Q3 2019 Earnings Call
Keep people.
Ladies and gentlemen, he kept the standing by and welcome to the Trimble third quarter 2019 earnings call. At this time, all participants are in listen only mode.
The speakers presentation, there will be question and answer session.
So I asked the question during the fashion you want me to press Star one on your telephone.
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If you acquire any further assistance. Please press star Zero I would now like to handle conference over to your speaker today Mr. Michael people. Thank you. Please go ahead.
Thank you good afternoon, everyone and thanks for joining us on the call.
Your today with Steve Berglund, our CEO and brought painter our CFO .
I would like to point out the earnings release in the slide presentation supplementing todays call are available on our website at www Dot Trimble Dot com hezbollah's within the webcast and we'll be referring to the presentation today.
In addition, we will also be post in her prepared remarks on our Investor Relations website at Investor Dot Trimble Dot com shortly after the completion of this call.
Turning to slide two of the presentation I would like to remind you. The forward looking statements made in today's call and the subsequent question and answer period are subject to risks and uncertainties.
non-GAAP measures that we discussed in today's call are fully reconciled to GAAP measures in the tables from our press release.
First he will start with an overview after that Rob will take us through the remainder of the slides, including an indicator view of the quarter. Our guidance and then we will go to queuing <unk> 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 that Scott the discussion of the quarter to Rob and I will focus on today's CEO succession announcement.
Robs appointment represents the outcome of a multiyear process.
Virtually every board meeting for years as featured a discussion and evaluation of talent with an emphasis on individuals within short and long term suites.
Capabilities.
The evolution of the company has made this a dynamic process as the company has changed so as the CEO specification.
This progression has included the shift from truck product solutions.
The increasing role of software and most recently the emphasis on recurring revenue in services.
As a result of the process. The board came to the conclusion conclusion that an insight candidate would generally be prefer a goal for two reasons.
First we are route or a relatively complex company with a nuance 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 represent as both the continuity of that kind of culture.
Well acting as an agent of healthy change.
Both the board and I believe we have found the right blend and Rob.
And it's 13 plus years with Trumbull. He has performed a number of roles that have ranged from a strategic to the operational.
And this last almost four years SC CFO . He has developed a deep understanding of trimbles opportunities and challenges.
He has also been a champion for a number of needed initiatives, including the conversion to south.
Improved Ralph 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 CEO for all CFO role in the near future with a veteran CFO .
As executive Chair I do not expect to play our direct Roland company operations Robin I have developed a flexible range of targeted <unk> 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.
Yeah beyond that I hope to be able to per provide him generally useful advice as he settles and [noise].
Let me now I'll turn the call over to the soon to be third CEO and Trimbles history.
Thank you Steve.
I see a few words on the transition and then get back to the business.
I joint their Trimble 13 years ago, because of our mission to transform the way the World works, what we do a substantive and inspiring.
I feel real sense of purpose.
I appreciate but the people around the world, who work here and the endless opportunities that are available to learn and contribute.
Looking forward and my message is one of optimism we are poised to continue leading the digitization of the end markets we serve.
Our fundamentals are strong or people are strategies and our technologies, there's nowhere else I would rather be.
I also want to express my gratitude to Steve The Board and my fellow Trimble colleagues for the vote of confidence.
Steve join Trembling 1999, when we had 271 million in revenue.
We're now over 3.2 billion in revenue.
Our enterprise value when Steve joined it was about 150 million as of today that stands at over 11 billion.
Financial track Records speaks for itself and his leadership legacy, which runs deep has had a solid foundation for years to come.
So on behalf of 11500 Trimble colleagues, we think Steve for his 20 years of service the bar is set high.
As for what comes next I'll 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 conductivity.
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 and our businesses.
Now to the business or 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 any P.S. came in ahead of expectations and 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 a our remains attractive and cash flow was strong.
That combined with cost control and lower incentive compensation expense to liberty P.S. 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 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.
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 well, creating sustainable competitive advantage.
Let's get into the financial details starting on slide five.
Starting with the topline 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% error. Our was 1.1 billion in the quarter up 9% organically.
Gross margin in 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 a 162 million with operating margins of 20.7%.
As I said 48 cents was ahead of expectations.
It 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 was up 6.5% EBITDA is up over 12% EBITDA margins have expanded by 120 basis points and EPS is 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 in 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 and 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 TTM basis, and a third quarter, we repurchased 121 million of Trimble shares.
With 496 million of free cash flow and a TTM basis and full availability over 1.25 billion revolving credit facility, we are well positioned to whether any economic disruptions and to continue our disciplined capital allocation strategy.
Moving to reporting segment details and starting with revenue on slide seven.
For context last quarter, we called out three challenges, including our OEM sales with significant influence from the trying to 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 yield de conversion.
These factors largely played out again, albeit amplified as compared to our expectations with the 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%.
Then that the discreet impact of OEM results reduced that growth by approximately 2% in the quarter.
Buildings and infrastructure or be and I was largely inline with expectations as was viewpoint. He built or in the majority of our software businesses to illustrate this recurring revenue in the be an eye reporting segment was up in the mid teens.
Moving to slide eight 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 the increased customer support.
To engage our customers through the software conversion to L.D. 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 you had a drag on short term profitability as we saw in the quarter.
The standup positive performer in the quarter was being <unk> overall, the team demonstrated an ability to manage a variable costs as the environment became more uncertain throughout the quarter. This was a result of managing that 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.
Incentive compensation plans reflect our pay for performance culture in our tightly aligned with the financial performance at the divisional and company levels.
Turning now to slide nine and overall geographic commentary.
We experienced a decline of 3% in North America, where being nine transportation group, but were more than offset by resources and utilities and Geo spatial.
In Europe , we experienced growth of 1% driven primarily by the being nice segment.
And the Asia Pacific region, we saw a headwind of negative 18% driven primarily by difficult conditions in China, well 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 four let me next overlay a strategic lens onto the financial and structural commentary.
The fundamentals of Trimble remained strong.
Our markets and the value proposition number solutions provides a compelling context or people are 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 us.
First we will responsibly use our balance sheet to pursue compelling acquisitions.
In the third quarter, we acquired three log in the forestry business three log is a leading supplier of timber management software solutions and as a strong complement to our forestry business.
On October 18th we acquired we acquired city works as part of our utilities business.
City works as 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 extendable across trimble.
Combined the acquisitions represent a purchase price of oversight of slightly over 200 million.
But the majority associated with Citi works in the fourth quarter.
Both businesses are in the resources and utilities reporting segment, and we expect approximately 40 million of combined revenue contribution next year, the businesses or a 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 say 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 and innovation.
As evidenced in the third quarter, we held three user conferences with the builder viewpoint and transportation teams to head over 3500 collective attendees.
On the innovation front in the last few weeks, we launched we'd seeker two in agriculture, we'd seeker as a spot spray system that senses, if a we'd as president and signals spray nozzle to deliver a precise amount of chemical spring 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.
And our survey business within Geo spatial we launched the X seven Threed laser scanner, which we believe leapfrogs the market in terms of performance and value. In addition, the focus on ease of use for the X seven scanner and the accompanying Trimble prospective software has already opened a new customer segments, such as public safety.
We're also investing in autonomy, which we generally think of his automation as the next phase to linked the industry Continuums, we serve and construction and transportation and agriculture.
Much of the IP and know how for approach for automation comes from our Geo spatial segment.
Our industry knowledge and intimacy with the workflows of our industry's enables us to automate and industry process as well as a machine tool or a tractor.
We believe we are uniquely advantaged to revolutionize 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 lifecycle is an important part of our strategy going forward.
Overall, we're 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 would 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 R 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're preparing for the revenue environment to continue to be challenging given the relative economic and political instability.
We plan to play offense on our strategy, we're making progress towards our business model targets.
Finally, working backwards again to fourth quarter guidance, we expect non-GAAP revenue of 770 800 million and non-GAAP EPS of 46 to 50 cents per share the fourth quarter revenue range implies total company growth of minus three to plus 1% with wine minus 1% organic growth at the midpoint plus about one per.
Descent growth from acquisitions, and 1% of headwind from FX.
Note that our fourth quarter this year as a 14 week quarter and the extra week is expected to bring an additional 2.5 points of growth.
These further note we expect restructuring charges of 12 million, which goes in line with a greater than 30 million of annualized cost reductions we mentioned.
Projecting a balance tone for the fourth quarter highlight a few areas of caution and optimism.
We're cautious on a few fronts, one similar conditions in agriculture pressure and OEM businesses and the tail end of yield the conversion push to Brexit uncertainty and the potential follow on impacts and three the aggregate weight of trade related uncertainty.
On the other hand, we're optimistic in a few specific areas as well one continued growth in aerostar and our strong cash flow generation, which provides visibility and liquidity in the business model.
Do 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 to 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.
As a reminder to ask a question you will need to press star one on your telephone.
I would draw your question pressed the pad or Heskey.
Please standby will be compiled the came near Boston.
The first question comes from the line of Jonathan Ho from William 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 yeah, let me let me go ahead and just go with the questions and 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 you know around the macro I know, you've just gone through sort of the positives and negatives there, but what could maybe swing the rich.
I will tell that better or a little bit worse.
From from that perspective.
Well on the on the I think the biggest factor would be where we land on.
Where we land on trade if it was to move meaningfully.
To the positive or negative I think the sentiment there would would be this the singular the singular factor I did I would I'd point out Jonathan.
I haven't to get more micro yeah, I'd be a little bit of a repeat of what we what I went through what I went through at the at the end I think Brexit would probably be also on the list and how this unfolds here in the coming weeks of were probably another one wed I'd put forward.
Got it and then just in terms of the OEM headwinds are those going to be temporary in nature.
In other words for this sort of come back to you overtime or do you guys have any sort of visibility on the timeframe that would take for some of this business.
Yeah, there's a couple ways to think about that at one level there is.
Look mathematical lapping effect, which say kind of Q2, some next year or so.
We would we start to lap when we started really seeing the draw back on the OEM businesses.
Called out 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 of OEM revenue, but I'll use that.
Quantitative fit to say that.
To the extent that Oems come back.
That is in the AG market or the trucking market or the construction market, there's a natural benefit for for from us and our and natural correlation we have to that so if they don't go up.
I think we would correlate to that and if they if they do recover if aspects recover a certain geographies or machine types.
Recover more than others I'm done that could be a catalyst.
For us.
Got it thank you.
Our next question comes from the line as Colin Rusch from Oppenheimer and company. Your line is.
So much.
Because 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 in how are you feeling about pricing in market share opportunities at this point.
Hi, calling so you're correct that the theres been a decent amount of of consolidation I think if you play behind.
Rearview mirror on on the strategy and the moves that we that we made particularly with viewpoint and need E. Builder, we were on the right side of that.
Of that curve, we thought that that was a there was a context for consolidation that was likely to occur we were on the I'd say pretty near Frontend to have that and then in fact it happened. So I think with sort of feel emphatically positive about the timing of the move in addition of course to the businesses.
Sales in terms of let's say the nature of competition and how that's changing.
Since this since there's been a bit of consolidation I actually wouldn't say that their spend any fundamental changes at this point and maybe there's an element where.
People are digesting the activities, but they've they've done but I think also if you really put it in context of the end markets. These markets are and take construction are large global underserved underpenetrated.
Vince fragmented markets and so I think that there's a fair I think what it should also shows as there is a fair amount of room for a number of a number of players with respect to pricing dynamics I wouldn't say theres anything specific to point out there at at this point, but I certainly understand where you were going what <expletive> .
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 and it's primarily been focused on off road and it does that change and how quickly is that changing.
Theres, obviously, a large opportunity set on the over the road market, but love to understand kind of how your strategy and thought processes is evolved and as those marks so developed as well.
Good question I think it it's fair to say that we have ER.
Incrementally moving more towards the audit automotive market, especially at the I'll say the intersection points where.
Efforts in automotive support what we're doing and the off road market. So for instance, with.
The Qualcomm announcement.
It's a essentially it has our our software on the chipsets such that customers can utilize our TX a correction services.
Whether this correction services are agnostic to whether.
Some things on the road or off 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 are the work we're doing off road could be of a benefit to opportunities on on highway. So I do think it.
Fair characterization to say that it does.
Incrementally have us moving more towards thinking on and and off road one of the areas, where we've been active and on road autonomy, but I wouldn't necessarily caught up on a per se it kind of an indirect way as 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.
The axis and shovels you know 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 quite a bit of activity at the moment. Thanks, So much guys.
Our next question comes from the line of and Goodman from Jpmorgan. Your line is something.
Hi, good evening and congratulations to both of your.
My question I guess is around the transportation business since I got to spend some time with that group, which has.
Informative.
Yes.
The decline and hardware sales and all told the transition to the can can you quantify the impact on Q4 margins from they increased costs and are they won and done in Q4 will lead to little bit into 2020, and then how do you think about that business in 2020 do OEM customer.
It does.
Take some time to digest DLD get used to see what they wanted to do you did they take a little bit of a breather 2020 .
It's a good question and so.
Let me break that into a couple aspects. So if we think about the fourth quarter and the yield de conversions.
I think there could be upwards of a couple points of headwind to the margins, we might have otherwise expected to see and the business and I'm and I think about that almost relative to Q4 2018 when I.
When I say that.
Now normally we see a sequential.
Growth in the margins and transportation in the fourth quarter, and we would definitely I expect to see that again in the fourth quarter. Some of that actually is policy with the way. The P.T. O is accounted for in that particular part of the business and some of Thats. The nature of the recurring revenue growth, but there's a multiyear pattern that you can 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 were it not for some of these.
Pressures coming at the towards the end of the of the mandate and as you know it's the.
Part two of the two part mandate going into going into effect to step back and put it in a little more context.
I know I, we talk a lot about we've talked a lot about yield the 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 and the transportation segment. If you really start to break down whats yield the specific get maybe 15% or so of the of the reporting segment, we do many other things.
And that 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 it come into the beginning of Q2. So you know more first half.
Dynamic as the those implementations, we think will bleed into the beginning of.
The next year, the first three or four months of next year at least we're planning for that to happen.
Relative to I T 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 ERP spend as we come into next year and that becomes the good news for the rest of the portfolio Thats not yield D. and we do many other things both on mobility technologies Enterprise Tech.
Knowledge. He is the mapping and routing engine technologies and so we have a conviction that we'll see those I TV budgets moved to move to other areas and that would inform our point of view on next year, and where we see growth opportunity and the segment.
Okay. That's helpful color I appreciate that.
Other bets that says I'm going to infrastructure.
Thats organically was up nicely and then there was an article that you co sponsored earlier in the quarter around them.
All that different inefficiencies in that holds supply chain, whether it's between the contractor and build our and.
Building owner.
What's the go to market strategy and then what's the outlook for.
Yes, just putting all the different disparate brands together in that business.
Our 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 then a tactical level. So the third thing a tactical level, we look at the NR 400, as a proxy for where there is the best fit for.
The aspects, we talked about and that report with owners contractors subcontractors coming coming together and the benefits of that so that naturally when you take any or in a list of any in our 400.
You can imagine taking the various trimble capabilities, what we're already doing and these different businesses mapping them across.
The in our 400, and 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, but then I'll say in a more effective manner than we're doing perhaps independently.
Doing that more 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 work.
Okay I'll leave it there in the interest of time I appreciate the thing good luck.
Thank you and.
Our next question comes from the line Kerry Radek from Goldman Sachs. Your line is open.
Yes, hi.
And that Rob and Steve.
Graduations.
Thanks Jerry.
I'm wondering if you gentlemen, good morning talking about your strategic priorities in your new roles, maybe top one or two that you're thinking about the next 12 months obviously.
Strong continuity with management team as a holding company's history to say I'm sure we're not talking drastic changes.
You're willing to talk about any areas.
Maybe moving up the acquired your scale.
To help us understand though.
We will be changes were modifications.
I think you're watching for you.
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.
I have a combination of of continuity and change.
In a single package. So I think that on one hand, I think in terms of the businesses and what we're trying to achieve with them in a large scope.
It's going to.
Remain unchanged.
And I think my relative priority is okay. The.
If you look at the terminals 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 attempt to provide some leadership, but I think theres an opportunity to for the board to sit back and kind of reflect.
On what its role as so I would I would hope that in combination with Rob.
That we define maybe a.
More robust relationship.
Between management and the board and get the board more engaged with strategy find the mechanisms to get bored.
More engage constructively with strategy. So I think that's that's not a strategic in another itself, but I would say that would be one of my priorities in the coming here, but otherwise I think the broad strokes remain in place and then Rob puts his own unique.
Span and emphasis on those.
And certainly.
He is he has demonstrated that well he has been the principal leader within the company.
On the SaaS can conversion the conversion of the SaaS model and I suspect 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 Gerry I mean, there is one element to the fall I'll stay somewhat high level and so far is still the.
CFO until until January but.
Say a bit more.
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 a little bit more at a at a strategy level.
Vision.
The mission of transformation in the vision of.
Delivering product and service at the intersection of physical and digital World. We will continue doing that that's that those building blocks have been in place for the better part of the 2020 years.
And what I see us doing is building a data strategy to further connect the industry Lifecycles. We have I think we'll we'll 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 will continue to execute and a decentralized structure keeping that intimacy with them markets in the accountability of the personnel that we have at the business units.
And I think we can create more alignment inefficiencies.
Around that around that model.
And at some level change or change of CEO were not change as CEO . These are activities we would have.
Then moving towards Oh.
Really I'd say, we've been moving towards anyway. So that maybe that gives you a little bit of a little bit of a flavor and certainly as we come into next year.
Another level specificity to put on top of that.
Okay, and then you in terms of E builder.
Viewpoint.
You just talked about how the lead indicators for those businesses again outperforming what do the pipelines look like what we're looking like in the quarter just to help us understand how these businesses are performing given the mix macro environment.
Sure and I understand you wouldn't naturally see see that level of detail of the best indicator to use would be they are and at an EMR level I'm, we're about 19% error, our growth and ER and the combined viewpoint any builder business.
Obviously, a healthy a healthy number.
We see no reason that that doesn't we can't continue that kind of performance.
As evidenced the builder team I mentioned, the user conferences and just give you sense of momentum in energy in those businesses the builder.
Business user conference out I think over 600 attendees that viewpoint user conference had over 21.
Hundred customer attendees, there, it's quite inspiring actually to be with both of these of management teams and the seed how that customers engaged with 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 with and was asking about a couple of minutes ago and its sets out for us. What we think is the right strategy with a lot of headroom overtime.
Okay, and lastly, you really had phenomenal gross margin performance services.
Both year over year and sequentially can you just talk about what moved into right direction.
Well the low margins.
So you want to on a go forward basis.
Sure. So what you're referencing are the are the web tables.
Presumed Jerry on the on the services component.
That's right.
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 that type as hardware software a recurring and professional services.
And it's an effort to really for investors better align.
How we talk about the business I'm with you have an ability to actually deconstructed deconstructed yourself. So we provided that we provide that revenue breakdown now for.
For the company and the goal would be.
If things go according to plan next year to align the face of the financials that as a key the Q onto 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 and the web table.
The.
Jerry is referring to you can now see the gross margins by the revenue types again hardware software recurring and professional services. Okay. So Gerry the specific question you had on pro services. If you look I'm over the time period, we've provided over the last three.
Three years from the pro Serv 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.
Hi explain us the nature of how the recognition can work on a and if you have a percent complete versus time and materials type contracts and how they may push from one one quarter to another quarter, we had a nice benefit in the construction software business in Q3.
Where we were able to move.
To 8% complete recognition and so we were able to catch up some revenue and some that had 100% margin associated with it in the third quarter. So I would call that a discrete change that gave us that bump and third quarter I wouldn't call that something I would expect to continue on and on on an ongoing.
Basis.
I appreciate the discussion thank you.
Thanks Jerry.
Our next question comes from blindness recharge.
Eastman from Baird. Your line is open.
Yes. Thank you.
Rob could you just maybe discuss.
No.
Yeah AG business.
And just where you see the business kind of tracking into year end in any any positives that you could that you have a good feel for around 2020 is kind of outlook. There I mean, we have obviously the tariff impact on the U.S. business, but rest of world as well.
How do you see that business tracking into 2020.
Well I would say at the moment it as we all know the conditions are somewhat challenging and 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.
And I'll say instability or situation in Argentina and.
And how that's working out with farmers in Argentina, and Q3 in Brazil, and you've seen a number of companies, including us of or 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 and a quarter that is now in place so that would be a positive.
Saying to you know as we move forward, Brazil should look incrementally better if the financing stays in place obviously, China lost about 40%.
With the.
With the swine with the swine flu, so 40% as one population.
That had some ripple effects around the world you've seen some protest in Germany farmers with some government policy. So the set of challenges for sure around the world, where we sell bright spots I would say, Australia and the third quarter.
Was it wasn't good market for us where I would also say as a bright spot for us is new product introduction and so it agritech Nick I think we'll have the bigger splash launch, but we have launched that we'd seeker two product and that's the kind of nature of the things that we need to do.
I'm in the March end excuse me in the AG business to create our control of our own destiny.
The displays that Weve launched about a year ago become GFX.
Initial had its rollout and success outside of North America, now start to be able to bring them into the Americas as we continue to add firmware, which further enables.
The to displays to be relevant for.
For this market. So that can continued product innovation as a big deal on continuing to work to go to market.
Channels, you know, there's always an element.
Have a of not just looking at what's happening in the world, but okay. What can what can we can control and and what can we do better on and so we think about our our go to market channel, which is a competitive advantage for us and you know and continuing to work that in addition last thing I guess I'd mention is.
We have continued to add a a number of OEM.
Relationships and while Oems are challenged at the moment on to the extent that we see the the Oems.
Find any green shoots next year that would be good for that aspect of the of the business and I think I've, probably like you have heard some.
I see.
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. Ron do you spatial I mean, we've had to do so China related issue now for a bit.
Would you would you look at the revenue in the quarter.
All of geospatial, including the surveying business, where you you referenced some government orders slowdown, but are we kind of basing here.
Have a 155 million dollar quarters, I mean, it doesn't sound like this OEM business in China.
Is going to come back.
And.
I wish we had the 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 the of the of the four reporting segments, we have geospatial as the one that we've called as the lower.
Lower gross segment naturally compared to let's say beyond I, where we think thats got the most organic growth potential in it. So at some level I would say remains the more mature of the markets where we have.
And when I say that it's it's a market a set of businesses. Our market are reporting segment, where we have high ambitions and we think we're taking tactical and strategic moves to enable growth to happen in Geospace show.
There I would I'd like I talked about AG I would look at new product categories. The two two years ago, we've talked about the ethics 10 for the better part of a year.
The combination of a scanner and on a total station.
X seven I talked about on the call I wouldn't be in indicative of really entering the mainstream threed laser scanning market and I would say, it's a category, where we were somewhat absent from and we think theres a lot of opportunity in there.
To grow that aspect.
Of the business so the China Oems or is this the OEM business in general yes. Some parts of that we think we'll be hard to recover no doubt.
At the same time some of the technologies that are for US involved in autonomy world are in the Geospatial segment, and we think that you know we've got some some avenues of growth to be able to achieve out of autonomy and the number of technologies that spawn out of out of Geo spatial so.
And I think that Theres opportunities Rick for a good things to happen in the business in for growth to happen in the business. Okay. Good. Thank you.
Our next question comes from the line of Rob Wertheimer from Millionths Research your line.
Hi, good afternoon.
I guess, it's pretty obvious across industrial world that the OEM business would have been soft and we saw that.
Could you talk and you touched on the certainly with Jerry but can you just talked a little about what you're seeing.
Buildings and infrastructure on the you know the software side is it just as a resilient as you were thought as you look into the more granular details then we can see 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 type of coming out of the software side of business.
Sure Rob I think that there is a little creeping uncertainty you know I was clearly wasn't enough to.
He moved the needle markedly on on the BNS segment.
But we are seeing some of that uncertainty into the buying behavior, what aspect is uncertainty and.
These pauses in waiting to see which way the wins going to below on some whether its trade or construction backlogs I think that part is a little hard to read or is it really you know a turn and fundamentals. There's obviously there's tons of different indicators out there.
You could look at the architecture index, and say, okay, and inflected to negative, but if I'm in north and I'll stay in North America, and the civil business contractors have healthy backlog of business. They may not be growing that backlog like they were the last couple of years, but there's a healthy backlog.
Business and we saw double digit growth for example, in North America and the civil construction.
Business and our field sales for what we doing machine control guidance, but back to software continued to see we did continue to see growth I do think it was incrementally.
So we certainly watch that of and I would close by reiterating that air our growth the 19% and the combined Ebola or 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 are there.
Got you a product that is also one of the software businesses and be Eni, the sketchup units or the revenue is down year over year, because we've converted to a SaaS model.
That'd be a if you called out the bad news. The good news is is that the units are up 50% year over year or the third quarter and a rover, we've had 50% up on units. It's I'd say, it's safe to say wildly 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 and in the long term. So nothing definitive right. We can see some puts and takes within that.
But so far you are obviously growing very strongly through it as the structural factors overall my gosh.
Okay. Thank you very much.
But.
Our next question comes from the line of James deposit from Morgan Stanley . Your line is.
Hi, I wanted to ask a couple of questions first you know, saying my congratulations to both Stephen Rob.
I'm wondering.
With that the change in responsibilities and some of the thanks, Steve talked about in terms of.
Moving the engagement of the board down strategic thinking et cetera, historically, Steve you've been very good acquirer of other companies and bringing them under the Trimble umbrella how are you thinking about that.
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.
Robs pointing at me.
Yes.
I guess is bind to answer.
He is he's he's being deferential here.
So I think that I think.
Rob and his remarks talked about being.
What offensive, taking the offense and I think that.
Still our mentality I think that if you.
Look at the three major.
Realms of construction.
Agriculture and transportation I.
I would point in particular, both transportation and construction still going through what I would call.
A pretty rapid.
Change and with the belief that in the next couple of years, the endgame relative to the competitor this date ultimate steady state.
Competitive.
Mixtures kind start to reflect so this is not a five year.
Sort of deal I think it's more like a two year.
Given the rate of consolidation and such so I think that.
Our intention certainly in and again, emphasizing transportation and construction.
Is to be on the off sense, 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 hours to win or lose and we certainly intend to win so.
Now speaking more from a board perspective, I think Rob Scott.
A great deal of support and degrees of freedom to define what winning how what the winning formula is and 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's all the total problem certainly in both transportation and construction so I think.
Maybe more of an attitude than a set of specifics here, but I think maybe because he has some color.
And just overlay of financial.
Lends to the strategic landscape.
If I look at a perspective.
Liquidity and leverage the net debt to EBITDA of 2.13 X.
Positions us well to be able to make moves should they be available or we look at the free cash flow.
And the business.
That we're generating.
Well over the course of 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 us that can enable us to assert ourselves on the strategic front and and I think we're.
Well enabled in order to do so.
That's really helpful. Yeah, you definitely seems like you have there the ability to go do things different 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 is concentrated in any specific groups and then last quarter. Your comments around Europe macro environment tend to descend around Germany et cetera, I'm wondering if we can get any type of update on.
Further developments in that market or or more broadly in the European.
Yeah. Thanks.
Well so earlier in the year at the company level, we talked about the incremental conversions to subscription being a headwind of one percentage point on revenue.
And one point on operating income or or EBITDA.
I would say that's played through.
Through the 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.
You know 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 they are.
Growth that we have in the business.
So that would be the that would be the answer on that one.
You asked about.
Europe , and what we're seeing in Europe over all if I got the question right.
In the.
Well with our take a quarter I'll take the corridor.
View on that we were up in Europe .
And it was primarily in the buildings and infrastructure segment.
We were where we were up.
There is.
I'd say big swings in what we're seeing in different parts of Europe in the in the quarter.
You know maybe not surprisingly UK improve the UK proved to be.
Quite difficult.
In the quarter I'd say central Europe .
Was largely.
Still in a growth growth pattern for southern Europe was still mostly Ana.
In a growth and a growth pattern, France, and Spain actually did quite quite well for us.
In the in the quarter that I know you know, Germany being the heartbeat of of the European economy. It was up.
Up just a bit in a low single low single digit.
Does that help.
That's really helpful. Thanks, a lot Rob.
There are last question comes from the line of and do the cast Parry from Berenberg. Your line is open.
Thanks for taking my questions first I guess on the competitive environment generally how is anything changed sequentially and any of your markets.
From the competitive landscape. We think we're you know in a better position competitively, we put a 13% to 14% of our revenue back into R&D and that innovation engine and something we continue to.
Who intend to have a central to the strategy.
Of the company and you know if you look at the relative market share of many of the Trimble franchise businesses, our ability to put more money back.
Into innovation met our size and to build out invest competition and we think we'll continue to be a good thing for the the.
So 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 and getting better if it's even if maybe it's incrementally better which you know those are kind of things that can get mast, obviously in an environment.
Like this is trying to reconcile absolute and relative relative results.
But I'd say pretty much across the board, we feel like we're in a good good and getting better competitive position.
Got it and then just as a follow up on M&A I'm. Just curious if you consider it or are you considering expanding into new verticals or really just focusing on.
Expanding the portfolio that you have right now.
I would say at the moment, I'd say and Fadeley the portfolio that we.
That we have so no we don't have an express intention to add to.
A vertical that were not currently serving today end to end 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 already today and I'm. So then the intention is to is to stay within the the markets that we're in.
Got it thank you.
Correct.
I'm showing no further questions at this time I would now like to turn the call back to Mike people.
Thank you for joining us on the call will speak to you again next quarter.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.