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Trimble Navigation Limited (NASDAQ:TRMB)

Q4 2012 Earnings Call

February 5, 2013 4:30 PM ET

Executives

Willa McManmon – Director, IR

Steve Berglund – President and CEO

Raj Bahri – CFO

Analysts

Rich Valera – Needham & Company

Jonathan Ho – William Blair

Brett Wong – Piper Jaffray

Paul Coster – JP Morgan

Andrea James – Dougherty & Company

Andrew Spinola – Wells Fargo

Eli Lustgarten – Longbow Securities

Ian Ing – Lazard Capital Markets

Operator

Good afternoon. My name is Thea and I will be the conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter and Fiscal 2012 Earnings Conference Call. (Operator Instructions) After the speakers’ remarks, there will be a question-and-answer session.

(Operator Instructions)

Thank you. I will now turn the conference over to Ms. Willa McManmon. Ma’am, you may begin.

Willa McManmon

Good afternoon. This afternoon we will refer to non-GAAP measures which are reconciled to GAAP measures in our earnings press release and web tables, which can be found on our website at www.trimble.com.

We’ll also make forward-looking statements including our expectations for the first quarter and fiscal 2013 financial results. We wish to caution you that these statements are predictions and that actual events may differ materially. The periodic reports that we file from time-to-time with the Securities and Exchange Commission including the Company’s Form 10-K and 10-Qs discuss important factors that could cause the actual results to differ materially from those contained in our forward-looking comments.

A replay of this call is available by phone and on our website. Dial-in information is contained in our earnings press release.

With that, I’ll turn the call over to Steve.

Steve Berglund

Good afternoon. Overall fourth quarter results were healthy and were achieved in – and included an improving picture in residential and commercial production in the U.S. and continued macro uncertainties in both Europe and the U.S. The quarter concludes a year of strong performance. Revenue growth for total 2012 was 24%, which consisted of organic growth at 15% measured with constant exchange rates and 9% attributable to the combination of acquisitions and exchange rate effects.

Non-GAAP operating earnings were up 36% and non-GAAP operating margins expanded from 17.8% to 19.5%, which represents the best fiscal year performance ever for Trimble. These 2012 results should provide a basic template for accessing 2013. Our overall competitive product and marketing positioning is, if anything, better than it was a year ago since the acquisitions and product extensions over the 24 months have expanded our addressable market and provide greater scope for action. The competitive environment remains largely unchanged and presents no immediate challenges.

We currently anticipate continued double-digit organic growth in 2013 with an acquisition kicker of approximately 5%, which gives us an aggregate growth projection of 15% or more. The current environment makes it impractical to be particularly precise in projecting organic growth. This lack of precision results from a combination of factors that provide both potential upside and downside adjustments to the 2012 template.

Our outlook assumes modest improvements in the U.S. residential and commercial construction markets relative to 2012. If the current accelerates towards what we regard as the long-term normalized rate, this will represent an upside to our expectations. We are assuming Europe will continue to limp along in its current state and we therefore remain cautious about what the continent can deliver. If it reverts to crisis, this would have a downside impact on expectations.

On the other hand, if confidence grows during the year that European leadership is adequately addressing the challenges, the investment climate could become more bullish and our outlook could improve. The most likely meaningful immediate sources of upside would be the Nordic countries, Germany, the U.K. and Netherlands. We anticipate that rest of the world beyond Europe and the U.S. will continue to provide a strong platform for ongoing growth. There are no obvious scenarios that are likely to jeopardize this outlook.

The largest swing issue is currently the U.S. During the fourth quarter we encountered some deferrals of planned investment as companies and agencies postponed investment decisions while waiting for improved clarity on tax policy, funding levels and a general resolution of the budgetary impasse. We do not believe this effort is indicative of core underlying demand, but more of a relatively short-term response to uncertainty. It does remain unclear how far into 2013 this effect might extend. We anticipated the effect in our fourth quarter guidance and believe our first quarter guidance also reflects an appropriately conservatively view on the uncertainty. Improved clarity in the first half of the year with an increase in confidence could enhance our growth rate for the year.

E&C segment revenue grew 20% in 2012 with expanded operating margins as a result both a strong heavy civil performance and acquisition effects. Software revenue trends in the sector were also positive, which reflects both the improving state of the market as well as strategic execution. Survey instruments represent the most significant current question mark in the segment, both due to the European slowdown and deferrals of purchase decisions in the U.S. Surveyors tend to be sensitive to headline effects and have a propensity to postpone investments when uncertainty increases. This was a factor in the fourth quarter and may continue into 2013.

Uncertainties aside, E&C is fundamentally well positioned for 2013. Market adoption in the heavy civil applications continues to intensify and the SITECH channel is becoming increasingly effective as a mechanism for penetrating that market. In the building and construction realm we have reorganized the capabilities we developed or acquired in the last several years to provide better organizational focus on specific market segments and are creating a specialized channel similar to SITECH.

In addition, we have launched a project to integrate our various software capabilities around a common platform, which will place our concept of the constructible model at the center of the design-build-operate continuum. Although the project is multi-year, we expect first releases in 2013.

Field Solutions segment revenue grew 16% in 2012, while retaining its strong operating margins. Agriculture represents the majority of the segment and remained strong throughout the year as we continued to rollout the Connected Farm strategy. GIS was relatively flat for the year and our new electrical utility vertical provided significant percentage growth partly through acquisition.

Again, uncertainties aside, the segment is well positioned for 2013. Agriculture has remaining significant penetration possibilities in the core guidance market, but also has significant adjacencies available in providing solutions for new crop types and extending the solutions set for the Connected Farm with new product categories. The primary opportunity for the remaining businesses in the segment, such as GIS, is the focus on new emerging vertical businesses. While these new verticals will generate relatively small revenues in 2013, they are setting the stage for substantial future growth.

Mobile Solutions revenue was up 59% for the total year and non-GAAP operating margins improved to 9.9%. While year-to-year comparisons are difficult due to acquisitions and the related accounting effects, the underlying trend-line for the segment remains positive, particularly in the transportation and the logistics market. With the recent acquisitions of TMW and ALK we now have a unique and comprehensive solution for truckers which we can leverage. The segment also has a number of emerging verticals that have the ability to add to results in 2013, with more to come later.

Advanced Devices, which tends to be a steady state segment for us, grew 34% in the fourth quarter and contributed 15% revenue growth for the year with comparatively strong operating margins. This relatively uncommon phenomenon resulted from particularly strong demand for our timing and defense modules. We regard this as a short-term and not the beginning of a trend. Overall we remain confident in the basics of the Trimble franchise and how they will map on to whatever the environment throws our way in 2013. Let me turn the call over to Raj.

Raj Bahri

Today I’ll discuss the non-GAAP numbers. The GAAP numbers as well as reconciliation from GAAP to non-GAAP are detailed in our earnings press release.

Fourth quarter 2012 revenue of $515.5 million was up 18% as compared to the fourth quarter of 2011. Fourth quarter 2012 non-GAAP operating income of $85.1 million was up 24% as compared to the fourth quarter of 2011. Non-GAAP operating margin was 16.5% of revenue as compared to 15.8% of revenue in the fourth quarter of 2011. Margin expansion was driven by operating leverage and higher software mix partially offset by the impact of acquisitions and costs associated with Trimble Dimensions, our biannual users conference.

Non-GAAP net income of $73.4 million for the fourth quarter of 2012 was up 8% as compared to the fourth quarter of 2011. Diluted non-GAAP earnings per share in the fourth quarter of 2012 were $0.57 as compared to diluted non-GAAP earnings per share of $0.54 in the fourth quarter of 2011.

The fourth quarter tax rate was 16% versus 8% in the fourth quarter of 2011. The higher year-over-year tax rate reflects the absence of R&D tax credit in the quarter, as well as the geographic mix of profits partially offset by a true-up of deferred tax accounts.

Fiscal 2012 revenue of $2 billion was up 24% as compared to fiscal 2011. The organic growth rate excluding the impact of foreign exchange and acquisition was 15%. Fiscal 2012 non-GAAP operating income of $397.3 million was up 36% as compared to fiscal 2011. Non-GAAP operating margin was 19.5% of revenue as compared to 17.8% of revenue in fiscal 2011. Improvement in non-GAAP operating margin were due to leverage on higher revenue and product mix from the software.

Non-GAAP net income of $339.6 million for fiscal 2012 was up 25% as compared to fiscal 2011. Fiscal 2012 non-GAAP earnings per share were $2.65 as compared to diluted non-GAAP earnings per share of $2.15 in fiscal 2011.

The tax rate for the full year was 17% versus 11% in the prior year. The higher tax rate reflects the absence of R&D tax credits in 2012 as well as the geographical mix of profit. Because international profits are taxed at a lower rate than those in the U.S. a slower Europe has moved the mix of profit more to the U.S and hence increased our tax rate. Assuming the current mix we expect our ongoing tax rate to be in the 17% to 18% range.

Turning now to segments. Fourth quarter 2012 E&C revenue was $269.1 million, up 13% as compared to the fourth quarter of 2011. Growth in the E&C revenue came primarily from sales of heavy and highway and building construction solutions as well as acquisitions. Fourth quarter non-GAAP operating income was $42.4 million or 15.8% of revenue as compared to $29.4 million or 16.5% of revenue in the fourth quarter of 2011. Non-GAAP operating margin was down primarily due to operating expenses associated with Trimble Dimensions.

Fiscal 2012 E&C revenue was $1.1 billion, up 20% as compared to fiscal 2011. Growth in E&C revenue came from revenue growth across all major product categories as well as contributions from acquisitions. Fiscal 2012 non-GAAP operating income of $219.1 million or 20.1% of revenue as compared to $159.2 million or 17.6% of revenue in fiscal 2011. Non-GAAP operating margin increased primarily due to leverage on higher revenue and product mix.

Fourth quarter 2012 Field Solutions revenue was $108.1 million, up 13% as compared to the fourth quarter of 2011 due primarily to increased sales of agricultural products. Non-GAAP operating income was $37.9 million, or 35.1% of revenue as compared to $34.7 million or 36.3% of revenue in the fourth quarter of 2011. Non-GAAP operating margin was down primarily due to product mix in our GIS sales.

Fiscal 2012 Field Solutions revenue was $482 million, up 16% as compared to fiscal 2011 due primarily to increased sales of agriculture products. Fiscal 2012 non-GAAP operating income was $184.9 million or 38.4% of revenue as compared to $162.4 million or 39.3% of revenue in fiscal 2011. Non-GAAP operating margins were down primarily due to product mix in our GIS sales.

Fourth quarter 2012 Mobile Solutions revenue was $104.5 million, up 38% as compared to fourth quarter of 2011 due primarily to higher subscription revenue and the impact of acquisitions. Non-GAAP operating income was $11.7 million or 11.2% of revenue as compared to $6.4 million or 8.5% of revenue in the fourth quarter of 2011. The improvement in non-GAAP operating margin was due to leverage from increased revenue and product mix.

Fiscal 2012 Mobile Solutions revenue was $348.1 million, up 59% of revenue as compared to fiscal 2011 due primarily to higher subscription revenue. Fiscal 2012 non-GAAP operating income was $34.6 million, or 9.9% of revenue as compared to $7.4 million or 3.4% of revenue in fiscal 2011. Non-GAAP operating margin improved due to leverage on increased subscription revenue.

Fourth quarter 2012 Advanced Devices revenue was $33.8 million up 34% as compared to fourth quarter of 2011 primarily due to stronger sales of embedded devices and timing devices. Non-GAAP operating income in Advanced Devices was $7 million or 20.7% of revenue as compared to $4.1 million or 16.1% of revenue in the fourth quarter of 2011. The improvement in non-GAAP operating margin was due to leverage on higher revenue and product mix.

Fiscal 2012 Advanced Devices revenue was $120.6 million, up 15% as compared to fiscal 2011 due primarily to increased sales of timing devices. Fiscal 2012 non-GAAP operating income was $21.6 million or 17.9% of revenue as compared to $16.5 million or 15.6% of revenue in fiscal 2011. Non-GAAP operating margin improved due to leverage from increased revenue.

In the fourth quarter of 2012 55% of revenue came from North America, 22% from Europe, 16% from Asia-Pacific and 8% from rest of the world. The year-over-year growth rate by region was 25% in North America, 12% in Asia-Pacific, 12% in Europe and 9% in rest of the world.

In 2012 54% of revenue came from North America, 22% from Europe, 15% from Asia-Pacific and 8% from rest of the world. The year-over-year growth rate by region was 31% North America, 27% in Asia, 14% in Europe and 9% in the rest of the world.

Non-GAAP operating expense for the fourth quarter of 2012 was $191.8 million or 37.2% of revenue down from 37.6% of revenue in the fourth quarter of 2011. Fourth quarter 2012 non-GAAP non-operating income was $1.9 million, down as compared to $3.9 million in the fourth quarter of 2011 primarily due to higher interest expense.

Non-GAAP operating expense for 2012 was $713.6 million or 35% of revenue down from 35.3% of revenue in 2011. 2012 non-GAAP operating income was $11.3 million up as compared to $9.4 million in 2011 primarily due to better profitability from joint ventures partially offset by higher interest expense.

We finished the fourth quarter of 2012 with $157.2 million in cash compared to $154.6 million in the fourth quarter of 2011. Our debt level was $911.2 million on a multiple of 2.1 times trailing 12 month adjusted EBITDA.

Cash flow from operations was $96.8 million versus $79.8 million in the fourth quarter of last year.

Accounts receivables for the fourth quarter of 2012 was $323.5 million as compared to $275.2 million in the fourth quarter of 2011. Days sales outstanding in the fourth quarter of 2012 was 57 days as compared to 58 days in the third quarter of 2012 and 58 days in the year-ago quarter. Inventory in the fourth quarter of 2012 was $240.5 million compared to $234.3 million in the third quarter of 2012.

Moving on to guidance. In the first quarter of 2013 Trimble expects revenue between $575 million and $580 million with GAAP earnings per share of $0.41 to $0.43 and non-GAAP earnings per share of $0.74 to $0.76. Non-GAAP guidance excludes amortization of intangibles of $38.2 million related to previous acquisitions, anticipated acquisition cost of $2 million and anticipated impact of stock-based compensation expense of $9.2 million. Both GAAP and non-GAAP earnings per share assume a 14% to 16% tax rate and 130 million shares outstanding.

Thank you. And now we’ll take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question will come from Rich Valera with Needham & Company.

Rich Valera – Needham & Company

Thanks, good afternoon gentlemen. Steve, was just hoping you could give a little more color on the U.S., more particularly the housing recovery and it sounds like you’re seeing a little bit of benefit from that, but if you could put a little more color on that?

And then if you’re seeing at this early stage in the first quarter any change at all related to kind of the budget issues out there? Or do you think it’s going to be kind of a similar environment to what you saw in the fourth quarter? Thanks.

Steve Berglund

Yeah, first of all, relative to the housing – and I would say housing and commercial, the commercial tends to be a bit more regional, but I think the two go a little bit hand in hand here. So during 2012 we were – talked about residential and commercial pretty much through the year of 2012. And early on in the year we were talking about anecdotes, people were talking about the possibility of projects occurring. I think in the second half of the year, particularly later in the second half of the year, we started to see these – the talk of projects actually get converted into projects.

So I think that it’s definitely on the upswing. I would say that against historical standards and the historical standards of anything prior to 2008 it’s still pretty anemic relative to those standards, but there is improvement. So I think that in general what we’re expecting is then an improving environment during the course of the year. But I think it’s still early enough; it’s hard to really understand how strong, how pervasive it might be and I think it’s still being held hostage to kind of macro events as well.

So still early days, but I think we’re now willing to talk about an actual improvement year-to-year, whereas up until late in the year it was all very kind of latent.

As far as the budgetary effects, I think that it was definitely an effect in the fourth quarter. We saw in some cases relatively active postponement, citing the budget uncertainty, from the fourth quarter into the first quarter. We had anticipated a lot of that; the early signs were there and it actually turned up to be relatively operative.

So for the first week – for the first month of the quarter through January it’s still I think – there’s still a great deal of uncertainty out there. How actionable is still not clear. Typically construction in the first quarter, which is the market most affected by this, really is a March event more so than a January, February event as contractors get closer to being in season; that’s when the real kickoff starts.

So I think that it’s still too early in the quarter to be overly precise, but I think the issues are still there: talk about sequestering funds; the big question of debt ceilings and all the rest of it is simply being kicked down the road. So I think it’s still there and we’ll see how operative it is. So afraid I can’t be a whole lot more precise at this point in time. I think we’re really looking for deeper into February and into March for kind of clear signals.

But again we think the guidance we’ve given for the first quarter has the effect built into it. So I would say that we’re being, shall we say, appropriately conservative relative to what we’re saying about the first quarter financially.

Rich Valera – Needham & Company

Great. That’s helpful. And then in your prepared remarks, Steve, you talked again about survey being the weakest area within E&C. Can you talk about what is strong and offsetting it, since that segment overall seems to be performing, you know, reasonably in line with your expectations?

Steve Berglund

Right. Well, I think the strong segment, as it was throughout 2012, is really the heavy civil, the machine control aspects of construction. A strong 2012; we would expect it to be strong in 2013. In part because the SITECH effect is becoming more real; we’re getting I think more mature presence in the market; we are getting a stronger presence in the market and I think that effect is being felt.

I would say at this point in time is what we’re calling building and construction, the construction of – the vertical construction of buildings is showing signs early – what I’d call early signs of strength. So particular with software elements of that; we’re seeing software license activity in a number of the businesses showing strong year-to-year growth, which is I think both a statement about the fact that there is some confidence returning to that marketplace and contractors are – contractors and owners are starting to feel like they can make prospective investments. And I think it’s also a matter of okay, as we build out the product line – some of this was just strategic execution on our part.

So I would say is heavy civil, machine control, machine oriented aspects of it are still the central point of strength, but we’re seeing the building construction element start to show more signs of life and we’re expecting that will continue into 2013. We wait and see what happens in – on the survey instrument side, but generally our outlook there is positive; it’s just a question of how much this uncertainty – how long this period of uncertainty may last into 2013.

Rich Valera – Needham & Company

That’s helpful. And for Raj quick one on tax rate I thought you said earlier in your prepared remarks 17% to 18% going forward because I think of the strengthening euro but then you guided for 14% to 16% in the first quarter. What’s going on with the tax rate?

Raj Bahri

I think Q1 will have a catch-up for the R&D credit, the legislation was passed in January, and it’s retroactive to January of 2011, so we have a catch up...

Rich Valera – Needham & Company

Oh, I got you.

Raj Bahri

In Q1. But the full year will be around 17%.

Rich Valera – Needham & Company

So does that mean we should model actually – so about 17% for the whole year, so a little bit above 17% for the remaining three quarters?

Raj Bahri

Yeah. That would be a conservative guidance. I mean as I mentioned in my script, the international profits, we have a structure where we don’t pay taxes as long as we don’t bring the profits back. And especially Europe, if Europe, the mix continues, you know, how Europe continues to be weak, so as a conservative guidance I think that’s appropriate. Now if Europe does come back, the tax rate becomes better.

Rich Valera – Needham & Company

Right, okay. And final one for me and I’ll yield the floor here. I’m just – in terms of TMW contribution, are you willing to say how much revenue that contributed in the fourth quarter?

Raj Bahri

You know, we had said that there will be a big revenue hair-cut in – for TMW in Q because of the deferred revenue hair-cut. So we did – said that that would not – that would add some revenue and it added around $15 million, $16 million of revenue. And we said on an EPS basis it’ll be breakeven to slightly dilutive. So that hurt our operating margins. As I mentioned in my script, our margins were dragged down because of acquisitions and Dimensions. We were up – in spite of those two things we were still up year-over-year on margins. But both those things, the Dimensions cost as well as the acquisition was a drag on margin in Q4.

And the acquisition impact, the dilution will continue a little bit in Q1 as well, of TMW, and really Q2 we’ll come to a steady state on these acquisitions. So these acquisitions will no longer be a drag in Q2 going forward. In fact, TMW is a very – as we said, you know, it makes – it has a run rate of $100 million of revenue and it has margins around the 25% – north of 25% range. Those really come into play in from Q3 – Q2 onwards. It will be a drag in Q4 – it was a drag in Q4 and it will be a drag in Q1 as well on our margins

Rich Valera – Needham & Company

Understood. Thank you.

Operator

The next question will come from Jonathan Ho with William Blair.

Jonathan Ho – William Blair

Hey, guys, congratulations on the quarter.

Steve Berglund

Thank you.

Jonathan Ho – William Blair

Just relative to your guidance how do you anticipate investments and kind of this – maybe the linearity of those investments going into next year and some of the spending that’s going to support that? Can you just give us a little bit of color around that?

Steve Berglund

Well, I’m not sure I fully comprehend the question, but let me try and you can redirect me as necessary. So I think that when we start to talk about next year – if we start to talk about 2014, frankly, I feel a higher level of security talking about the out quarters and out years more so than just exactly what may be happening in the next three to six months in the U.S. in particular. But I think the – well, the source of the funding is largely commercial decisions; we’re selling ROIs. So I think the appetite for investment overall, short-term considerations aside, is strong. If you look at construction we’re selling productivity and significant productivity into the construction realm. And I think that there is a strong appetite and in fact a growing appetite to invest in technology to capture the ROIs in construction. So I think E&C is overall a positive story relative to both willingness and ability to invest.

I think the technology change is probably going to lead to structural changes in construction because those contractors able and willing to invest in technology will get the upper hand competitively over time.

So I think it will lead to some structural changes. But I think the willingness and ability to invest on the E&C side is strong.

Now there’s a secondary issue here, which is the relative health of state and local spending on things like highways and the like. So there is a government funding issue that is out there, but if anything, that environment somewhat improved to what it was two, three years ago. So I think steady as she goes in that regard.

So I think that there are no fundamental limitations relative to ability to invest or willingness to invest in E&C. I think agriculture runs to its own rules, to its own tempo, and I think the – in general, on a worldwide basis the farm economy is strong and farmers have a strong willingness and ability to invest.

And then when we get to Mobile, if anything there, I think the implementation of technology. If anything the driving forces there are stronger than anywhere else in the company. Part of this is regulatory. The regulatory regime in the U.S. is toughening and, in fact, trucking companies for example are going to have to invest in technology to comply with the regulatory environment. And then again there’s a very strong ROI here in the Mobile space as well.

So I would say is the – willingness and ability to invest is not the longer term constraint. We may see a quarter or two of indecision, but I think playing out over the course of the year it should be very strong.

Jonathan Ho – William Blair

Got it. And just a quick one for Raj. In terms of the Mobile Solutions business how do you – how would you see the Mobile operating margins trend then throughout the course of 2013?

Raj Bahri

So, you know, as we saw this year we finished almost to a double digit margin – 9.9% – and last year was around 2% to 3%, so we saw significant expansion this year. And we should see an upward trend; as subscription revenue is increasing this margin should trend upwards into 2013. So you should look at a slope upwards throughout the quarter. I don’t want to be precise – give a precise number, but, you know, it should be an upward trend. And we have significant leverage on the subscription revenue, as you saw in 2012.

Jonathan Ho – William Blair

Got it. And just one last one for me that’s a little bit more strategic. As we think about the technology penetration story, how much do you see of the organic growth being driven by penetration of the core businesses that you had for a while versus the new solutions and the new applications that you’re now selling? Just wanted to get a sense from you whether you’re seeing a transition point there or whether it’s still being led primarily by the legacy solutions?

Steve Berglund

Well, certainly for let’s call it the next two, three years the – what we would call the core businesses today are going to be carrying the load from a dollars and cents standpoint; we would expect to see much faster percentage growth rates coming out of these emerging businesses. But in reality what we’re attempting to do here and it takes some time, but if you flashback to my early days at Trimble – started in 1999 – of what we call the five core businesses today which are: geospacial surveying instruments and GIS; heavy civil infrastructure-related construction; building construction; agriculture; and then trucking and logistics. All of these buried in segments, four of them did not exist really in 1999 and 2000. All that really existed at that point in time was geospacial and what we’re attempting to do with these emerging businesses is replicate that success. And that success did not take place overnight.

So I would say as the next two, three years from a contribution standpoint, they’re still going to be heavily oriented towards, as you call it, the legacy businesses, which still have enormous amounts of penetration available to them. And then hopefully over the next two, three years some of these emerging businesses will enter into the conversation more and more and will start to be – start to shift the needle in their own right. But I’d say it’s not likely to see any real rocket ships; that’s just not the nature of these businesses emerging over the next two, three years. It’ll be steady consistent year-in, year-out performance that ultimately leads to a larger business.

Jonathan Ho – William Blair

Great. Thank you.

Operator

The next question will come from Brett Wong with Piper Jaffray.

Brett Wong – Piper Jaffray

Hi, gentlemen. Thanks for taking my questions. Kind of going along that same line. With that shift to software services, looking at 2013 is there a way you can kind of give us a more concrete idea of that contribution there, on a basis points stance or something? Do you think it’s a couple hundred basis points that shift is or...?

Steve Berglund

What, in terms of margin or revenue, or..?

Brett Wong – Piper Jaffray

In revenue.

Steve Berglund

Okay. Well, first of all that’s not – internal for the company, that’s effectively not how we look at it. There’s this breakout that we’ve got into the three current categories which Raj can speak to a little bit. But fundamentally internal to the company we talk in terms of providing solutions to the user and the nature of the solution’s typically a bundle of hardware, software, services.

And so, yeah, the software content is increasing, it’s increasing all the time and, okay, there are indicators to that, but in reality software as a discrete item isn’t necessarily what we’re typically selling to the users. It’s more often than not a bundle that ultimately is hardware. There are a number of discrete software businesses, but – I’m hoping Raj can be a little bit more articulate – but frankly, we just don’t look at it as a software – software as being a discrete item. It tends to be okay what industries are we providing solutions to and what’s the nature of – what’s occurring in those industries? Not so much ‘how much software are we selling at any point in time?’ Raj do you have some perspective?

Raj Bahri

Sure. So I can give you some perspective. We started breaking down our revenue in three different categories. The product category includes the hardware and the software licenses that we sell, so it does include a combination of both. And then we have service revenue, which is a recurring stream, which is primarily maintenance on the software licenses we have sold and also warranty and those type of things. And then we have subscription revenue where we charge things on a monthly basis for providing the service.

So as a combination of service and subscription revenue in 2012 was $473 million and last year the same was $298 million. So in those two categories which carry with it a higher margin there was a 57%, 58% growth rate. Now some of it was acquisition, some of it was organic, but it gives you a direct – and as a result, if you look at the gross margins, we saw a big jump up in our gross margins year-over-year. Our gross margins jumped from 53% to 54.5%, 150 basis points, and that was a reflection of this shift towards higher maintenance revenue related to software and higher subscription revenue.

Brett Wong – Piper Jaffray

Okay. Thanks. Okay well let me ask a more specific question within Field Solutions. So looking at kind of what you’re talking about with a bundled solution. As more devices go into the field and you’re looking at an emphasis on Connected Farm, how should we think about that software-service sales mix?

Steve Berglund

Again, there will be a general trend even in agriculture towards what’s called a more software-rich environment. But then the question gets to be is, okay, if on the tractor the farmer is looking at a screen that is controlling the entire system so that what looks to be a piece of hardware probably has tens of thousands, maybe more, lines of code on it. So is that software or is that hardware? So I think that the software content, the relative value of the software in the solution is going to grow. It’s just okay, where’s the line of demarcation between hardware and software; sometimes it’s relatively hard. Now I think there will be a general trend – not really all that evident yet – there will be a general trend in agriculture just as there will be in construction, again very early days in either of these, but where we’re talking about the constructible model in construction, which is let’s call it a very data rich information intensive environment that will tend to shape all other activity in construction, we would start to see the same thing developing in the agriculture. Where you’ve got a sensor rich environment that’s collecting large amounts of data – maybe stretching the point here a little bit – square yard by square yard.

So if you look at the amount of acreage planted worldwide, there gets to be a huge data question in terms of being able to do diagnosis and prescription kind of square yard by square yard, again stretching the case here a little bit. And so there will be a major, strong trend in the industry for agriculture to turn into let’s call it a data and software rich environment to make use of all the data that’s being generated by all these sensors out there collecting things like yield by square yard, so to speak. By the – and then the ability to prescribe a solution kind of square yard by square yard whether it be relative to fertilizer, pesticide, insecticide or even watering solutions. So I think that there are tidal forces that work both in construction and agriculture that leads to a much more – a much richer information and data solution.

But then what enables that both in terms of collection and in terms of application is the hardware. So I think again it’s – the two blend into each other, which is why I’m being a little careful about declaring software to be a discrete business in and of itself, because it’s interwoven with the sensors and the hardware capability as well as a complete integral solution.

But there are – the trend in both construction and agriculture is going to be towards much richer solutions based on the, let’s call it the big data sort of solutions that are becoming available out there.

So I don’t know if that’s on point or not, but maybe about the best I can do for today.

Brett Wong – Piper Jaffray

No, yeah. That’s actually exactly what I was getting at. And just wondering in your view and what you’re seeing, when do you see that transition to that rich data environment for ag and construction?

Steve Berglund

Well, I think we’re being a little bit more open on construction in terms of what we’re doing. So certainly the acquisitions of SketchUp, the acquisition of Plancal, Tekla, when asked have been all aimed at the goal of what we’re calling constructible model, which to us is something different than the conceptual models, the kind of the cat oriens conceptual models that have been around. But a constructible model in our view is a lot more than lines and vectors and angles and that sort of thing, but actually encompasses a much richer information solution. Everything going on to – that’s being installed on the construction site has a history. And so the solution can essentially reach out and capture a history as well as just the current as-designed plan.

So I think construction is closer to signs of evidence and, as I said in the script is, in terms of the platform concept we’re working on, is the first releases will be in 2013. So I would hope as a company that we start to provide evidence during the year of 2013 as to really what we believe – putting it on the line a little bit – in terms of new products coming out in 2013. So I think construction is, shall we say, a little bit more imminent.

I think agriculture will play out over a longer period of time. But again there are comparative tidal forces at work here that make agriculture in many ways as interesting as construction. But on that one I’ll be a little more vague in terms of exactly when something’s going to happen.

Brett Wong – Piper Jaffray

All right, that’s perfect. Thank you very much for all the color.

Steve Berglund

Thank you, yep.

Operator

The next question will come from Paul Coster with JP Morgan.

Paul Coster – JP Morgan

Thanks for taking my question. I think most of my questions have been answered. But perhaps, Steve, you can give us some sense of what kind of operating margins you think the business model can now target?

Steve Berglund

Well, I think – well, we’re back to – well, I guess for the fiscal year we were at – on non-GAAP operating margins – we were at a historical high for a fiscal year, of 19.5%. So I would say is that what will drive the margins up over time will be, first of all the software impact. As the software content increases, it will pull greater gross margins. And as long as we’re diligent on managing the costs below the gross margin line, we should be able to leverage that into higher operating margins.

And then there’s kind of an overlapping effect, but it’s simply the portfolio effect. So if you look at Mobile Solutions, which is rounding slightly to 10% operating margins, the model should enable us over time to converge on the company average of – current company average of 20%. So there’s a portfolio effect that’s coming out of Mobile. Those would be the two primary effects.

But I think – yeah. And so I think – but I think the key thing here – and I think we covered it either the last call or the call before that, is if you take these higher gross margins that we’re generating these days, which are up deeper into the 50%s than they used to be, and if we can return – if we can achieve the leverage to return to R&D, G&A, marketing and selling costs to levels that we’ve had in the past, which are higher at this point in time largely because of the acquisitions we brought in with higher gross margins but also higher costs below the gross margin line.

If we can return to levels that we’ve had historically, which would be our overall intent, is, I would say, there – beyond kind of the 20% number that we’re achieving at this point in time – there’s at least two to three points over time that are available to us just through kind of prudent financial management.

So I would kind of point at that and say, okay, without necessarily giving a precise timeline on how quickly we get there, but certainly I think the model as we’re operating it has the next two or three points available to us. And then after we’ve achieved that, we can talk about how we do better than that.

Paul Coster – JP Morgan

Very good. Thank you very much.

Steve Berglund

Thank you.

Operator

The next question will come from Andrea James with Dougherty & Company.

Andrea James – Dougherty & Company

Hi. Thank you for taking my questions. Can you unpack the 15% growth guidance a bit, with 10% organic? Maybe starting with where you’re being more cautious today and then where you’re feeling more confident? And then, I guess, are there any segments that are going to fall below the corporate average and then some will be above?

Steve Berglund

Well, I don’t think we want to be overly descriptive on it. I think that the language was selected in terms of, okay, we believe our organic growth for the year will be double – we said two things, effectively. We said that all else being equal that 2012 represents a template for 2013. So if we could take 2012 conditions and apply them on to 2013, the 15% organic growth that we achieved in 2012 would seem to be the, let’s call it the default option under that scenario.

We’re also suggesting that there are moving parts. Relative to the macro economy is, on average, the European economy is likely to be worse in 2013 than it was in 2012, simply because it came down during the course of 2012. In fact if the end condition stays constant through 2013 – it’s an if – Europe net-net will probably be worse in 2013 than 2012. At the same time, if we take the U.S., if that stays the same as 2012, we’ve got a lift in terms of the residential and commercial.

So there are a number of effects here that are playing out against each other. So I think that just taking 2012 as a template for 2013 would lead you to the arithmetic of 15% organic plus 5% inorganic at 20%, but we’re not suggesting that is the right number. And – but we’re saying – we’re suggesting that it’s 15% plus something, probably, at this point in time. But until we get some better clarity and just in terms of how the year is going to play out, and particularly how the first half of the year is going to play out, I don’t think we want to be overly descriptive about the year either in aggregate or by segment.

But as you heard me say is actually we’re comparatively – with the exception of Advanced Devices – we’re comparatively bullish on all three of the other segments relative to competitive positioning, product that we’re bringing to market and kind of the value that we’re selling into those markets. So, in total we’re actually quite bullish about the year. We’re just not sure what the environment will give us as the year goes on. So, we’re being cautious about the macroeconomics. We’re being – we’re actually quite bullish about our own prospects relative to that, whatever that environment is.

Andrea James – Dougherty & Company

That’s actually really helpful, thank you. Just one final one, is 25% incremental margin still the goal for 2013?

Steve Berglund

I think that our state – what we’ve said historically is that 25% is what people should expect from us. Now historically we’ve done better than that, but at the same time I think that we are making a – let’s say, we’re constantly triangulating in terms of how much investment we should be making for the longer term, how much of that gross – incremental gross margin we’re getting we should be reinvesting back into the business in either channel development or product development.

And so I think that as a general guide this 25% is a reasonable number to hold us accountable to. At times it may be higher than that, but 25% still is continually raising the corporate average. When the corporate average gets to 25% we’ll need to reconsider what we’re saying. But I think – right now I think that 25% is probably the expectation people should have for us and we’ll see maybe (inaudible) if we have particularly – particular conditions in any quarter, is we may be able to over-deliver on that. But I would say for the year it’s – kind of a 25% number is probably appropriate at this point in time.

Andrea James – Dougherty & Company

Thank you so much. I appreciate it.

Steve Berglund

Okay.

Operator

The next question will come from Andrew Spinola with Wells Fargo.

Andrew Spinola – Wells Fargo

Thanks. Could you provide a little color on how you’re thinking about capital allocation in 2013 in term of say debt pay down, acquisition, share repurchases?

Steve Berglund

Yeah. So I think that we obviously have levered ourselves up here a bit in the last 18 months. A number of assets have become available and we chose to be a participant as opposed to a spectator to the M&A process. I would say in general – without necessarily making a promise of any sort here – but in general the expectation would be that, okay, we revert a bit more to our historical pattern, so making a reasonable number of acquisitions but generally of a smaller nature.

So, general expectation – conditions may change – but general expectation at this point in time would be yeah, we continue to make a number of smaller acquisitions, but funding them out of operating cash flow and with the expectation that there will be cash flow available beyond that needed for acquisitions which will be used to pay down debt. I think that’s the general expectation that should be held. Again circumstances may change, but right at this point in time we’re not saying the acquisition – level of acquisition activity of the last 18 months or so to continue into 2013 or 2014.

Andrew Spinola – Wells Fargo

Got it. And you had – I think you emphasized your credit facility at the end of last year and I was just wondering if there was any signal from that and just generally how you think about your leverage target?

Raj Bahri

So we did upsize the facility because the financing, you know, was much – the refinancing was cheaper and we put more flexibility on the balance sheet just in case. But there is no intent of using it. And then we also extended the facility for another – you know for five years, so it gave us another two years extra. So those were reasons for doing it. It wasn’t to – there was no signal to say that we are acquiring something big. It was for more flexibility, better cost and extension of time.

Andrew Spinola – Wells Fargo

Thank you very much.

Operator

The next question will come from Eli Lustgarten with Longbow Securities.

Eli Lustgarten – Longbow Securities

Good afternoon, everyone.

Steve Berglund

Good afternoon.

Eli Lustgarten – Longbow Securities

I have – most questions have been answered. One question for Raj: on the income statement, the other income number was $9.1 million versus $2.8 million. What was that?

Raj Bahri

Sure. We had a one-time gain. We had a small equity interest in a dealer that we had for a while. We were able to sell it at a big gain, so that showed up in other income. I think it was $6.8 million or so, but we non-GAAP’ed it out. So it’s not in the non-GAAP numbers. It is in our GAAP EPS we have a favorability, but we do not take into account when you look at the non-GAAP numbers.

Eli Lustgarten – Longbow Securities

You take it out of the non-GAAP number?

Raj Bahri

Yes, absolutely. Since it was one-time in nature, we took it out.

Eli Lustgarten – Longbow Securities

Okay. And the other investment income was the JVs, right?

Raj Bahri

Yes.

Eli Lustgarten – Longbow Securities

Now can you give us some idea what’s going on at the JVs at this point, with particularly the one with Caterpillar, I guess, because they basically have shut down a lot of operations for a while.

Steve Berglund

Well, so probably the – just cataloging the relevant JVs here, there are probably four of them, two with Caterpillar and one with Nikon and one with Hilti. So I think the Caterpillar JVs are first of all the one that was created in 2002 CTCT, which is – whose purpose is to design and build on-board machine control. That, as you could probably guess is doing very well. It established new thresholds in 2012, is generating significant profitability and all in all is a significant...

Eli Lustgarten – Longbow Securities

A home run.

Steve Berglund

Yeah. It’s a home run; I hope Caterpillar would say the same. The other joint venture of Caterpillar was formed – and timing was perfect – was formed in October 2008 and is 55% owned by Trimble and really is intended to write software that puts the machine in the context of the construction site and that has – that was intended to have a long runway. It is not, at this point in time, adding significantly to the bottom line, but at the same time is on a very significant upside ramp in terms of number of machines the software is operating on. So I think that strategically after some – after a couple early years of, let’s call it, refining what we were really after there, I think that is on a strong upwards trend at this point in time and is impacting the industry as it was intended to do. So I would say that’s still a strategic play, not yet necessarily, financially, all that additive to Trimble.

The other two joint ventures for completeness is, we have a long standing joint venture with Nikon, the camera manufacturer, 50/50 Japanese centered to design what’s called lower-end survey instruments. We absorbed the Nikon survey instruments business at the time into the joint venture. That is actually doing quite well, is quite profitable even on a U.S. standard as opposed to a Japanese standard.

And the fourth joint venture of note is the joint venture with Hilti, which is a tools manufacturer headquartered in Liechtenstein, probably could conceivably call the premier tools manufacturer for construction. Again that would fall in to the realm of strategic and really is intended to take advantage of this constructible model concept we’re talking about, and access that model and create a – generations of smart tools, tools that are intelligent, that access the model, access the plan and provide a level of intelligence on the construction site.

And that’s – so it’s got a long runway. It’s got a long term development program. We’re still in the early phases of that, but that is really intended to be something of a revolutionary force on the building and construction side. So those are the four joint ventures that have some financial relevancy to our other income line, but that’s more or less the rundown.

Eli Lustgarten – Longbow Securities

And I don’t have any worries about the ag market for the year, but there is some consternation about what’s going on in the short term, because of droughts and timings and reaction. Are you seeing anything in the first quarter to be – to which we should be conservative on the outlook for the ag market at all?

Steve Berglund

To the extent that we need to be conservative, hopefully we’ve already baked it into the first quarter number. But we’re not overly – we’re not aware of any reason we should be particularly concerned at this point.

Eli Lustgarten – Longbow Securities

Sure. And can you – Raj, can you give us the amount of carry-over of the acquisitions that we have in 2013 versus 2005 in revenues?

Raj Bahri

Steve had mentioned that, we can account at approximately 5 points of growth in 2013 versus 2012 from acquisitions.

Eli Lustgarten – Longbow Securities

And is that all – most of that in Mobile Solutions or how is it split out among the divisions?

Raj Bahri

I think a lot of it is going to be in Mobile Solutions at this point of time.

Eli Lustgarten – Longbow Securities

Okay, I’ll take the rest offline. Thank you very much.

Steve Berglund

Thank you.

Raj Bahri

And TMW being the biggest one of acquisitions.

Operator

The next question will come from Ian Ing with Lazard Capital Markets.

Ian Ing – Lazard Capital Markets

Yes, thanks for fitting me in. Just two questions there. First of all infrastructure to support “big data”, you’ve talked about customers connecting and analyzing a lot more information and in your solutions. So does that mean you’re starting to host some cloud and datacenter services and, if so, where are we in that investment process and is it reflected in the incremental op margin guide?

Steve Berglund

Yeah, so actually I mentioned the Caterpillar joint venture from 2008 and as part of that joint venture Trimble took on the responsibility for hosting the solution worldwide. So really the investment that – the bulk of the investment to kind of bulk up to worldwide aspirations took place in 2008, 2009, and anything from this point on is really incremental. So Trimble has created an internal launch team called Trimble Hosting Services in 2008 that – to basically take on the responsibility for this Caterpillar joint venture and as well as all the other activities within Trimble.

So I would say is that there’s the dialogue of what’s inside versus the reliance on the cloud, that’s taking place and that will continue. But as far as any step function infrastructure cost necessary to support the activity, we’ve got the facilities in place; we have the staff in place; we’ve got the organization in place; and really have had for now on the order of, I guess approaching four years. So I think we’ve got that well in hand at this point.

Ian Ing – Lazard Capital Markets

Okay. That’s a good explanation. And then at Dimensions you highlighted emerging markets; you talked about opening a lot of new offices, a lot of runway there. It looks like in December that Asia-Pac plus other is down a bit sequentially on an absolute basis. Perhaps you could just dive into that a bit? And how does emerging markets play out this year and what are some of the catalysts? I noticed China railways in the headlines and things like that? Thanks.

Raj Bahri

Sure. I mean, if you look at our full year numbers Asia-Pac was up significantly. Asia-Pac was up like 27%; just to trying to dig the numbers here as we talk. Asia-Pac for the full year was up 27% and the rest of the world was up 9%. Now quarter-to-a-quarter there are sometimes swings, one-times that we just sometimes get especially in emerging markets there are contracts that are up for bid. So we may have – last year I know we had a big contract that was up in India that we won.

It was not repeatable in Q4 of this year, so India was down this year $3 million or $4 million in one quarter and that impacted the Asia-Pacific number for this quarter. So you will always have a little bit of swings by quarter, but you really need to look at it on a full year basis. And Asia-Pacific was up 27%. And we hardly had any acquisitions in Asia in 2012.

Steve Berglund

So I think, you know, in terms of kind of overall it’s – in talking about the emerging markets as being regional, emerging markets is that, okay, as kind of indicated in the script is that we’re generally pretty bullish about everything outside of the U.S. and outside of Europe. And that would include places like Africa but certainly Brazil and other parts of South America, China. China is doing – back to doing well after a little bit of a hiatus in 2011. India still kind of early days but a strong upward trajectory. So you name a continent – aside from Antarctica – and we’re probably bullish on it as long as the continents are not North America – well, North America excluding Canada and Mexico – and Europe. So I think the regional emerging markets are actually doing quite well and the key issue for us is just executing to the market potential.

Ian Ing – Lazard Capital Markets

So broadly positive on emerging markets, not any particular catalysts for this year?

Steve Berglund

No. No, I don’t think there are – I think fortunately I don’t think there are any particularly unique triggers. I think maybe the one that’s worth mentioning is we tend to have a strong link to China railways, less strong or less dominant than it would have been a couple of years ago. So I think that the railways in China have kind of returned back to a steady state; change in government, kind of the scandals and the issues are behind them. So I think we’re seeing a return to something that we would regard a steady state in China, but that’s probably the only specific factor that would stand out. Otherwise I would say we’re just playing into what’s kind of a mega trend here on infrastructure development in the emerging parts of the world.

Ian Ing – Lazard Capital Markets

Okay. Thank you, Steve. Thank you, Raj.

Steve Berglund

Thank you.

Operator

And your final question comes from Jonathan Ho with William Blair.

Jonathan Ho – William Blair

Hey, guys, just one quick follow-up question. What was the organic growth rate during the fourth quarter? I think you gave it for the full year but just wanted to know what it was for the fourth?

Raj Bahri

We will be giving more on the full year basis because it varies from quarter-to-quarter but it was double-digit in Q4 as well.

Jonathan Ho – William Blair

Great.

Steve Berglund

The issue becomes one of revenue recognition and other kind of accounting considerations, creates some distortions that kind of quarter-by-quarter. So I think that what we’re going to try to point out more is kind of annual trends with some of these – with the volatility taken out of it. So it was double-digits in the fourth quarter, is about as good as we’re going to get at this point.

Jonathan Ho – William Blair

Got it. Thank you.

Operator

And there are no further questions at this time.

Steve Berglund

Good. In that case, talk to you next quarter. Thanks for attending.

Operator

Thank you for participating in today’s conference call. You may now disconnect.

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