Trimble Inc. (TRMB) Q3 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Trimble Third Quarter 2019 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today Mr. Michael Leyba. Thank you. Please go ahead.

Thank you. 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. In addition, we will also be posting our prepared remarks on our investor relations website at investor.trimble.com shortly after the completion of this call. Turning to Slide 2 of the presentation, I would like to remind you that the forward-looking statements made in today’s call, and the subsequent question-and-answer period, are subject to risks and uncertainties. Trimble’s actual results may differ materially from those currently anticipated, due to a number of factors detailed in the Company’s form 10-K and 10-Q, or other documents filed with the Securities and Exchange Commission. The non-GAAP measures that we discuss in today’s call are fully reconciled to GAAP measures in the tables from our press release. First, Steve will start with an overview. After that, Rob will take us through the remainder of the slides, including an in-depth review of the quarter, our guidance and then we will go to Q&A. With that, I will turn the call over to Steve.

Good afternoon. This will be my 83rd, and final, quarterly conference call. To put things in context, my first call for Trimble for the first fiscal quarter of 1999, reported revenue of $68.8 million and operating income of $3.7 million. Today, I will leave the discussion of the quarter to Rob and I will focus on today’s CEO succession announcement. Rob’s appointment represents the outcome of a multi-year process. Virtually every board meeting for years has featured a discussion and evaluation of talent with an emphasis on individuals with short and long-term CEO level capabilities. The evolution of the company has made this a dynamic process as the company has changed, so has the CEO specification. This progression has included the shift from product to solutions, the increasing role of software, and most recently, the emphasis on recurring revenue and services. As a result of the process the board came to the conclusion that an inside candidate would generally be preferable for two reasons. First, we are a relatively complex company with a nuanced strategy and growing numbers of common platforms that would be a challenge for an outsider to assimilate. Second, our company culture is central to our success and it was important to find an individual that represented both the continuity of that culture while acting as an agent of healthy change. Both the board and I believe we have found the right blend in Rob. In his 13 plus years with Trimble he has performed a number of roles that have ranged from the strategic to the operational. In his last almost four years as CFO he has developed a deep understanding of Trimble’s opportunities and challenges. He has also been a champion for a number of needed initiatives including the conversion to SaaS, improved rationalization of our portfolio and margin expansion. Another important consideration is that he is well known to the financial community and trusted. As indicated in the press release, we expect to fill the CFO role in the near future with a veteran CFO. As executive chair, I do not expect to play a direct role in company operations. Rob and I have developed a flexible range of targeted activities that will enable me to support him. Activities will include leveraging the external network I have established over 20 years and playing targeted roles to help develop specific strategies, initiatives and people. Beyond that, I hope to be able to provide him generally useful advice as he settles in. Let me now turn the call over to the soon to be third CEO in Trimble’s history.

Thank you, Steve. I’ll say a few words on the transition and then get back to the business. I joined Trimble 13 years ago because of our mission to transform the way the world works. What we do is substantive and inspiring; I feel a real sense of purpose. I appreciate both the people around the world who work here and the endless opportunities that are available to learn and contribute. Looking forward, my message is one of optimism. We are poised to continue leading the digitization of the end markets we serve. Our fundamentals are strong: our people, our strategies and our technologies. There is nowhere else I’d rather be. I also want to express my gratitude to Steve, the Board, and my fellow Trimble colleagues for the vote of confidence. Steve joined Trimble in 1999 when we had $271 million in revenue. We’re now over $3.2 billion in revenue. Our enterprise value when Steve joined was about $150 million. As of today, that stands at over $11 billion. His financial track record speaks for itself and his leadership legacy, which runs deep, has set a solid foundation for years to come. So on behalf of 11,500 Trimble colleagues, we thank Steve for his 20 years of service. The bar is set high. As for what comes next, I will say just a few words here today, as we don’t transition until January, and we have a fourth quarter to deliver. Our overall focus will be to prepare Trimble for an era of increased connectivity. This includes respecting 40 years of approaches that got us to this point in addition to taking a fresh look at the portfolio, along with the strategy, structure and systems in our businesses. Now to the business of the quarter. I’ll start by summarizing the quarter in three aspects, starting with an overall financial narrative on the third quarter results. Revenue fell short of our expectations and EPS came in ahead of expectations. The market environment is challenging and revenue was largely impacted by the same factors we’ve been talking about over the last couple of quarters. Revenue mix, including ARR remains attractive and cash flow was strong. That, combined with cost control, and lower incentive compensation expense, delivered EPS slightly above expectations, which demonstrates that our team is reacting to the environment. Structurally speaking, in the last few weeks, we have implemented over $30 million of annualized structural cost reduction, which we will see the full benefits of by the second quarter of 2020. We have also exited, or are in the process of exiting, a small number of discrete efforts and businesses. In aggregate these portfolio actions are not financially material; however they do increase our focus and sharpen the impact of resource allocation. Strategically speaking, we will continue to execute on our long-term plans with an intention to exit any period of uncertainty on a stronger competitive footing. To say it another way, short-term results do not change the fundamentals of our strategy or the long-term financial model. Our mission remains the same to transform the way the world works. Our vision remains the same to deliver products and services that connect the physical and digital worlds. And our financial model ambitions remain the same to profitably grow the business while creating sustainable competitive advantage. Let’s get into the financial details, starting on Slide 5. Starting with the top line, third quarter total revenue was $784 million, down 2.5% year-over-year. Breaking that down, currency translation subtracted 1%, acquisitions added 1%, and organic growth was down 2.5%. ARR was $1.1 billion in the quarter, up 9% organically. Gross margin in the third quarter was 57%, down 90 basis points, which was primarily driven by revenue mix in the quarter. Adjusted EBITDA margin was 23% in the third quarter, flat year-over-year. Operating income dollars came in at $162 million with operating margins of 20.7%. EPS at $0.48 was ahead of expectations. EPS was down 2% year-over-year, driven by revenue and partially offset by lower operating expenses and lower interest expense. For context, on a trailing 12-month, or TTM basis, revenue is up 6.5%; EBITDA is up over 12%; EBITDA margins have expanded by 120 basis points; and EPS has increased 7%. Cash flow from operations was $137 million in the quarter, up 17%, and up 20% year-to-date. Free cash flow, which represents cash flow from operations minus CapEx was $121 million in the quarter, up 21%, and up 23% year-to-date. Cash flow growth has been driven by EBITDA growth and favorable working capital dynamics as our business continues to move towards higher levels of software and recurring revenue, as well as lower M&A expenses and lower tax payments. Moving to the balance sheet, deferred revenue was $419 million, up 15% year-over-year. This correlates to the increased recurring revenue mix in the business. Net working capital, inclusive of deferred revenue, stands at less than 3% of revenue on a TTM basis. Net debt to adjusted EBITDA is 2.13 times on a TTM basis. In the third quarter, we repurchased $121 million of Trimble shares. With $496 million of free cash flow on a TTM basis, and full availability of our $1.25 billion revolving credit facility, we are well positioned to weather any economic disruptions and to continue our disciplined capital allocation strategy. Moving to reporting segment details and starting with revenue on Slide 7, for context, last quarter we called out three challenges; including our OEM sales with a significant influence from the China market, the impact of the trade dispute on the agriculture market, and short-term pressures in the transportation market coming at the tail end of the ELD conversion. These factors largely played out again, albeit amplified as compared to our expectations, with a combined impact of government orders pushing out of the quarter and a higher mix of subscription bookings pushing us below the expected range. Total company organic revenue growth was minus 2.5%. Within that, the discrete impact of OEM results reduced that growth by approximately 2% in the quarter. Buildings and Infrastructure or B&I was largely in line with expectations, as was Viewpoint, e-Builder and the majority of our software businesses. To illustrate this, recurring revenue in the B&I reporting segment was up in the mid-teens. Moving to Slide 8 for operating income by segment, performance largely correlated to the revenue factors. Of note, Geospatial margins were primarily impacted by the weakness in our OEM components business in China. Transportation margins were negatively impacted by spend associated with increased customer support to engage our customers through the software conversion to ELD compliance, as well as continued compression on hardware margins. Further, we are seeing bookings on our enterprise business starting to shift towards subscription. This dynamic is great for the long-term metrics, yet a drag on short-term profitability, as we saw in the quarter. The standout positive performer in the quarter was B&I. Overall, the team demonstrated an ability to manage variable costs as the environment became more uncertain throughout the quarter. This was a result of managing net attrition and tactically executing on cost-reduction activities. In addition, at the company level, incentive compensation expense was lower compared to the prior year quarter by more than $15 million. Our incentive compensation plans reflect our pay for performance culture and are tightly aligned with the financial performance at the divisional and company levels. Turning now to Slide 9 and overall geographic commentary. We experienced a decline of 3% in North America, where B&I and Transportation grew but were more than offset by Resources & Utilities and Geospatial. In Europe, we experienced growth of 1%, driven primarily by the B&I segment. In the Asia-Pacific region, we saw a headwind of negative 18%, driven primarily by difficult conditions in China, while other major regional markets were mixed on a year-to-date basis. Lastly, in other regions we were up 27% year-over-year, driven largely by growth in Brazil. Please now turn to Slide 10 for a review of our revenue mix, by type, which is presented on a TTM basis. Software, services and recurring revenues continued to grow, up 20%, with organic growth rates in the high teens, and now represent 56% of total Trimble revenue. Within that, recurring revenue, which includes both subscription as well as maintenance and support revenues, grew 25% year-over-year, and now represents 33% of total Trimble revenue. Software and services grew 14% year-over-year, and hardware contracted by 7%, reflecting in large part the recent headwinds in our OEM related businesses, particularly in China. Returning to Slide 4, let me next overlay a strategic lens onto the financial and structural commentary. The fundamentals of Trimble remain strong. Our markets and the value proposition of our solutions provide a compelling context. Our people, our innovation pipeline and our go-to-market capabilities are enablers of our competitive advantage. Our business model produces compelling cash flow and enables us to assert our strategy. Three categories of comments to build on this. First, we will responsibly use our balance sheet to pursue compelling acquisitions. In the third quarter, we acquired 3LOG in the Forestry business. 3LOG is a leading supplier of timber management software solutions, and is a strong complement to our forestry business. On October 18, we acquired Cityworks as part of our utilities business. Cityworks is a leading provider of enterprise asset management software for utilities and local government and its solutions address the global challenges associated with maintaining and replacing aging utility, transportation, and infrastructure assets. We believe this platform is extendible across Trimble. Combined, the acquisitions represent a purchase price of slightly over $200 million, with the majority associated with Cityworks in the fourth quarter. Both businesses are in the Resources & Utilities reporting segment and we expect approximately $40 million of combined revenue contribution next year. The businesses are 100% software and services, with significant and growing recurring revenue streams and we expect profitability for these acquisitions above the Trimble average. Second, we will continue to transition license software businesses to subscription business models. We won’t chase short-term optics at the expense of long-term value creation. We will also experiment with hardware as a service models. Third, we will continue to invest in our customer relationships and in innovation. As evidence, in the third quarter we held three user conferences with the e-Builder, Viewpoint and Transportation teams that had over 3,500 collective attendees. On the innovation front, in the last few weeks, we launched WeedSeeker 2 in agriculture. WeedSeeker is a spot spray system that senses if a weed is present and signals spray nozzle to deliver a precise amount of chemical, spraying only the weed and not the bare ground. The value proposition includes the reduction of input costs, increased yield on crops, and lower environmental impact. In our survey business within Geospatial, we launched the X7 3D laser scanner, which we believe leapfrogs the market in terms of performance and value. In addition, the focus on ease-of-use for the X7 scanner and the accompanying Trimble Perspective software has already opened new customer segments, such as public safety. We are also investing in autonomy, which we generally think of as automation, as a next phase to link the industry continuums we serve in construction, transportation and agriculture. Much of the IP and know-how for automation comes from our Geospatial segment. Our industry knowledge and intimacy with the workflows of our industries enables us to automate an industry process as well as a machine, a tool or a tractor. We believe we are uniquely advantaged to revolutionize this automation because of our industry and technology competencies. Finally, we appointed a Chief Data Officer in September, as connecting the data within our lifecycles is an important part of our strategy going forward. Overall, we are optimistic about our ability to deliver a compelling set of connected innovations. Let’s close with guidance and move to Slide 11. First, a reminder that at our 2018 Investor Day, we put forward a model that will produce 23% to 24% EBITDA margins by 2021. We reaffirm our commitment to being within this range in 2021. For context, current EBITDA margins on a TTM basis are 22.8%. Working backwards to 2020, it would be premature to talk at any level of specificity, but it is safe to say that we are preparing for the revenue environment to continue to be challenging given the relative economic and political instabilities. We plan to play offense on our strategy while making progress towards our business model targets. Finally, working backwards again to fourth quarter guidance. We expect non-GAAP revenue of $770 million to $800 million and non-GAAP EPS of $0.46 to $0.50 per share. The fourth quarter revenue range implies total company growth of minus 3% to plus 1%, with minus 1% organic growth at the midpoint, plus about 1% growth from acquisitions and 1% of headwind from FX. Note that our fourth quarter this year is a 14-week quarter, and the extra week is expected to bring an additional 2.5 points of growth. Please further note, we expect restructuring charges of $12 million, which goes in line with the greater than $30 million of annualized cost reductions we mentioned. Projecting a balanced tone for the fourth quarter, I’ll highlight a few areas of caution and optimism: We are cautious on a few fronts. One, similar conditions in Agriculture, pressures on OEM businesses, and the tail end of the ELD conversion push. Two, Brexit uncertainty and potential follow-on impacts. And three, the aggregate weight of trade related uncertainty. On the other hand, we are optimistic in a few specific areas as well: One, continued growth in ARR, and our strong cash flow generation, which provides visibility and liquidity in the business model. Two, we expect that cost-reduction and containment measures that we have implemented will begin to show in the fourth quarter and more so as we come into 2020. Three, we believe customers are ready for the innovations that we can uniquely deliver, and we believe our investments in customer-driven innovations are done in a context of managing short and long-term pressures and opportunity. With that, let’s now take your questions.

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

Hey guys, I just wanted to offer my congratulations on the new roles and hopefully Steve, you have a little bit of time to enjoy your retirement as well. But yes, let me go ahead and just go with the questions. When we look at some of the macro factors that are impacting the business, I guess what’s baked into your revised guidance assumptions at this point? And what are some of the puts and takes around the macro? I know you’ve just gone through sort of the positives and negatives there, but what could maybe swing the results a little bit better or a little bit worse from that perspective?

Well, on the – I think the biggest factor would be where we land on trade, if it was to move meaningfully to the positive or the negative. I think the sentiment there would be the singular factor that I’d point out Jonathan. To get more micro, it’d be a little bit of a repeat of what we – what I went through at the end. I think Brexit would probably be also on the list and how this unfolds here in the coming weeks. I would probably be another one who had that put forward.

Got it. And then just in terms of the OEM headwinds, are those going to be temporary in nature? In other words, will this sort of come back to you over time or do you guys have any sort of visibility on the timeframe that it would take for some of this business?

Yes, there’s a couple of ways to think about that. At one level, there is little mathematical lapping effect, which say kind of Q2 some – next year or so. We’d start to lap when we started really seeing the drawback on the OEM businesses call that a mathematical answer at a more fundamental answer. Stepping back to Trimble overall, we have talked before about 15% of our revenue being OEM oriented and 85% being aftermarket oriented. Not all of that 15% is the exact same type of OEM revenue. But I’ll use that quantitative bit to say that to extent that OEMs come back that is in the ag market or the trucking market or the construction market. There’s a natural benefit from us and natural correlation we have to that. So if they don’t go up, I think we would correlate to that and if they do recover or if aspects recover or certain geographies or machine types, we recovered more than others, then that could be a catalyst for us.

Got it. Thank you.

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

Thanks so much. Guys we’ve seen a lot of consolidation in the buildings and infrastructure space over the last 18 months or so. How the competitive dynamics changed and how are you feeling about pricing and market share opportunities at this point?

Hi Colin, so you’re correct that there’s been a decent amount of consolidation. I think if you play hind – rearview mirror on the strategy and the moves that we made particularly with Viewpoint and e-Builder, we are on the right side of that curve. We thought that was – there was a context for consolidation that was likely to occur we were on the, I’d say pretty near front-end of that and then in fact it happened. So I think we sort of feel sort of empathically positive about the timing of the move in addition of course to the businesses themselves. In terms of let’s say the nature of competition and how that’s changing, since there’s been a bit of consolidation. I actually wouldn’t say that there’s been any fundamental changes at this point. Maybe there’s an element where people are digesting the activities that they’ve done. But I think also if you really put it in context of the end markets, these markets are let’s say, construction, a large global underserved, underpenetrated, fragmented markets. And so I think that there’s a fair – I think what it also shows us that’s there’s a fair amount of room for a number of players. With respect to pricing dynamics, I wouldn’t say there’s anything specific to point out there at this point. But I certainly understand where you were going with the question. I think time will tell.

Okay, thanks. And then just following up on the discussion around automation and the recent announcement about the partnership with Qualcomm, you’ve talked about some autonomy aspirations and it’s primarily been focused on off-road. Is that changing and how quickly is that changing? There’s obviously a large opportunity set on over the road market. We’d love to understand kind of how your strategy and thought processes is evolving as those markets developed as well.

Yes, good question. I think it is fair to say that we have incrementally moving more towards the automotive market, especially at the, I’ll say the intersection points where efforts in automotive support what we’re doing in the off-road market. So for instance, with the – if you take the Qualcomm announcement, it’s essentially it has our software on the chip sets such that customers can utilize our RTX correction services. Whether those correction services are agnostic to whether something’s on the road or off the road. So to the extent that we are enabling, let’s say in on highway market, we believe that’s in support of what we’re doing off-road and we believe there’s elements that play the other way where the work we’re doing off-road could be of benefit to opportunities on highway. So I do think it’s a fair characterization to say that it does incrementally have us moving more towards thinking on and off-road. One of the areas where we’ve been active in on-road autonomy, but I wouldn’t necessarily call out autonomy per se kind of an indirect way is we provide high definition mapping engines data collection devices that autonomous companies are using to build their own HD maps. So maybe that’s selling the axes and shovels for those creating the business. And then you have areas where we’re participating with the correction services on highway meets what we’re doing off highway, so quite a bit of activity at the moment.

Thanks so much, guys.

Our next question comes from the line of Ann Duignan from JP Morgan. Your line is open.

Hi, good evening, and congratulations to both of you. And my question I guess to the run the transportation business and so I got to spend some time with that group, which was very informative. With the decline in a hardware sales and also the transition to ELD, can you quantify the impact on Q4 margins from the increased costs? And are they one and done in Q4 or will they bleed a little bit into 2020? And then how do you think about that business in 2020? Do OEM customers take some time to digest ELD get used with, see what they want to do. Do they take a little bit of a breather in 2020?

It’s a good question, Ann. So let me break that into a couple aspects. So if we think about the fourth quarter and the ELD conversions, I think there could be upwards of a couple points of headwind to the margins we might’ve otherwise expected to see in the business. And I think about that almost relative to Q4 2018 when I say that. Normally we see a sequential growth in the margins and transportation in the fourth quarter. And we would definitely expect to see that again. And the fourth quarter, some of that actually just policy with the way the PTO is accounted for in that particular part of the business. And some of it’s the nature of the recurring revenue growth. But there’s a multi-year pattern that you can see in terms of expansion of margins on a sequential basis. And so we would expect to see that. We think it could have been perhaps a couple points higher or not for some of these pressures coming at the – towards the end of the mandate. And as you know, it’s the part two of the two-part mandate going into effect. To step back and put it in a little more context, I know, we talk a lot about – we’ve talked a lot about ELD and that becomes a bit of the, let’s say the highlight or the headline for the transportation segment. We do many other things as you know in the Transportation segment. If you really start to breakdown what’s ELD specific, it may be 15% or so of the reporting segment. We do many other things in that segment. So as we turn to 2020 and you asked about how that this might impact margins as we come into 2020, that same pressure I’m talking about at the moment and then to the rest of the year I think could come into – we think could come into the beginning of Q2. So more first half dynamic as those implementations, we think we’ll bleed into the beginning of next year, the first three or four months of next year at least we’re planning for that to happen. Relative to IT budgets and where spend may go for transportation companies, I think it’s fair to say that there may be some degree of fatigue on ELD spend as we come into next year. And that becomes the good news for the rest of the portfolio that’s not ELD. We do many other things both on mobility, technologies, enterprise technologies, the mapping and routing engine technologies, and so we have a conviction that we’ll see those IT budgets move to other areas. And that would inform our point of view on next year, and where we see growth opportunity in the segment.

Okay. That’s helpful color. I appreciate that. And then the other businesses, I’m building an infrastructure that business organically was up nicely. And there was an article that you co-sponsored earlier in the quarter around all the different inefficiencies in the whole supply chain, whether it’s between the contractor and the builder and the building owner. What’s the go-to-market strategy in that business and what’s the outlook for just putting all the different disparate brands together in that business for marketing and go forward.

Well, first, I’m glad you saw the report. Second, it does serve as a good forcing function internally to help us work towards a common vision. And in a tactical level, so the third thing, at a tactical level, we look at the ENR 400 is a proxy for where there’s the best fit for the aspects we talked about in that report with owners, contractors, subcontractors coming together and the benefits of that. So that naturally when you’ve taken list of an ENR 400, you can imagine taking the various Trimble capabilities, what we’re already doing in these different businesses, mapping them across the ENR 400 then stepping back from that. And then looking at from a, if you may call it a key account type go-to-market strategy, how do we think about engaging those customers. And I’ll say in a more effective manner than we’re doing perhaps independently. I’m doing that more together. And then it’s just working them at some level, one by one getting off the spreadsheets and just getting on the street and doing the work.

Okay. I’ll leave it there. In the interest of time, I appreciate it and good luck.

Thank you, Ann.

Next question comes from the line of Jerry Revich from Goldman Sachs. Your line is open.

Yes. Hi, good afternoon. And Rob and Steve, yes, congratulations.

Thanks, Jerry.

I’m wondering if you gentlemen wouldn’t mind talking about your strategic priorities in your new roles, maybe top one or two that you’re thinking about or over the next 12 months, obviously strong continuity with management team as a whole over the Company’s history. So I’m sure we’re not talking drastic changes, but I’m wondering if you’re willing to talk about any areas there may be moving up the priority scale to just to help us understand the flavor of any changes or modification in the direction from here.

Well, let me start, because I think, and then I’ll look to Rob to carry the substance of the question, because I think again Rob represents kind of a combination of continuity and change in a single package. So I think that on the one hand, I think in terms of the businesses and what we’re trying to achieve with them in a large scope is going to remain on change. And I think my relative priority is okay. The – if you look at the Trimble’s 40 years, Trimble has had two CEOs, Charlie who is Founder and he had a unique relationship with the Board. And I came in during a period of great stress and okay, I attempted provide some leadership, but I think there’s an opportunity to – for the Board to sit back and kind of reflect of on what its role is. So I would hope that in combination with Rob that we redefine maybe a more robust relationship between management and the Board and get the Board more engaged with strategy, find the mechanisms to get the Board more engaged constructively with strategy. So I think that’s not a strategic in and of itself, but I would say that would be one of my priorities in the coming year. But otherwise I think the broad strokes remain in place. And then Rob puts his own unique spin and emphasis on those. And certainly, he’s demonstrated that while he has been the principal leader within the company on the SaaS conversion, the conversion of the SaaS model. And I suspect to when I throw it over to him, that’s going to be a point of emphasis, which was certainly a consideration in this whole decision making process. So I’ll let him talk now.

So Jerry, I mean there is one element of I’ll stay somewhat high level and so far as I’m still the CFO until January. But to say a bit more, I know I mentioned in the opening comments, taking a fresh look at the portfolio along with the strategy, structure and systems and the business. To break that down just a little bit more at a strategy level and this vision or the mission of transformation and the vision of delivering products and service at the intersection of physical and digital worlds, we will continue doing that. That’s – that those building blocks have been in place for the better part of 20 years. And what I see as doing is building a data strategy to further connect the industry lifecycles we have. I think we will continue to develop more subscription business models. When I look at the people in Trimble, I think we employ extraordinary people and the objective would be to develop and engage our people even more. If I think about the aspect or dimension of execution, we have a unique, I think somewhat unique organizational model. It’s a decentralized structure. We’ll continue to execute in a decentralized structure. I mean keeping that intimacy with the markets and the accountability of the P&L that we have at the business units. And I think we can create more alignment and efficiencies around that model. And at some level change of CEO or not change of CEO, these are activities we would have been moving towards. I would really tell, we’d be moving towards anyway. So that maybe that gives you a little bit of a flavor and certainly as we come into next year. There’ll be another level of specificity to put on top of that.

Okay. And then in terms of e-Builder and Viewpoint, can you just talk about how the lead indicators for those businesses are performing? What do the pipelines look like? What were bookings like in the quarter? Just to help us understand how these businesses are performing given the mixed macro environment.

Sure. And I understand, yes, you would naturally see that level of detail. The best indicator to use would be the ARR. And at an ARR level, we were about 19% ARR growth in the combined Viewpoint and e-Builder business, that’s obviously a healthy number. We see no reason that that doesn’t, we can’t continue that kind of performance as evidenced the e-Builder team. I mentioned the User Conferences and just to give you a sense of momentum and energy in those businesses, the e-Builder business User Conference had I think over 600 attendees, the Viewpoint User Conference had over 2,100 customer attendees there. It’s quite inspiring actually to be with both of these management teams and then to see how that customers engaged with the teams. You put that together and it really has us feeling quite optimistic about where we are with those businesses and then take it in combination with the rest of the Trimble portfolio and connecting to what Ann was asking about a couple of minutes ago. And it sets out for us what we think is the right strategy with a lot of head room overtime.

Okay. And lastly, you really have phenomenal gross margin performance in services both year-over-year and sequentially. Can you just talk about what moved in the right direction and then that level of margins they’re sustainable on a go forward basis?

Sure. So what you’re referencing are the web tables. I presumed Jerry on the services component.

That’s right.

And yes, so I probably should step back for just a moment. So we are – we have supplementary web tables that we put out with the release. One of the things that we introduced last quarter was a revenue breakdown by type and the type is hardware, software, recurring and professional services. I mean, it’s an effort to really for investors better align how we talk about the business with you having the ability to actually deconstruct it yourself. So we provided that – we provide that revenue breakdown now for the company. And the goal would be, if things go according to plan next year to align the face of the financials that is the cue to the same kind of categories. The incremental addition we made this quarter was adding gross margin supplemental information that aligns with those revenue categories. And so in the web table that Jerry referring to, you can now see the gross margins by the revenue types, again, hardware, software, recurring and professional services. Okay. So Jerry, the specific question you had on pro services, if you look over the time period, we’ve provided over the last three years, the pro serve category is the one that jumps around the most category to category. And that’s really reflective of revenue recognition policies and the nature of how explain this – the nature of how the recognition can work on, if you have a percent to complete versus time and materials type contracts and how they may push from one quarter to another quarter. We had a nice benefit in the construction software business in Q3, where we were able to move to a percent complete recognition. And so we’re able to catch up some revenue and some that had 100% margin associated with it in the third corridor. So I would call that a discrete change that gave us that bump in third quarter, I wouldn’t call that something I would expect to continue on an ongoing basis.

Okay. I appreciate the discussion. Thank you.

Thanks, Jerry.

Our next question comes from the line of Richard Eastman from Baird. Your line is open.

Thank you. Rob, could you just maybe discuss the ag business and just where you see that business kind of tracking into your end and any positives that you could – that you have a good feel for around 2020s kind of outlook there. I mean, we have obviously the tariff impact on the U.S. business, but rest of the world as well. How do you see that business tracking into 2020?

Well, I would say, at the moment that as we all know, the conditions are somewhat challenging in the market. If you do the walk around the world, I’d say there’s been more challenging spots than opportunistic spots. What we’ve – just to give you a few examples, Argentina has become a very difficult market with the political, I’ll say, instability or situation in Argentina, I mean, how that’s working out with farmers in Argentina in Q3. And Brazil, you’ve seen a number of companies including us, are mentioning the lack of financing that was in place. It wasn’t in place enough in the third quarter to be a catalyst for sales in the quarter. That is now in place. So that would be a positive thing to, as we move forward, Brazil should look incrementally better if the financing stays in place. Obviously, China lost about 40% with the swine flu. So 40% of the swine population, that had some ripple effects around the world. You’ve seen some protests in Germany, farmers with some government policy. So there’s a set of challenges for sure around the world, where we saw bright spots. I would say Australia in the third quarter was a good market for us, where I would also say as a bright spot for us is new product introduction. So at ag or tech, I think we’ll have the bigger splash launch, but we have launched the weed seeker to product. And that’s the kind of nature of the things that we need to do in the – excuse me, in the ag business to create our control of our own destiny. The displays that we’ve launched about a year ago, we call them GFX, initial had its roll out and success outside of North America. Now, we’re starting to be able to bring them into the America as we continue to add firmware, which further enables the displays to be relevant for this market. So that can continue to product innovation is a big deal continuing to work the go to market channels. There’s always an element of not just looking at what’s happening in the world, but okay, what can – we can control and what can we do better on. And so we think about our go-to-market channel, which is a competitive advantage for us and continuing to work at. In addition to the last thing, I guess, I’d mentioned is, we have continue to add a number of OEM relationships and while OEMs are challenged at the moment to the extent that we see the OEMs find any green shoots next year that would be good for that aspect of the business. And I think I probably, like you, I’ve heard some commentary from that part of the universe that’s been slightly positive for next year. So we pay attention to that as well.

Okay. And then, just as a follow-up, somewhat similar question around Geospatial. I mean, we’ve had this China related issue now for a bit. Would you look at the revenue in the quarter for all of Geospatial, including the surveying business, where you referenced some government order slow down? But we kind of basing here, it kind of $155 million quarters, I mean, it doesn’t sound like this OEM business in China is going to come back. And obviously, we have this slowdown in the surveying side more domestically. But your thought around that level of revenue, I mean, would you look at that and think it’s maybe stabilizing down here?

Well, of the four reporting segments we have, Geospatial is the one that we’ve called as the lower – I’ll say, lower growth segment naturally compared to let’s say B&I, where we think that’s got the most organic growth potential in it. So at some level, I would say, it remains the more mature of the markets where we have. And when I say that it’s a market set of businesses or market to reporting segment, where we have high ambitions and we think we’re taking tactical and strategic moves to enable growth to happen in Geospatial. There, I would – I’d like I talked about ag, I would look at new product categories two years ago, we had talked about the SX 10 for the better part of a year. The combination of a scanner and a total station, the X7 I talked about on the call, I wouldn’t be an indicative of really entering the mainstream 3D laser scanning market. And I would say it’s a category, where we were somewhat absent from. And we think there’s a lot of opportunity in there to grow that aspect of the business. So the China OEMs or its just the OEM business in general, we have some parts of that, we think will be hard to recover, no doubt. At the same time, some of the technologies that are for us involved in the autonomy world are in the Geospatial segment. And we think that, we’ve got some avenues of growth to be able to achieve out of autonomy in a number of technologies that spawn out of Geospatial. So definitely think that there’s opportunities for good things to happen in the business and for growth to happen in the business.

Okay, very good. Thank you.

Our next question comes from the line of Rob Wertheimer from Melius Research. Your line is open.

Hi, good afternoon. I guess, it’s pretty obvious across the industrial world that the OEM business would have been soft and we saw that. Could you tell – can you touched on this earlier with Jerry, but could you just talk a little bit about what you’re seeing Buildings and Infrastructure on the software side. Is it just as resilient as you were thought, as you look into the more granular details than we can see? Is the growth rate just as good or is there any creeping uncertainty on purchasing decisions coming into the – I mean, obviously, the growth is great, right. But coming into the software side of the business.

Sure, Rob. I think that there is a little creeping uncertainty, obviously clearly, it wasn’t enough to, I’ll say move the needle markedly on the B&I segment, but we are seeing some of that uncertainty into the buying behavior. Now what aspect is uncertainty and these pauses and waiting to see, which way the wind’s going to blow on some, whether it’s trade or construction backlogs. I think that part is a little hard to read or is it really a turn in fundamentals. There’s – obviously, there’s tons of different indicators out there. You could look at the architecture index and say, okay, at an inflected to the negative, but if I’m in – I’ll stay in North America. In the civil business, contractors have healthy backlog of business. They may not be growing that backlog like they were at the last couple of years. But there’s a healthy backlog of business and we saw double-digit growth for example in North America in the civil construction business and our field sales for what we do in machine control and guidance. Back to software, continued to see – we did continue to see growth. I do think it was incrementally off. So we certainly watched that and I would close by reiterating, like that ARR growth at 19% and the combined e-Builder and Viewpoint, which is a subset of that, not that leads us to feel good about the prospects for those businesses coming into 2020. We take the architecture and design business or the SketchUp product. That’s also one of the software businesses in B&I, the SketchUp units – the revenues down year-over-year, because we have converted to a SaaS model. That’d be – if you call that the bad news. The good news is that the units are up 50% year-over-year, it’s the third quarter in a row where we’ve had by 50% up on units. It’s safe to say while we exceeded the expectations. We had four at the teams done a heck of a job with the conversion that’s clearly expanded the addressable market even further than we thought it would expand. And that’s clearly a really good thing for us in the long-term. So nothing definitive, right, I can see some puts and takes within that.

But so far you’re obviously growing very strongly true, it is the structural factors overwhelmed, I guess. Okay, thank you very much.

You bet.

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

Hi. I wanted to ask a couple of questions is, first, extending my congratulations to both Steve and Rob. I’m wondering with the change in responsibilities and some of the things that you’ve talked about in terms of improving the engagement of the board down to strategic thinking, et cetera. Historically, Steve, you’ve been a very good acquirer of other companies and bringing them under the Trimble umbrella. How are you thinking about that as a strategy – ongoing strategy going forward, particularly as we’re going through this transition to more of a subscription business and trying to expand the software capabilities overall?

Okay. Rob’s pointing at me. I guess, it’s fine to answer. He’s being deferential here. So I think, Rob and his remarks talked about being what offensive or taking the offense. And I think that is still our mentality. I think that if you look at the three major realms of construction, agriculture and transportation, I would point in particular both transportation and construction and still going through what I would call a pretty rapid change. And with the belief that in the next couple of years, the end game relative to the competitive this date, ultimate steady state competitive mixtures going to start to reflect. So this is not a five year sort of DL. I think it’s more like a two year given the rate of consolidation and such. So I think that our intention certainly in, again emphasizing transportation and construction is to be on the offense, because I think we have a unique set of capabilities at this point in time and we have a unique position in the marketplace and it’s in some sense ours to win or lose and we certainly intend to win. So now speaking more from a board perspective, I think Rob is got a great deal of support and degrees of freedom to define what winning – what the winning formula is, but I think that that is the relative mindset we’re bringing. Now that does not automatically mean acquisition after acquisition, but I think that does play a role in this, in terms of the kind of the competitive winner is going to be the one with the best array of assets that solves the total problem, certainly in both transportation and in construction. So I think maybe more of an attitude than a set of specifics here, but I think maybe, they gives you some color.

And it’ll just overlay a financial lens to the strategic landscape. If I’d look at it perspective of liquidity and leverage, the net debt to EBITDA of 2.13x, positions us well to be able to make moves, should they be available or we look at the free cash flow in the business that we’re generating well over the call it the $500 million range. The business produces the cash flow to enable us to play offense. And when we look at, for instance, the – we have a $1.25 billion revolver that’s on untapped and available to we have stacked maturities on the debt. So we put the, I’ll say, component pieces together underneath this that can enable us to assert ourselves on the strategic front and I think we’re well enabled in order to do so.

That’s really helpful. Yes. Definitely seems like you have the ability to go do things to, if and as opportunities present themselves. Rob, just a couple of quick follow-up questions, more related to near-term. First, can you give us any sense of how much subscription transition, maybe curtailing revenue right now and if that’s concentrated in any specific groups. And then last quarter, your comments around Europe on macro environment tended to center around Germany, et cetera. Wondering if we can get any type of update on further developments in that market or more broadly in the European theater things?

Well, so earlier in the year at the company level, we talked about the incremental conversions to subscription being a headwind of 1 percentage point on revenue and one point on operating income or EBITDA. And I would say that’s played through the year. So we do see a headwind as a result of that and it’s a good point to ask the question, because it masks what is in reality a really good thing that’s happening in the business. Now you see that not entirely, but you see that mostly through the ARR growth that we have in the business. So that would be the answer on that one. You asked about, Europe in what we’re seeing in Europe over all, If I got the question right, any – whether I take a corridor – I’ll take the corridor view on that. We were up in Europe and it was primarily in the Buildings and Infrastructure segment, where we were up. There’s – I’d say big swings in what we’re seeing in different parts of Europe in the quarter, maybe not surprisingly UK, proved to be quite difficult in the corridor. I’d say central Europe was largely still in a growth pattern for a Southern Europe was still mostly in a growth pattern. France and Spain actually did quite well for us in the quarter. That – I know, Germany being the heartbeat of the European economy. It was up just a bit in a low single digit. Does that help?

Cool. That’s really helpful. Thanks a lot Rob.

Our last question comes from the line of Andrew DeGasperi from Berenberg. Your line is open.

Thanks for taking my questions. First, I guess on the competitive environment generally, how’s – is anything changed sequentially in any of your markets

From that competitive landscape, we think we’re in a better position competitively in, we put 13% to 14% of our revenue back into R&D and that innovation engine and something we continue to intend to have a central to the strategy of the company. And if you look at the relative market share of many of the Trimble franchise businesses, our ability to put more money back into innovation at our size and to be able to out invest a competition, we think we’ll continue to be a good thing for the, I say, the long-term sustainable competitive advantage of the businesses that we have. So from that perspective, we would say we feel like we’re in a good spot and getting better if it’s even if maybe it’s incrementally better, which those are the kinds of things that can get masked obviously in an environment. Like this is, trying to reconcile absolute and relative results, but I’d say pretty much across the board we feel like we’re in a good, a good and getting better competitive position.

Got it. And then just as a follow-up in M&A, I just curious if you considered or you considering expanding to new verticals or are you really just focusing on expanding the portfolio that you have right now?

I would say – at the moment, I’d say emphatically, the portfolio that we have. So we don’t have an express intention to add a vertical that we’re not currently serving today and to go after that. We think there’s a lot of room within the markets we serve. We clearly serve a number of markets already today. And so intention is to stay within the markets that we’re in.

Got it. Thank you.

I’m showing no further questions at this time. I would now like to turn the call back to Michael Leyba.

Thank you for joining us on the call. We’ll speak to you again next quarter.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.