Trimble Inc. (TRMB) Q3 2017 Earnings Report, Transcript and Summary

Good afternoon. My name is Jona, and I will be your conference operator today. At this time, I’d like to welcome everyone to the Trimble Third Quarter 2017 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the call over to Mr. Michael Leyba. Sir, you may begin your conference.

Thanks, Jona. 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 two 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 three for an agenda of the call today. First, Steve will start with an overview of the quarter; after that, Rob will take us through the remainder of the slides, including an in-depth review of the quarter and our guidance; and then we will go to Q&A. With that, please turn to slide four and I will turn the call over to Steve.

Good afternoon. Third quarter results came in at the high end of our expectations and continued to build on the growth moment of the last eight quarters. The goodness [ph] of the quarter can be encapsulated in three points. First, the relative strength was company-wide with all four reporting segments, reflecting meaningful year-to-year progression. Second, if baseline is the organic performance of the businesses in place a year ago, our baseline performance for the quarter was strong with year-to-year organic revenue growth of over 10%, baseline non-GAAP operating margins of roughly 20% and baseline operating leverage of 27%, acquisitions added over 3 points of growth, but as expected they also diluted earnings in the short-term. Third, regional performance was also positive. North America, Europe and South America were all up double digits, while Asia and the Middle East grew but at a slower rate. The improved performance in North America’s potentially meaningful because North America has been something of an underachiever for us and an improvement could accelerate the aggregate performance. This North American buoyancy is occurring in spite of continuing ambiguities about U.S. infrastructure spend, tax reform, and trade policy. The most dramatic change year-to-year was in the Resources and Utilities segment, which reported a revenue increase of over 30%. Although, the five announced acquisitions year-to-date contributed to the growth, underlying year-to-year organic growth for the segment was double digits. The most significant acquisition, in fact, was Müller which was completed in July and is performing in line with our acquisition model and is generating positive market reactions. Although the acquisitions reduced segment profitability for the quarter, in part because of seasonality, we anticipate their effect to be additive over full year. Transportation continues to demonstrate the highest organic growth in the Company with contributions from North America and Europe. Although external effects such as ELD mandate are providing some of the momentum, our continuing innovation and market penetration initiatives are driving current growth as well as providing the foundation for future expansion. The Building and Infrastructure segment grew by over 13% in the quarter with significant margin expansion. The growth came from both the vertical and horizontal elements of the business. Perhaps the most encouraging elements of the quarter was the apparent market acceleration in North America. Beyond North America, the buoyancy in the segment was relatively widespread and global with double-digit growth in North America, South America, Asia and Europe. Although we remain hopeful that the Washington centered discussions on infrastructure may lead to something, our expectations do not include any effect from a step-up in U.S. spending. We are encouraged that beyond the record, infrastructure discussions in Congress have acknowledged that any build out should incorporate technology to improve the technology to improve the outcomes. We are also encouraged by the tendency for some of the states to control their own destiny by initiating infrastructure programs without relying on federal funding. Finally, although, rebuilding the hurricane-impacted areas in the U.S. will undoubtedly have an impact, we do not expect it to be material. The Geospatial segment demonstrated respectable revenue growth and year-to-year earnings improvement. Our results continue to be favorably influenced by new products and regional strength, particularly in North America and Europe. The last 12 months have been strong on innovation with the introduction of the SX10 late last year and the recent introduction of new Mechanical Total Stations, in both cases to strong market enthusiasm. Although, Geospatial is technically the most mature of the Trimble segments, we are demonstrating that innovation can drive incremental demand. Overall, Company performance in the last six months is consistent with the historical Trimble standard, which was established before the impact of agricultural and oil price declines. Although, we have no quantified view to share on 2018, we currently expect next year to be roughly consistent with current performance levels, assuming no major macro surprises. There is some potential lift in 2018 from ongoing strategic trends and initiatives. We have discussed all of these elements before, but I’ll summarize six of the major themes. The first is M&A. With eight, mostly small acquisitions year-to-date, we have obviously stepped up our acquisition activity from 2015 and 2016 levels. This reflects no change in our long-standing acquisition strategy, which remains focused on adding increments of technology or market through acquisition with anticipated network effects in the market. In the last two or three years, we have placed renewed emphasis on ensuring both strategic fit and early financial performance from the acquisitions we do make. Another strategic trend is our growing network of OEM relationships across all segments. Although we remain an emphatic end-user company, OEM relationships do facilitate adoption by the user and accelerated market penetration. Over the last two years, we have established a string of meaningful new OEM relationships, which have provided us with new machine platforms, which can be integrated into our information ecosystem. Another point of strategic emphasis is in the Transportation segment. Initiatives in this segment include efforts to develop a driver community, to improve transparency to enable improved alignment between capacity and demand, to establish the Trimble freight cloud, and to establish a first mover advantage in the application of Blockchain. The fourth element of strategic focus revolves around information and analytics. This represents a major push across all our segments and includes comp conversion of traditional software licenses to SaaS and the use of cloud resident data to power analytics embedded in new categories of applications. Because of Trimble’s footprint in both hardware and information, we are uniquely positioned to facilitate the two-way exchange between the physical and digital worlds. Our fifth strategic initiative is centered on autonomy. The concept is relevant in all of our segments and we are engaged in multiple ways. Although the end result may turn out to be complete autonomy, the timetable is ambiguous, and our approach is centered on maintaining progression along a continuum of increasing automation. An example of this approach is represented by the recent introduction of our 3D excavator machine control system, which moves us a significant distance towards automating the bucket operation without removing the operator from the cab. Final point of strategic activity is DEM and Trimble’s extension of the concept to the constructible model. We have developed and acquired most of the pieces necessary for a comprehensive solution over the last several years. A strategic emphasis for 2017 and into 2018, is to increasingly integrate these elements into a compelling total solution. Let me turn the call over to Rob. A quick summery before I do that is to say that we’re seeing improved market conditions and that we’re well-positioned to exploit those conditions based on our past investments and innovation.

Thanks, Steve, and good afternoon, everyone. Let’s start on slide five. Our third quarter results came in ahead of expectations with top line and bottom line results meeting or exceeding expectations in all reporting segments. Third quarter total revenue was $670 million, up 14.7% year-over-year. Within that, currency translation added approximately 1%, and the net effect of acquisitions and divestitures added about 3%. Organic growth was over 10%. And we’re now in our 6th quarter of accelerating organic growth. Notably, the rate of organic growth increased in all segments. In short, we continue to experience generally favorable conditions in our construction markets, the electronic login device mandate as a catalyst for transportation growth, agriculture continues to recover, and new product introductions are benefiting Geospatial as well many of our other businesses. Third quarter non-GAAP gross margins were 56.1%, down 80 basis year-over-year. Excluding the impact of acquisitions, gross margins were relatively flat. Operating income increased to 12% to $123.6 million while the operating margin percentage dropped to 18.4%, primarily due to acquisition effect. On an organic basis, operating margins expanded year-over-year and were just under 20%. Third quarter non-GAAP net income was up approximately 19% and non-GAAP earnings per share in the third quarter were $0.39, up $0.06 or 18% year-over-year. Our non-GAAP tax rate declined from to 24% to 23% year-over-year, reflecting geographic income mix. Turning to the balance sheet and cash flows, please turn to slide six. We finished the quarter with [$509] million of cash and short-term investments and our gross debt level at the end of the third quarter was $696 million, leaving us ample flexibility from a capital allocation perspective, despite recent acquisitions and share repurchases. Deferred revenue increased 11% to $327million. Operating cash flow decreased in the quarter to $61 million, primarily due to increased inventory investment and the growth environment we’re seeing coupled with the comparatively strong cash flow comp last year. Operating cash flow on year to date basis is up 8% and up 19% on a trailing 12-month basis. Net working capital, defined as accounts receivable plus inventory minus payables, accrued compensation and total deferred revenue, remains near 3% of revenue on a trailing 12-month basis. Turning now to review the reporting segments. Let’s start with Transportation on slide seven. Revenue was up over 16% year-over-year with currency translation adding less than 1% and acquisitions adding less than 4%. Over the past two years, Transportation has been our fastest growing segment on an organic basis. Our mobility business continues to benefit from the fourth coming ELD regulations in North America along with other initiatives such as video and OEM sales. Our enterprise businesses in routing, navigation and transportation management continue to experience fast revenue growth. Finally, in our rail business, we are seeing the positive collective impacts of recent acquisitions coming together to deliver unique customer value and revenue growth. Revenue growth in combination with both cost control and strategic investments enabled us to expand operating margins by 20 basis points to 18.2%. Operating margins would have expanded more without the negative effect from recent acquisitions. Next, turning to Resources and Utilities on slide eight. Segment revenue was up 31% year-over-year with currency translation adding less than 2%, and acquisitions and divestitures providing a positive effect of about 18%, which primarily reflects the acquisition of Müller. In agriculture, we continue to experience healthy growth in markets such as Europe, Russia and Brazil, which continue to reflect 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 which enables our customers to achieve high levels of positioning accuracy in the field. Finally, in our forestry business much like our rail business, we are seeing the positive collective impact of recent acquisitions, delivering unique customer value and revenue growth. Next, let’s step back and talk about the impact of acquisitions in the segment. In Q3, we closed the acquisition of Müller which provides electronic control unit technology that supports one of the next big opportunities in precision ag, the variable rate application of inputs in the field. As discussed in last quarter’s call, Müller does have seasonality in its revenue, which in turn impacted profit contribution in the third quarter. This seasonality along with the impacts from other acquisitions in the segment had a meaningful negative impact on the operating income margins in the segment. As a result, the operating margins contracted 560 basis points on a year-over-year basis to 23.2%. Please note that organic operating margins were up year-over-year. As we enter 2018, we expect these acquisitions to be accretive to EPS. Within the next couple of years, we expect these acquisitions to be accretive to company operating margins. Given the historically high margins and the Resources and Utilities reporting segment, we may, mathematically speaking, see modest dilution at the reporting segment level. Moving next to the Geospatial segment on slide nine. Revenue was up approximately 6% year-over-year, with currency translation adding approximately 1%, and acquisitions and divestitures subtracting about 2%. Organic revenue was up in the segment for the third 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 products as well as end-market diversification. Operating margins are 21.6%, down slightly year-over-year, primarily due to product mix and tradeshow expenses in the quarter. For example, the INTERGEO tradeshow was in Q4 in 2016 and in Q3 in 2017. Turning to the Buildings and Infrastructure reporting segment on slide 10. Segment revenue was up more than 13% year-over-year with currency translation adding about 1% and acquisitions providing a positive effect of less than 1%. The building construction business was up double-digits for the quarter including double-digit increases in our architecture and design, structural engineering, and mechanical electrical and plumbing businesses. Civil engineering and construction business grew double-digits in the quarter with growth in all major regions. Gross margins expanded largely on a higher software mix in the quarter. The impact of growth, gross margin expansion and operating leverage enabled us to expand operating margin 270 basis points to 24.3%. It’s worth noting again this quarter that a meaningful amount of financial performance comes from our 50-50 joint ventures with Caterpillar, Nikon, Hilti, which fall below the line in non-operating income and are therefore not represented in segment results. Equity income in the quarter was almost $9 million, a majority of which came from the Caterpillar joint ventures. On a trailing 12-month basis, equity income represents over $26 million, which if included above the line in the reporting segment, would have further improved operating margins. To put the equity income from our Caterpillar joint ventures into further prospective, the revenue from these joint ventures were up more than 35% on a year-over-year basis, reflecting sales to the parent companies. The profits associated with that turnover flows into the equity income line and the revenue therefore does not consolidate into the Trimble numbers. While on the topic of construction, we thought it would be insightful to share how we’re using our own technology on a building project where we are the project owner. We’re currently building a second building in Colorado that will expand our workforce capacity by an additional 600 people. If you turn to slide 11, you’ll see a sample of some of the 50 plus Trimble solutions we’re using on this project. Like our original building, the second building enables us to once again demonstrate a set of transformative technologies with our surveyors, architects, engineers, trade partners and also our general contractor to drive time and cost efficiencies as well as quality and safety improvements. We create digital models of the physical earth with our geospatial technologies that move into a set of civil and building workflows. In effect, we build it digitally and then build it physically. And we’re using Trimble Connect’s interoperability backbone throughout the project to drive coordination and collaboration. As the project is literally in our backyard, it provides an incredible opportunity to work directly with our partners to drive voice of customer [ph] into our product development. It also provides the unique opportunity to capture return on investment metrics and case studies from technology appointment. We expect our project to be completed on time and on budget late next year. Next, slide 12. By geography, our revenue mix for the quarter was 54% from North America, 24% from Europe, 15% from Asia Pacific and 7% from Rest of World. North America was up 13% year-over-year where each of four reporting segments grew on a year-over-year basis. Europe was up 27% in the third quarter, reflective of the addition of Müller, which drives the majority of its revenue in Europe. Growth was relatively broad-based and led by markets including Germany, UK, France, Finland and Russia. Currency translation contributed about 4% for this growth rate with organic growth in the low teens. Asia Pacific revenue was up 7% in the quarter and continued to be lead by growth in Japan, Australia, and Korea. Growth was strong in Geospatial as well as Buildings and Infrastructure. Lastly, rest of world was up 6% with notable increases in markets such as Argentina and Brazil. Moving now to slide 13 and our revenue mix. Software, services and recurring revenue streams continue to grow in absolute dollar terms and represent approximately $1.2 billion or 47% of revenue over the trailing 12 months. Recurring revenue represents over $700 million or 28% of revenue over the trailing 12 months. The steady percentages of revenue mix reflect broad based growth in revenue including strong growth in hardware among Geospatial, agriculture, civil construction and transportation. The hardware revenue stream also benefited from the inclusion of Müller, where our technology capabilities include embedded software but where the revenue is characterized as hardware. Let’s turn to slide 14. In the third quarter, we close Müller in 10-4 Systems. While the profile of recent acquisitions has a short-term negative impact to operating margins, we expect them to add significant growth and profitability in 2018 and to achieve operating margins approaching the Company average in 2019. Let’s now move to fourth quarter guidance on slide 15. We expect our fourth quarter revenue to be between $655 million and $685 million and non-GAAP EPS to be between $0.34 and $0.38 per share. Two comments. First, with respect to top line growth, the midpoint of the range implies more than 14% year-over-year revenue growth, which includes greater than $25 million in revenue from acquisitions in our Resources and Utilities, and Transportation reporting segments. Second, in terms of profitability, the midpoint of our guidance assumes the Q4 2017 non-GAAP operating margin that is similar to the year-ago Q4 2016 operating margin of 18.3%. We expect our fourth quarter operating margins to include about 100 basis points of margin dilution from recent acquisitions. As a result, organic margins would otherwise have been in the 19% range and would be higher still were it not for the temporary cost associated with the ASC 606 compliance work. In closing, we will be presenting at the Baird Industrial conference on November 7th and our presentation will be webcast and accessible from the Investor Relations section of our website. Let’s now take your questions.

[Operator Instructions] Your first question comes from the line of Mr. Jerry Revich from the Goldman Sachs. Your line is open.

Hi. Good afternoon. I’m wondering if you could talk about within the Transportation business, you highlighted pick-up in the business in Europe. Can you just update us on where adoption rates are for your products and what’s driving the pick-up? And if you’re willing to comment on, what additional [ph] OEMs you’re referring to, and the nature of the agreements in the slide? Thanks.

So, I’ll start with the OEM agreements. That is status quo progress that we have in the Transportation segment. The additional OEM performance, we talked also about in agriculture as well as construction, but then Transportation would be status quo relationship with PACCAR. Our business is primarily in North America, really, the vast majority of our turnover is in North America in this reporting segment. However, we do have some business in Europe, India and Australia that are of note. And business in Europe really is reflective of a little bit of the market growth and expansion, but more so of our competitive product sets and gaining some ground in that respect in Europe.

Okay. And Rob, can you just say more about the margin profile of Müller. So, this quarter looks like it was negative from an operating income standpoint, based on M&A accounting; without acquisition based accounting, what would have been the margin profile this quarter? Can you just help us get visibility on how quickly it’ll get to the company average margins based on the accounting that you outlined earlier?

Sure, I’ll give you directional guidance as we don’t comment on individual -- at individual business level. In the case of Müller, it’s mostly a hardware business. So, from an accounting perspective, they really aren’t substantial negative accounting effects. What we referred to are the seasonal effects for Q3, a seasonal low; in that business, Q1 is a seasonal high. And so, it’s a margin profile that slows accordingly. So, as we come out of Q3 and we come into Q4 and then the beginning of next year that’s where we expect to see the substantial pick-up and really most meaningfully in the first half of next year, starting in Q1.

[Operator Instructions] Your next question comes from the line of Mr. Jonathan Ho from William Blair. Your line is open.

I just wanted to start out with some of the discussion you had around the analytics opportunity and maybe combing hardware and the cloud. How do you think about, I guess the go-to-market for that type of solution and how quickly do you think market will adopt this type of solutions?

Well, I think in some sense, we could point out -- point at probably a 10 or more year history that’s already in place in terms of combinations of the hardware and software and analytics thing applied. I think to the extent that it’s a new thing for the world, it’s a relatively old thing for Trimble because I think we’ve been doing it for some period of time. Certainly, the rate of -- capability, the rate of change has picked up with the ability to access more data through the cloud. So, I -- certainly, the rate of acceleration or the acceleration rate is increasing. But I think that it’s not necessarily a terribly new thing for Trimble and does not represent a step function for us in that sense. But, yes, that go-to-market and I would say it is a challenge, at least a challenge in terms of many of our markets from the standpoint. On the one hand -- and this not a new issue, I think we’ve been talking about it for some number of years. But, when it comes to software and information in analytics, that would tend to favor, let’s call a more direct style of distribution. But when there is a hardware element and that hardware breaks let’s say on a construction site or on a farm at 4 o’clock in the afternoon, there is a need to deal with it real time in a perfect world having it fixed by the next morning. So, I think in terms of our formula as a company, this isn’t universal, this is in the realm of construction and agriculture, transportation is a little bit more of a linear solution. But, I think it’s a mix, hybrid type distribution channel that’s actually going to be required to be successful in those markets. And again, the construction side, we point to, the SITECH channel we point, to the BuildingPoint channel. On the agriculture side, we point to Vantage channel that we are creating third-party but with let’s call, a whole lot of Trimble must be behind it. And then, again, in Transportation it -- solving the equation tends to be a relatively direct solution. So, the answer is that it depends. But, I think it’s again a not a straight forward sort of consideration, given the complexities of some of these markets.

And then, just as a follow-up. Can you maybe give us a little bit more color in terms of the SX10 and some of the new products that you’re releasing that maybe extend your lead in Geospatial and some of the interesting business units as well?

So, the SX10 was released at the INTERGEO tradeshow roughly a year ago. It is actually a new category of instrument. It combines the characteristics of a conventional Total Station, long standing survey with those of the laser scanner and really creates a new category of survey instrument. There is no true competitor in the market yet after a year. We still tend to be production constraint, more so than market constraint on it. So, it has been a true hit in the marketplace. But, the other product -- couple of products that were released this year at INTERGEO roughly a month ago are Mechanical Total Stations, using the term broadly towards the lower end of the market, less robotics, less automation. But, these units do have auto focus, which again starts to introduce elements of robotics into low-end survey instruments, and again, represents a category but towards a lower price, cheaper, but bringing new functionality and changing the value to cost curve at the lower ends of the survey market. But I think the point there in Geospatial is that, okay, yes, it’s relatively mature market, every surveyor in existence has a tool of some sort or another that enables him or her to do his or her job. But, there is still the ability to replace that instrument with new capability if it brings new productivity and new functionality into play. So, I think that’s the Geospatial innovation. But, I think the other easy example -- a couple of easy other examples to point to in other places of company. First of all is this excavator product in machine control, which is getting very strong market reactions as it’s tested in the workplace and is bringing significant productivity improvements to let’s call it conventional excavator operations and in some ways is enabling on some construction sites, which have traditional called for both an excavator and a bulldozer being on site. The performance of the excavator is not good enough in those cases to actually eliminate the need to bring the bulldozer on the site. So, again, major cost factor for the contractor. And I’d say just to be a little democratic here, pointing at transportation over the last year, year and half, we brought video into the marketplace, which again has been something of a game-changer in terms of bringing new capability into the marketplace and altering a lot of the traditional economics in trucking. So, I think, again, we’re feeling reasonably good as a company in terms of the innovation that we’re displaying across the entire company.

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

I had a couple of developmental questions. First, you mentioned that you’re investing in Blockchain in your Transportation segment. Can you give us a little insight there as to what the -- like, where you see an opportunity there? I guess, this is relatively new technology. There a lot of people that focus on in the financials area but where you see opportunity in the Transportation segment?

If we start with the why, the why is about effectively tracking goods about -- across the supply chain. So, Blockchain itself is just an underlying let’s say technology of the shared ledger in the cloud. I think where we think we have a unique play to track those goods across the supply chain is because we think we have a unique insight into capacity and demand in the transportation market. So, if you think about the business we have in the mobility side with our PeopleNet business and then managing enterprise fleets, trucking fleets. You think about the capabilities we have with our TMW business which does the back office or transportation management systems for companies where you’re actually managing down to the level of the bill of lading. So, the bill of lading is to tell you where the pallet is, we have the GPS, to know where the vehicle is. And to be able to manage that fleet, we just recently acquired 10-4 Systems, which drives capabilities into shipper visibility or shipment visibility. Putting these pieces together, we think gives us unique insight into the market. And so, the play with Blockchain for us would be, think of full lifecycle transactional processing. So, think Smart Contracts, I think freight bids and we are one of the charter members of Blockchain of alliance and trucking -- Blockchain in Trucking Alliance. And we feel pretty good about the early work that we’re doing in this -- with this space.

Great. And then, just a couple of business cycle and seasonal related questions, quickly. First, are you seeing faster cycles related to the ELD mandate and do you expect those then to change or normalize next year? And then, second question is similar as it relates to agriculture, entering the winter months and crop prices being where they are, how are you expecting that segment to develop late this year and then into next year? Just wondering any color or...

I’ll start with ELD. So, in December of this year, the easy way to think about it is, you have to be either AOBRD or ELD client. AOBRD is an Automatic Onboard Recording Device. If you’re AOBRD compliant in December of this year, you have an additional two years until December of 2019 to become fully ELD compliant. So, we have seen throughout the year record amount of backlog and bookings coming in to the PeopleNet business, which is the business that has the most positive impact from the ELD mandate. What I would also want you to hear is that it’s not a cliff of demand that happens, starting in January because of this additional two-year window to go full ELD compliant. So, yes, we do have growth that’s been going up on a linear, maybe almost non-linear basis throughout the year, but we don’t expect that to fall off a cliff next year, maybe different next year, but it won’t go away because of that additional cycle and in addition because of the broader product offering between things like video and the OEM work that we do. So that’s the view on ELD. As it relates to ag and I think you said as we’re in the harvest season and coming into winter before too long, I mean, some level the die is cast on the harvesting and the crop prices. What we see at a macro level is stability and farm income, so that’d be one of the indicators we look at which means some of the input prices have stabilized. And so, it’s not that farm income has suddenly exploded or gone up, it’s just that it’s not continued to go down. And so, the stabilization of farm income is a net positive for us in our view. And then, if you look as well at let’s say, used machinery prices, the used market appears to have an -- inflected at this point, which is a positive sign as well. So, I’m not sure James that that’s the question you had on ag.

That’s actually exactly it. Thank you so much.

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

The operating margins on the Building and Infrastructure segment is making nice improvement. Could you talk a little bit about the cadence for ongoing improvement as we go forward, to the balance of this year and into next year?

Sure. And I would agree, the business leaders are doing a nice job with operating leverage in addition to the revenue growth here over the last quarters. As we move forward, I mean, one of the things to put that into context is we have been talking for quite a while now about the operating margin expectations for the company overall. Getting Buildings and Infrastructure back to the let’s say the company average, it had been below the company average, getting Buildings and Infrastructure towards and at or above the Company average is of course is a big deal to the overall company model. So, as we move in -- and when I talk specifically to Q3, one of the drivers of that delta is up over couple of hundred basis points year-over-year, was the mix. And so, we did have a higher proportion of the software business growth in the quarter, which helped that margin improvement. So, in addition to operating leverage, let’s call that a function of cost management and we also had gross margin improvement, that gross margin improvement was driven a decent amount by the software mix. As we move forward, and let’s say into the balance of the year, we’d expect a similar profile in terms of margin growth and off leverage in the business. And then, if you turn the page and let’s move into 2018 while we are not yet guiding 2018, the notion of managing the operating leverage and in a 25% to 35% range is still very much affordable model. And so, I would expect Buildings and Infrastructure to conform within that range as we think about planning and managing the business.

Okay, thank you. And then, just in terms of divestitures. Can you talk a little bit about any areas where you are looking to lighten up the portfolio at all. Obviously it may be premature, but is there -- are there areas that you are targeting or can you talk about any detail around that?

Hey, Colin, I would say that’s premature.

Okay, great. And then, just a final one. The delta between pro forma and GAAP tax rate, can you just help us understand what’s driving that in a little bit more detail?

Yes. So, you’ve seen that in Q3 and you will also see that if you look forward into the Q4 expectation of a delta and the tax rate. There was an accounting change that went into effect this year that changed where -- essentially how the stock option compensation is treated or stock compensation, it’s not just a option, [indiscernible] so rather than flowing just through the balance sheet, there is also a P&L impact. So, what you would see this quarter as well as in Q4 is we have a number of RSUs that will last and the stock prices going up. And so, when you compare the price of the stock, when the RSUs were granted versus where the stock price is now that they are investing, the stock price has obviously gone up. That creates a further tax benefit, that brings -- that has the impact of bringing that tax rate down on a GAAP basis. So, this accounting is a new accounting, that’s gone into effect to show this on the P&L that started at the beginning of this year. So, what I would expect therefore on an ongoing basis is that the GAAP tax rate will have more volatility quarter to quarter and ergo, the non-GAAP tax rate and why we use it.

We do have a follow-up question from the line of Jerry Revich from Goldman Sachs. Your line is open.

Great, thank you for taking the follow-up. I’m wondering if you folks can talk about on the excavator machine control product lines. What regions is that probably available at SITECH dealers and over what time frame do you expect production to ramp up? Can you just lay that out for us, maybe if you want to use the bulldozer comparable machine controls as a proxy for rollout just to frame where we’re in that process?

Sure. I would think of it, kind of three -- let’s say two-fold, machine type as well as geography. From a machine type perspective, we make kits that our technology on to variety of manufacturer models of excavators. So, whether it’s the manufacturer or the tonnage of that excavator, there is different let’s say kit that’s required to install the technology. So, I would call this early innings on the kit, the size of the kit, so the number of machines that we’re touching. And that’s one of the reasons, and Steve’s commentary that we see some buoyancy in terms of further upside in this. So, the early reaction we’ve gotten in the market, that should really apply to a small subset of the machine, the available machine. So, as the additional machines come on board, that’s obviously a very good thing for us. So, from a geographic perspective and how it relates to our global SITECH network, we do have a bit of a regional approach to the rollout. The nature of the work is actually done region to region can be very different, so how contractors use an excavator in the Nordics is different than how they use them in Asia, it’s different than how they use them in North America. So there’s intersection between the software, both application and embedded software. And the hardware is a pretty important factor. So, what we’ve seen is that really North America has been the primary geography that has had the uptake on the new product line. And the next region that we would expect to see come on line is Europe, because in Europe, they’re using excavators for many more applications than we use in let’s say in North America where we may be using a dozer or grader, an excavator, or separate machines you’ll see sometimes in Europe, especially maybe in Northern Europe that the excavator is let’s call multi-tool machine. And so there’s a level of software capability we’ll add to that for Europe as that comes online that becomes more attractive for European contractors to take on the technology.

I appreciate the color. And I’m wondering, Steve, can you expand on your prior comments on autonomous ecosystem, obviously the solution is going to be different depending on the market, but how do you see Trimble’s position compared to some of the automotive, higher volume applications? So, where do you folks see the Trimble key competitive position versus where are you going to be buying things like sensors and other off the shelf products from folks that are higher volume producers? Can you just frame the landscape for us as you see it?

Yes. From our standpoint, it is a relatively confused landscape, because I think there are multiple plays from a Trimble perspective. So, first of all, starting with the high volume, the automotive standard world. We are working actually with a number of automotive focused providers. Now, the relative focus -- it’s not the exclusive focus, but the relatively major focus there is that really over the last - fairly late in the game, called over the last 18 months or so. Precision GPS or precision GNSS more properly has actually become a bigger factor in the solution set. It’s not just relative position, it’s absolute position that is part of the solution here. And in terms of providing centimeter level -- potentially a centimeter level accuracy, Trimble actually has significant advantage over many other providers in terms of being able to provide that through space based signals or otherwise. So, I think that there is a play for Trimble in multiple ways at the -- let’s call at the high volume end of the marketplace, but that’s probably the easiest one to point out at this point in time. And then, our interest is relative to autonomous -- increasing automation, I think we’re a little dubious in terms of just when full autonomy will reach some of these markets but let’s call it increasing levels of automation. Certainly in agriculture, there are possibilities there. Again, that may -- full autonomy may not actually be the answer in the medium term, there may be halfway houses, if you will, in terms of increased automation, simply because of some of the physical limitations such as you need to refill the seed bin or the fertilizer bin every 400 acres or so. Okay, that’s not -- that doesn’t mean you can send a machine out to do large fields and leave them alone for a day. So, again, automation is the key there. And then in construction certainly, it’s progressive. Transportation, there is certainly lots speed down there. We’re working on elements of that without being overly specific here. I would just say there, there is a solution for the open highway, then there is final mile problem. The final mile problem is not easy or straight forward and I think it is going to take some work. So, it will be again a progressive sort of thing. So, I would say is that we are not seeing it as the category onto it itself but we see automation and autonomy to be kind of embedded in our existing market position. I suppose the high volume stuff would be perhaps a kind of a new business category for us. Although we’re currently selling GNSS into automotive applications already. In that sense, it would be an extension as opposed to a new category. So, we are approaching in a fairly incremental fashion just because that’s what we think market will -- how the market will actually evolve.

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

I wanted to circle back, Steve, in discussing your [indiscernible] as one of the major themes. Could you just update us where we are in that process of integrating the various elements, various businesses within that business and when you think that process might be complete? As well as if you have any examples on the adoption side, where we’ve gained some, where you think we’ve gained some traction and adoption of that solution?

Well, again, I think it’s progressive as opposed to kind of digital. There may never be a day when we say we are whole and complete and we’re done relative to it. So, I think that over the last five or six years, we have acquired most of the elements to formulate a complete solution. And I think, there is first of all, two considerations, really one from a products level, the other is from a go-to-market standpoint. And I think from the product perspective, it has been progressive. So, you’ve seen us talk more and more about platforms within the company whether it would be Trimble Connect or Trimble TPaaS. And so I think that increasingly, we’re talking about more integrated product platforms. So, I think there are increasing numbers of examples where okay we’re able to walk into a large account and kind of talk persuasively about the whole set of Trimble capabilities. And then there is the go-to-market aspect, which is really -- really starts with the segmentation of the market. So, we in effect acquired or developed a number of relative product silos over time. I think in terms of specific focus on certain markets such as architecture which is catch-up gave us, mechanical, electrical plumbing market, general contractors and then structural, all of those represent kind of points of products focus. We need to take care of those. But I think in terms of cases of large contractors, there is, call it, go-to-market challenge on our part. For example, we put out a press release about relationship with AECOM sometime ago and that would represent an example where we need to conform to a different pattern than our historical pattern. So, I think the response on go to market varies depending on kind of which market segment and which group of customers we’re talking about. But again, over the last few years, you’ve seen us talk more and more about kind of key account management. We’ve organized more persuasively around the idea of accounts. And you see relative successes such the new Beijing airport and what our other example of airports we’ve announced along the line. So, you’re seeing successes and this is both key accounts but it’s also maybe more generally about capturing large projects, which tends to be the integer value in construction projects more so than kind of account -- than enterprise level relationship. So, I think, again, progressing. I don’t think there is a defined end point, but I think increase -- as we integrate more product level, more from a go to market, I think we’re starting to see examples, whether we can announce them or not.

Fair enough, that’s helpful. Rob, just a couple of quick questions accounting wise. Did you mention any type of currency impact for fourth quarter revenue?

We didn’t speak to it but we do expect to see a modest positive in the numbers that were provided from FX.

Similar to third quarter then?

Yes.

And then, have your -- as you wrap up the 606 exercise, have your costs in the fourth quarter --should we assume that those are higher than the third, has there been any change in that? And then, I’m just curious if there is -- any insight you can give as you look forward how implementation adoption of 606 impacts you?

Relative to the spend, we do see a step-up in the fourth quarter versus the third quarter. And if were to be taking about the third quarter result that you would have, you could see part of that in the corporate on allocated line and the step-up, whether sequential a year -- year to year, you could see some of those additional expenses. And so, we would expect that to play through in Q4, as well and we expect to spend more in Q4 than we did in Q3. So that is, I would say largely as planned. And as I talked about last quarter as well how some of the timing of that goes. In terms of what’s -- I think the other part of your question is what impact might we expect to have when 606 actually goes to play. So, the reporting begins for the Q1 2018 results. So, our Q1 conference call, the first time we actually hear about the results. First start with say that our plan is to do a full retrospective, not a modified approach, but full retrospective. That means our 2016 and 2017 numbers will be represented in a 606 compliant from such that U.S. investors have comparability in investor community and comparability of the 2018 number versus 2017 number. And then, getting to the heart of the question is, we don’t expect it to have a fundamental shift in the majority of Trimble’s revenue and I think that’s sort of the punch line and the people are looking for. We do expect to have subset of the revenue that will change and the same actually holds true for some of the direct costs to obtain customer contract. So, some costs will come in, some costs will go out. And so, when you think about -- if I go back to the revenue, as you would see in 606, you would see such items such as term licenses that would be recognized, upfront as opposed to over time like they are today. We would see some of the projects or services implementation work we do. That will likely be recognized on a percent complete basis as opposed to at the end of contract completion. That would have the impact of moving -- potentially moving some revenue forward. And so, you have all these different revenue streams that move around. But really, it’s a slice of our revenue that’s impacted, not every single dollar of revenue in Trimble. And therefore, we don’t see a fundamental shift in the majority of our revenue.

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

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

That does conclude today’s conference call. Thank you everyone for your time. You may now disconnect.