with share repurchases in Q2. Our stock repurchase program has a remaining authorization of $237 million. I will now turn to our guidance for Q2 2015. We expect second quarter revenue to be between $570 million and $600 million and non-GAAP earnings per share of $0.23 to $0.30. Non-GAAP guidance excludes the amortization of intangibles of $40 million related to previous acquisitions, estimated acquisition cost of $4 million, the anticipated impact of stock-based compensation of $13 million and $5 million in anticipated restructuring charges. Second quarter non-GAAP earnings per share guidance assumes approximately 262 million shares outstanding and a 24% non-GAAP tax rate. This non-GAAP tax rate assumes that the R&D tax credit will be reenacted for 2015. Our Q2 revenue guidance assume that we continue to see the headwinds we experienced in Q1 with the agriculture market and the oil and gas market. Q2 revenue guidance also assumes an unfavorable currency translation impact of approximately 5%. In addition, Q2 '14 benefited from a positive revenue recognition event involving a distributor, also creating an unfavorable revenue growth impact of approximately 2%. As Steve discussed, we're taking a number of cost actions to ensure that we can better manage operating margins. We expect these actions to have a minor impact in Q2 and a positive impact in the back half of 2015. We expect larger-than-normal restructuring charges in the quarter associated with these actions, as I mentioned above. With that, we'll now take your questions.

[Operator Instructions] Your first question comes from the line of Richard Eastman from Robert W. Baird. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Steve, could you just kind of walk through maybe the setup here a little bit on the mobile side of the business, in particular T&L? Obviously, these EDL mandates that have kicked in this summer it feels like we should be quite well positioned there with PeopleNet, TMW and some of our relationships that we have had in place. So maybe we could just talk how you see that unfolding and if your enterprise-level approach gives you an advantage in that market.

Yes, I think you're right. I think that we consciously attempt to build what's called a franchise about mobility and enterprise and actually analytics. Within this mix, we have a pretty robust and growing analytics business, which gives us, I think, in many cases, a differentiated advantage as well. So I think that up until quite recently, it's taken time to bring together the elements, so we were operating maybe more at the PowerPoint level than the reality. I think the Paccar deal, for example, shows the relative power of kind of having all the elements within one umbrella and being able to speak to mix and match to situations. So I would say that in terms of capabilities, we are unique as a company. I think that as that mandate and just the drives for productivity and driver safety in general and such play out as we have the ability to craft better solutions than anyone else. And in reality, over the last 6 to 9 months in particular, at the product level, we have integrated the PeopleNet and TMW capabilities. And what you'll see more over the next 12 to 18 months is a more unified, more integrated approach to the marketplace. So we think we have an advantage. We think we're executing on that advantage and we still have some things to do but I think we're in good shape. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then can I just one follow-up here? Just -- can I clarify a comment that I think that you made at the beginning of your presentation, Steve, where returning to kind of normal footing here in the second half of the year suggest I think you saves mid-single-digit second-half revenue growth inclusive of FX and operating margins around 20% or at least that's the target? Is that the goal that's here for the second half?

Yes, I was on script. I said, high-single-digit revenue growth, not mid-single-digit revenue growth. Yes, and that's inclusive of the FX effects.

Right. And the 20% was a moving towards 20%. Richard C. Eastman - Robert W. Baird & Co. Incorporated, Research Division: Okay. And Francois, just one question for you and then I'm off. But in the E&C segment, can you give us a sense of what the amount of revenue that was deferred off the acquisitions either in dollars? Or potentially, or possibly, can you tell us what the operating margin would be exclusive of the deferred revenue, in other words, if you include the deferred revenue in an adjusted number, adjusted revenue number?

Yes, so let me try to answer that. I'll give you some elements for the answer, which is that we continue to have a little bit of deferred revenue from the acquisitions on the balance sheet. But Q1 was a much more normal quarter compared to Q4 in that respect. And overall, the acquisition, I would say, had about a 2-point negative impact on the sector OI.

Your next question comes from the line of Jonathan Ho from William Blair. Jonathan Ho - William Blair & Company L.L.C., Research Division: Just wanted to talk a little bit about some of the changes that you made at the executive level. And can you maybe give us a sense of what those changes might bring in terms of either strategic or execution changes and sort of the time frame for those to have an impact on the business?

Well, I think this may not be what's called a comprehensive view. But I think, first of all, in terms of impact, I think the idea here is to in some ways have an immediate impact, both an immediate impact and a longer-term impact. So I think this is both, if you will, a little bit tactical as well strategic. So I think that we've missed a number of quarters here within the last year. I think part of this was to kind of maybe recover a little bit of the historical Trimble culture in terms of singular accountabilities for numbers. And so some of the changes down in the organization related to kind of realigning sales management and getting a stronger accountability for the number in the hands of people that have kind of demonstrated the ability to both forecast the number and deliver the numbers. So some of it this is just, if you will, hard-knock short-term accountability and a kind of a reemphasis on that. Now when I talked about the Chris Gibson reassignment, that is also a bit strategic when we talk about getting a little bit more of a hard-charging focus on the emerging economies, whether it'd be in China or whether it'd be in India or the like, is that we've had a dispersed accountability for geographies spread among a number of people. Chris will be responsible for the country managers in those places. And the idea here is, this is about an organizational change as well as, let's call it, a process change. But the idea here is to get more specific focus on what we're doing in countries like India and to align the organization around both short-term and long-term actions. I also mentioned relative to Chris' key accounts, which is a significant success criteria for Trimble in the next few years. Just as we landed the Beijing job, there are other jobs out there we need to bring singular organization focus on those. And then as part of the key account effort, more focused on professional services, so we acquired Gehry Technologies, which gave us a step function in professional services, so that will report to Chris. So part of this is to, if you will, create a single point of focus within the company for being able to concentrate resources where we need to do that. And then I think part of the next is this is a long-standing management group is -- I think times like this where we have missed is a good time to say, "Okay, have we gotten a little more comfortable with our historical patterns of management?" And so I think shaking that up. So in terms of the Mark Harrington retirement and his replacement, I think we will consider bringing in an outsider, in part, just to kind of liven up the diversity of the viewpoint within the senior group. So I don't know that there are any, call it, dramatic step changes involved, but I think this is to improve focus and, in particular, improve focus on accountability around the set of numbers. Jonathan Ho - William Blair & Company L.L.C., Research Division: Got it. And then just as a follow-up. I mean, as we look at the agriculture business, both the results this quarter and sort of your expectations for improvement towards the second half of the year, what kind of surprised you this quarter outside of the currency impacts? And maybe explain some of the delta between your internal forecast and maybe the outcomes? And how do you sort of think about this across both the aftermarket and OEM channels? And particularly, as you look forward, how do you sort of reconcile the revised guidance with that perspective?

You're talking about agriculture alone or... Jonathan Ho - William Blair & Company L.L.C., Research Division: Specific to ag, specific to ag.

Okay. So first of all, we were on our number for the quarter. So if you will, there were not -- no kind of net changes. We were on the number that we have forecasted for agriculture. What gives us some confidence is that we're getting control of our market model in agriculture. So I don't think there were any significant negative surprises either coming out of the OEM realm or elsewhere. I think it was more or less as expected, some pluses or minuses. Now the thing is, kind of peeling back the onion without expressing a premature kind of optimism here, there are a number of things happening within agriculture that it provides some level of improving confidence. So if you look at the performance of channels within agriculture, the best performing channel is our own aftermarket channel. Second comes the OEMs' channels, and third comes OEMs. So in a sense, it's our own channel which gives us a little bit more of maybe a picture of what is really possible in the market, not for technology, not for equipment, that channel is performing relatively better again. And then the emerging markets geographically are also outperforming the rest. So there are a lot of moving pieces here and some of them are actually positive. So still a volatile market, it's still uncertain. We are still assuming as part of our market model that equipment sales will be down in the second half of the year, year-to-year. But we think that our particular set of circumstances enables us to, say, play flat year-to-year, and we would see that continuing into 2016. And then we can hopefully start to engineer maybe some upside movement once we achieve that kind of stability.

Your next question comes from the line of Paul Coster from JPMorgan. Paul Coster - JP Morgan Chase & Co, Research Division: Steve, so you had this big win in Beijing, what was the magnitude of it? And what can you tell us about the pipeline of software-related sales, and to what extent hardware sales come attached?

Yes. So given the sensitivity of this one is -- let's just describe it as being 7 figures with, what I would call, meaningful tag-along capability. So we got the kind of top of the mountain sort of territory here that is a large project. There'll be a lot of tag-along with it and now we're well positioned to capture that as well. But 7 figures there. I would say the software -- kind of the software-oriented pipeline in terms of the number points of engagement around the world for this kind of project is growing. It's not a needle-mover in 2015. Hopefully, in 2016, it becomes a much more significant part of the conversation. And I think that exactly what the bundle is in any of these deals is circumstantial, but I would say Trimble has the ability to walk into a C-level suite of a contractor and offer up a comprehensive solution that involves software and hardware. So I would say the significant majority of these sorts of arrangements would involve both hardware and software simply because it's all bundled. The hardware isn't in reality, just a note in an information that works. So the hardware would typically go with the software side. I would say, without being particularly specific, is the pipeline is growing, the points of engagement is growing. And again, back to the organizational issue. We're organizing more aggressively around the idea of pursuing the big project deal, such as Beijing deal. Paul Coster - JP Morgan Chase & Co, Research Division: Well, just going back to the pipeline, if I may. Do you have dozens or hundreds of potential deals in the pipeline? And if there's a medium size to these deals, what would it be?

Well, I think probably in any given 6-month period, there are hundreds of conversations. But probably to bring some level of reality to it, if you counted the number of large -- medium to large projects around the world at any point in time, there are probably dozens in some sort of serious conversation where there's some level of planning taking place. And again, I would say medium-size would be pretty -- kind of variable. But I would say it is for a large project, it would be kind of typically. And depending on scope, depending on circumstances, would be again kind of 7-figure numbers.

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

So you had a big win with Paccar. I'm wondering if you could talk about how you expect the timing on the Navistar sourcing decision, when do you expect that to play out. And then just broadly touch on how you feel about your opportunities to get on other platforms as the factory default. In U.S. truck, I think you have a relationship with Volvo, but they've been single sourced with a competitor until now. Can you just flesh out the opportunity set to the extent you feel comfortable?

Well, my comfort level is not particularly high here. I mean, these are -- any conversations we are having is, I think, pretty confidential and I don't want to, by talking about it, create a dynamic here where we're irritating the other side. So I'm going to take a pass, basically, on the question and avoid the question simply to avoid getting myself into a problem here. But let's just say that we are engaged with the number of players and sometimes elements of it are not press releasable, but I think I'm just going to have to tell you to wait for the press release.

And then separately, on Field Solutions business, the outlook flat ag revenue in the back half of the year, can you just talk about what kind of tractor production environment you're calibrated to? So CNH, I know you're in lockstep with them. They're talking about a 40% production cut in large ag and meaningful excess inventory at the dealer and company levels. So can you just calibrate us when you say flat ag in the back half of the year? What kind of tractor production environment are we thinking about?

Yes, so I think that in terms of tractor environment, the numbers seems to be shifting around over time in terms of -- if you listen to the major producers, it does seem to be shifting around. I would say it's basically kind of if I were to name a number in terms of implicit in our assumption or our set of assumptions, they lead to our own view of the market. We're assuming kind of the year to be down, the first half of the year to be down probably in the 30% to 30%-plus realm for tractors. The second part of the year, we would expect as the year -- as manufacturers lap themselves, we're kind of more on the 15%, 20% down range. So as I said in the script is that we're kind of in our market model. We are assuming that, in general, tractor sales will be down on the order of 15% in the second half of the year. So there seems to be a little bit of a census that maybe the numbers haven't been quite as bad as they were originally forecasted in terms tractors out the door. There is still too much inventory in the channel for the manufacturers, which is not a secondary sort of consideration for us, mostly what we're interested in the sell-through to the ultimate market. The channel inventory doesn't matter particularly to us since we had our own channel inventory adjustment in the second half of last year. So I would say, those are kind of what's implicit in our numbers and that's what our market model is assuming, and then we've got a whole model built around kind of the aftermarket. And again, right now the aftermarket is significantly outselling the factory in terms of technology.

And lastly, the 15% to 20% end market outgrowth that you're looking for, for your business to be flat in ag in the back half of the year, are there any new product contribution in there? Is there an irrigation piece in there? Or any new products that you're rolling out on the aftermarket side, because I guess it's been a while since we've seen that level of outperformance in ag?

Yes. So we are again -- as I said, we are seeing some points of life. There are not enough of them and they're not big enough to really kind of wave the flag too much. But, for example, we came out with a new display in the first quarter, the TMX. We did outperform our expectations in the first quarter on that product. So during the course of 2014, we were talking about the ability to outperform the market based on new product introductions and new product category -- new product categories being introduced. The TMX display, it kind of gets lost in the shuffle because of the big moves in numbers. For example, that did beat our quarter 1 expectations. The Connected Farm Advisor, which is a piece of software we put out there. It's a subscription-based. Okay, that is still very small, not necessarily worth trying to quote a set of numbers on it yet. But okay, we are seeing uptick there. And you talked about the irrigation product. We now have built out our direct sales force on the irrigation. There's a lot of engagement. We're going to have to see how quickly that monetizes. But certainly, against the scale of involvement on the irrigation that we had even 6 months ago is substantially higher. So that is all resonant in the second half assumption or the second half forecast. They're not big numbers, still guidance that drives the numbers. But all of that is resonant in that number. So it's a lot of moving parts, but in aggregate, we think that provides upside. Now just in terms of the raw numbers, the year-to-year comparison during the second half of 2014 we were subjected to OEM significant inventory adjustments where we saw demand just absolutely in a matter of days just fall to nothing. And so if nothing else, in the second half of the year, we'll have a much easier comp situation. But even beyond that, we see kind of this environment continuing into 2016 at this point.

Your next question comes from the line of Ryan Connors from Boenning and Scattergood.

I wanted to talk a little bit about this aftermarket versus OEM dynamic that you talked a lot about here. And I guess there's a lot of talk about a shift going on in the industry from kind of the traditional aftermarket sales and precision agriculture into more and more of an OEM embedded type model. And much of this happened kind of in the automobile industry, for example. And yet obviously, you're talking about aftermarket being relatively strong. What's your view, Steve, on that shift? Is it -- is that happening in the industry or not in your view? And if so, what is the impact of that on the business?

Yes. So I think, certainly, from a secular strategic standpoint, this has been our assumption all along, is that in terms of the base capability kind of the box and the receiver, GPS receiver, that's in agriculture and it's not nearly as true as in construction, just as parenthetically. But in agriculture, yes, so the base capability, the ability to -- the box and the receiver will continually move more towards a factory install. Now our longer-term strategy is that's fine, we'll participate with the OEMs on that. Where we see the bigger dollars down the road is actually selling software and data-related services that utilize the factory installed capability for positioning computing power. So our model is more expansive than just being a provider to OEMs. Now here in the short term -- so that's a long-term trend, and so there's a secular trend, we acknowledge that, we accept that. But here in the short term, significant parts of the emerging world are still aftermarket. So you go to China, you go to places like that, it's aftermarket. Those are actually, at the moment, the more dynamic markets where we're seeing significant take-up. Our OEM channels were down in the quarter kind of more than 20%, whereas our channel, the Trimble channel, was down single digits. So there is -- at this moment in time, there is a significant difference in kind of just performance levels. And maybe that's to be expected is that a farmer if we achieve some level of stability -- now farm sentiment is still pretty rocky. The farm psychology is still pretty negative. But if a farmer feels any kind of stability, the farmer may choose to defer the investment in the new tractor for a year or 2, whatever, they just postpone it. Whereas with the new feature set technology, and Trimble has been coming up with -- continually with new features, features on our products, the farmer may decide to retrofit the existing tractor with a new version of the technology. And I suspect that's part of the story for why Trimble's aftermarket is doing reasonably well. We should be going back in either upselling or retroselling an installed installation because maybe after 5 years, the feature set has expanded enough to make it attractive for the farmer to upgrade an existing installation. So there will always be an aftermarket either selling kind of extended versions of the technology or selling software and data services. So it's not as though the factory is going to push the aftermarket completely out of the game. They will continue to exist side by side.

Got it, that's helpful. And then my other question just had to do with the management changes. It seems like you specifically tied the management shakeup to what you'd called hitting the numbers in sort of internal accountability. And yet, obviously, you're facing some big external headwinds. During the release, you talked about oil prices, ForEx, strong dollar, you still had the cyclical issues in agriculture. Those would seem to be external factors where you're sort of implying that there's internal execution has been the issue and you have to make some changes. Can you just talk about kind of the rationale for the big shakeup and those 2 relative factors?

Well, I think you're right. I think we could be pointing at the external factors as being the prime drivers. At the same time is, if you look at Trimble today versus Trimble 5 years ago, in terms of they make up the company, they were significantly more complex equation than we were 5 years ago, much more software content, professional services, different elements. And so I think that we've always had the view is that we have to step up to a new level as a company to basically be able to execute on things like the Beijing job, which requires kind of a level of focus and a level of collaboration in the company that we haven't historically had provided. So I think there's always been the view that we needed to transform. I think just the current situation and the fact that, I guess from my standpoint, I think we need to be a bit more intimate with the market than maybe we've demonstrated here in the last 2, 3 quarters. I think maybe we should be a little bit more -- we should have seen some of the ag stuff coming. We should have seen elements of this oil and gas thing coming. So I think that it's a good time to accelerate things, accelerate the strategic moves into the present. So I think that part of that is the world may not provide us -- do us any favors here in the next few years. I think at some point that we execute whatever the conditions that we see. So I think we're getting the opportunity to make sure that we're ready for whatever the world shows us here in the next few years.

Your next question comes from the line of Eli Lustgarten from Longbow Securities.

Can I get one clarification because you said something in the end which struck me as funny? Francois, you said you are assuming the R&D tax credit is being reinstated. Does that give you at about 1% lower tax rate? Is that the magnitude that you...

Yes, roughly. That's roughly right.

Okay, just want to make sure I understood that. First, can we talk about the profitability of Field Solutions? I don't have any problem with your forecast, really, in ag and you're doing a fine job. I guess I was impressed by the profitability in the first quarter of Field Solutions with the weak volume, that you sort of reestablished sort of almost a baseline kind of profitability. Do you have some idea where that's coming from and with the new products, that if indeed you hold the improvement and outperformance that you expect in the second half that those margin can actually course back up to the 40% level?

Yes. I mean, we saw strong gross margins pretty much in line with last year. And also we worked in reducing expenses a little bit, and the run rate is a result of the drops in -- drop in revenue. Other than that, yes, we had some new products coming in Q1. Some of those were associated with a small price increase that I think helped maintain those gross margins. But yes, there's no other big factor that I'd point to.

Yes. And if indeed you can get the volume that you're looking for towards the second half of the year, do some -- your focus is restoring the profitability back to historic levels in that business?

I think in Field Solutions, we're at the 35% kind of operating income level, and I think that's -- we were -- we felt like it's a good level. So certainly, we want to maintain that. We want to staying north of 30. But not sure we plan to go back to the high 30s or 40% level that we once had.

Okay. And can you give us some magnitude about your agreement with Paccar and what that could mean? You talked about 7 figures when you talking about Beijing. Because I assume the Paccar deal has 2 parts to it, which is the hardware installation going on and then there's the software package that can go with it. Can you give us some idea what the top line and bottom line impact would be from that project? Is it a couple -- several million dollars in the quarter is what we're looking at? Or can you give us some idea what it is?

Yes, so let me characterize it broadly. Again, I don't want to share Paccar's business with the world. So I think the expectation is tens of thousands or significant tens of thousands of units of subscribers with the possibility of more. And then there is a recurring piece there, let's call it, a respectable ARPU. And again, our strategy would be to upsell and, okay, increase the ARPU. So that's about the best I can do, Eli.

Okay, but there is a -- there would be hardware component installation. That will be direct revenue, right?

Yes.

Can you give us a little bit more color, the profitability shortfall at E&C were sort of more dramatic than I think anybody expected, and I know weather and all those other things. We are looking at positive trends in nonres construction at this point that have accelerated, if anything, as you went through March as most of the companies had tough January and February, but very strong March in a lot of the areas that I look at, I would say. Are we looking at just natural business being able to drive the profitability back towards more normal level? Or is the restructuring in better business outside the U.S. really the crux of the matter?

Yes. I mean, within E&C, kind of profitability story there, again a number of moving parts. Part of this is this geospatial impact of revenue dropping out with relatively high gross margins. There are the acquisition effects, which will -- some of them will pass with the time where the acquisitions of the latter part of 2014 are dragging down profitability, that once we get kind of the revenue recognition accounting straight out there will be some natural adjustment there. And yes, so I would say if I were to point fingers, I would point the fingers at kind of the volume effects mostly from geospatial, and then this acquisition accounting FX is kind of being kind of the thing affecting the historical trends.

Can you get back to your targeted second half metric with added recovery in geospatial?

No. I think that, hopefully, I was relatively specific on that in the script is that, until we get this figured out in terms of the secondary effects, which are kind of our outside of our immediate perception. We're being pretty conservative on geospatial. So I would say is, there is a conservative geospatial element in what I said about the second half if it -- we return to normal, it turns out to be inventory effects that reverse up fairly quickly, that will be net upside.

Your next question comes from the line of Andy Netzel from Dougherty & Company.

I'm dialed in on behalf of Andrea James. So you've obviously done a great job assembling a BIM suite that nobody else has. What's your pipeline on that? And are you seeing any inflection point in the growth?

Yes, so I think the pipeline, it's lots of engagement. I think that -- to be a little careful on just not to give kind of early, too early of an optimistic sense, I think, okay, again, we're engaging at the big project level or we're engaging at the enterprise level. So we're talking about kind of in terms of the big story we're impacting the work process of large enterprises or the potential large projects. So there is a time function here. So I believe that, strategically, we're at an inflection point because I think the recognition is by large contractors, in the case of Beijing, in terms of large owners to -- there's an understanding that they need to engage the technology. So I think we are at a strategic inflection point. Am I -- can I make a call that, okay, a third quarter, fourth quarter that sort of thing? I don't think so, but I think there is a -- it should be a meaningful part of the story certainly during 2016. And Beijing, the fact that we were able to make the Beijing win public, I think the reference value of that is huge. It's an endorsement of the first magnitude.

Great. And just one more, I know predicting what Congress is going to do is kind of a fool's errand, but I want to throw it out there anyway. Do you have any color on the Highway Bill?

I'm waiting. Not really, I think they're kind of caught up in other things at the moment. But for the moment, we're just waiting to see what happens.

We have no further questions at this time. I turn the call back over to the presenters.

Okay, thanks for attending. We'll talk to you next quarter.

Thank you.

Thanks, everybody.