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Trimble Navigation Limited (NASDAQ:TRMB)

Q3 2011 Earnings Call

November 1, 2011 4:30 PM ET

Executives

Willa McManmon – Director, IR

Steven Berglund – President and CEO

Rajat Bahri – CFO

Analysts

Michael Cox – Piper Jaffray

Ajit Pai – Stifel Nicolaus

Jonathan Ho – William Blair & Company

Richard Valera – Needham & Company

Tavis McCourt – Morgan Keegan

Jonathan Goldberg – Deutsche Bank

Hi.Jonathan Goldberg – Deutsche Bank

Paul Coster – JP Morgan

Eli Lustgarten – Longbow Research

Jeff Rath – Canaccord Adams

Operator

Welcome, everyone, to the Trimble Third Quarter Earnings Conference Call. I would now like to turn the conference over to your host, Ms. Willa McManmon.

Willa McManmon

Thank you. Good afternoon.

Before we begin, I’d like to remind you that the forward-looking statements made in today’s call and the subsequent Q&A period are subject to risks and uncertainties. Trimble’s actual results may differ materially from those currently anticipated due to a number of factors including the competitive nature of the marketplace, the condition of the worldwide economy, and other factors detailed in the company’s Form 10-Ks and 10-Qs or other documents filed with the Securities and Exchange Commission.

During this call, we will refer to a press release. The press release and additional financial statements are posted on our website at www.trimble.com. The non-GAAP measures discussed in the call are reconciled to GAAP measures in the tables to our press release.

I will now turn the call over to Steve Berglund, our CEO; and Rajat Bahri, our CFO.

Steven Berglund

Good afternoon. The third quarter was consistent with the second quarter, in that it provided a sense of confidence about medium-term prospects and the state of the financial model. This momentum was demonstrated in our three most strategically important segments: E&C, Field Solutions, and Mobile Solutions. Our results, of course, contrast to the current negative public commentary about the macroeconomic environment. But, we are seeing more deliberation on major buying decisions as a result of headline negativism. We have not seen signs that point to a meaningful market slowdown, although a few of our markets have not yet recovered from the last recession and represent more upside than downside.

The strong revenue growth in E&C reflected both strong organic growth and the Tekla acquisition. Profitability for the segment was distorted because of short-term purchase accounting effects associated with the acquisition and did not fully reflect the revenue profile. Although we saw continuing strong growth in heavy and highway in the quarter, we also saw continuing improvements in survey instruments and other businesses in the segment. These improvements in E&C were delivered in spite of a commercial and residential construction – parts of Europe. Slower sales in China related to the recent problems specific to railway construction and the slower, more deliberate decision-making process by some of our customers.

The Tekla transition continues to progress, and we are increasingly engaged in the market with the BIM 5D and BIM to Field offering that includes Tekla, the Accubid, and QuickPen products, our build construction products and the products from our joint venture with Hilti. This product range provides a contractor with significant potential to lower costs.

The Field Solutions segment once again demonstrated a strong year-to-year growth, with contributions from both agriculture and GIS. The agricultural performance was driven by continuing strength in the agricultural economy around the world as well as – and expanding product range. GIS, although still negatively impacted by budgetary constraints at the state and local level, reflects the effects of new products and early results of greater focus on vertical markets.

The Mobile Solutions segment’s quarterly results provide an inflection point compared to the recent past. One reason for the positive change is the rework of the business model over the last profitability. Another reason is more significant and is the redirection of the portfolio towards vertical markets, both through acquisition and the selective pruning of the existing subscriber portfolio. The core vertical markets reported in this segment are forestry, construction supply, transportation and logistics, communications, environmental, field services, and public safety.

Our industry-focused emphasis is to move beyond broad-dot-on-a-map horizontal functionality, to add specific value and the capabilities that are relevant to these industries such as safety, diagnostics, and our 5D solutions. By providing this increased value, we will be able to both create competitive differentiation and expand gross margin.

Mobile Solutions segment profitability was reestablished in the quarter, and we believe we have a path to a significant expansion of segment profitability in 2012. Beyond improved profitability, we are taking steps to establish a unique worldwide strategic position. We have enhanced our original base business with the recent acquisitions of PeopleNet, Punch Telematix in Europe, Tata Automotive Mobility Technologies in India, and Yamei in China. These provide us both access to growth markets as well as substantial scale.

The Advanced Devices segment results recovered as expected from first half performance based on strong performance from Applanix. We have additional future upside potential within the segment as ThingMagic, which was acquired in 2010, integrates into Trimble product offerings and begins to produce profits.

In summary, we believe we remain on track to exceed our stated financial targets for the entire year, with momentum carrying us into next year. Our outlook for 2012 is positive, and we expect solid double-digit revenue and earnings growth. On the one hand, this view assumes that the economy does not decline dramatically. On the other hand, it does not assume any meaningful recovery in the commercial and residential construction market. If that were to occur, it could provide meaningful additional upside.

Let’s turn the call over to Raj.

Rajat Bahri

Good afternoon. I will now cover the non-GAAP numbers in my prepared remarks today. Our GAAP numbers as well as a GAAP to non-GAAP reconciliation are available in today’s earnings press release.

Today, we announced third quarter 2011 revenue of $417.4 million, up approximately 31% as compared to the third quarter of 2010. Tekla contributed $15.2 million in revenue for the quarter. This was approximately $7 million lower than the baseline revenue, primarily due to the non-cash write-down of deferred revenue. We expect these write-downs to be completed by the fourth quarter of 2011. Excluding Tekla, the top-line growth rate was 26%.

Third quarter 2011 non-GAAP operating income of $73 million was up 39% as compared to the third quarter of 2010. Non-GAAP operating margin was 17.5% as compared to 16.5% in the third quarter of 2010, representing operating leverage of 21%. Excluding Tekla, the operating margin for the total company was 18.4%, compared to 16.5% in the third quarter of 2010, resulting operating leverage of 26%. The tax rate in the quarter was 9% versus 14% in the third quarter of 2010. Non-GAAP net income of $65.7 million for the third quarter of 2011 was up 36% as compared to the third quarter of 2010. Diluted non-GAAP earnings per share in the third quarter of 2011 were $0.52 as compared to diluted non-GAAP earnings per share of $0.39 in the third quarter of 2010.

Third quarter 2011 E&C revenue was $241.1 million, up 27% as compared to the third quarter of 2010, driven by strength across most product lines, the positive effects of the SITECH channel, and the acquisition of Tekla. Non-GAAP operating income was $45.2 million or 18.8% of revenue, as compared to $38.5 million or 20.3% of revenue in the third quarter of 2010. Non-GAAP operating margin was lower due primarily to a non-cash write-down on a portion of Tekla’s pre-acquisition deferred revenue and resulting profitability. As guided, Tekla is expected to be dilutive in the third and fourth quarters of 2011 and accretive beginning in the first quarter of 2012.

Third quarter 2011 Field Solutions revenue was $91.1 million, up 35% as compared to the third quarter of 2010 due to growth in sales of both agricultural and geographical information system products and the acquisition of Tekla. Non-GAAP operating income was $31.6 million or 34.7% of revenue as compared to $21.5 million or 32% of revenue in the third quarter of 2010. The increase in non-GAAP operating margin was due to higher revenue.

Third quarter 2011 Mobile Solutions revenue was $58.1 million, up 54% as compared to the third quarter of 2010, due primarily to acquisitions, and growth within the base business also contributed. Non-GAAP operating income was $3.2 million or 5.5% of revenue as compared to operating income of $744,000 or 2% of revenue in the third quarter of 2010. The improvement in non-GAAP operating margin was due to primarily acquisitions and also some improvement in the base business, driven by verticalization of the portfolio. As we guided last quarter, we should continue to see progressive improvement in the Mobile Solutions segment profitability each quarter.

Third quarter 2011 Advanced Devices revenue was $27.1 million, up 15% as compared to the third quarter of 2010, due primarily to sales of Applanix products and acquisitions. Non-GAAP operating income in Advanced Devices was $4.6 million or 17% of revenue as compared to $4.5 million or 19.1% of revenue in the third quarter of 2010. The decline in non-GAAP operating margin was due to product mix and acquisitions.

In the second quarter of 2011, 51% of revenue came from North America, 24% from Europe, 15% from Asia-Pacific, and 10% from the rest of the world. The year-over-year growth rate by region was 28% in North America, 13% in Asia-Pacific, 35% in Europe, and 78% in the rest of the world. Europe, excluding Tekla, was still up 22% versus prior year.

Non-GAAP operating expenses for the third quarter of 2011 were $150.8 million or 36.1% of revenue, up only slightly as compared to 35.8% in the third quarter of 2010, primarily due to acquisitions. Third quarter 2011 non-GAAP non-operating income was negative $1.6 million versus a profit of $3.6 million in the third quarter of 2010, due primarily to greater interest expense, impact of foreign exchange transactions, and change in deferred compensation liabilities; partially offset by higher joint venture profitability.

We finished the third quarter of 2011 with $138.3 million in cash compared to $249.8 million in the second quarter of 2011. Our debt level was $637.2 million or 2.2 times trailing 12-month EBITDA. Accounts receivable for the third quarter of 2011 was $287.7 million as compared to $257.2 million in the second quarter of 2011. Days sales outstanding in the third quarter of 2011 was 63 days as compared to 57 days in the second quarter of 2011 and 66 days in the year-ago quarter. Inventory in the third quarter of 2011 was $215.7 million compared to $216.1 million in the second quarter 2011, with turns at 3.5 times, flat as compared to the second quarter of 2011.

Effective October 28, 2011, Trimble’s Board of Directors has approved a $100-million stock repurchase program. This program supersedes the existing repurchase programs. The program does not require a purchase of any minimum number of shares and may be suspended or discontinued at any time.

Our guidance for the fourth quarter of 2011 is for revenue between $415 million and $420 million, with GAAP EPS of $0.20 to $0.22 and non-GAAP EPS of $0.47 to $0.49. The non-GAAP guidance excludes the amortization of intangibles of $29 million related to previous acquisitions and anticipated stock-based compensation expense of $8 million. Both GAAP and non-GAAP earnings per share assume a 9% to 11% tax rate, with 127 million shares outstanding and interest cost of $3 million.

It should be noted in the year-over-year comparisons that earnings per share in the fourth quarter of 2010 were favorably impacted by a non-GAAP tax credit of 14%, driven primarily by a catch-up on research and development tax credit that (inaudible) in the fourth quarter of 2010.

Now, for your questions. We will take questions at this point.

Willa McManmon

Operator? Hello, operator?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Michael Cox Piper Jaffray.

Michael Cox – Piper Jaffray

Thanks a lot. Congratulations on a great quarter, guys.

Rajat Bahri

Thanks.

Michael Cox – Piper Jaffray

My first question is on the Mobile Solutions segment. How should we think about the step function in revenue? Is this largely a reflection of the PeopleNet acquisition and a run rate that we should model up of and is there any sort of seasonality to the PeopleNet business so it would be different than your traditional Mobile Solutions segment?

Rajat Bahri

So, Michael, this is Raj. There are three factors that are contributing to this growth rate. One is PeopleNet acquisition that you mentioned. Second is our base business excluding acquisition is also up double-digits versus prior year, and the third is actually an offset. As Steve mentioned, we are verticalizing our portfolio, focusing on high value-added solution, and we are pruning based where it doesn’t make sense. So, there’s an offset. Those are the three factors that are contributing to that 54% growth rate, two on the plus side, one on the negative side. And, going forward, we would expect the revenue – in our core business, we have lot of subs that are coming online that will continue to generate growth.

PeopleNet is a very – is a growing business so their revenue should continue to grow into Q4 as well, and we will keep on pruning that base that we think is non-value added, but the net result is that we’ll continue to see strong double-digits growth rate into Q4, and then next year also we should have strong double-digit growth rate for Mobile Solutions with operating margins expanding quite a bit next year versus where we are. We had a 5% operating margin. We should be close to a double-digit operating margin next year with the revenue growing at double-digit, so we could see significant profitability next year in our Mobile Solutions segment.

Michael Cox – Piper Jaffray

Okay. That’s very helpful. On the rest of world side that 78% growth you noted, was there any particular segment that drove that growth and any particular regions within rest of the world to call out?

Rajat Bahri

Rest of the world has been strong throughout the last few months and really we’ve seen growth in E&C in Africa. Africa is continuing – we’d put a lot of focus in Africa earlier on. We are seeing good growth in Africa. We’re seeing good growth in South America, and Mid East Middle East is also growing for us. So, basically, all the regions are – South America and Africa, I would say, are driving the growth and we expect that to continue in the near future.

Steven Berglund

But, it will tend to be more – well, ag is getting a foothold in some of those regions as well but it’s primarily an E&C, construction-oriented show at this point in time. But, with the build-out of Mobile Solutions as well as, let’s call it, a number of new agricultural footholds – maybe not so much in the next 12 months but over the next two, three years, we’d expect them to start to put up some numbers in new regions around the world.

Michael Cox – Piper Jaffray

Okay. If I could, just one last qualitative comment – or question; if you could just compare and contrast what you’re seeing today on the E&C side of the business relative to where you were this time three years ago given the concern of investors trying to draw the parallel between the two?

Steven Berglund

So, when you say three years ago, we’re talking about post September 15th, 2008?

Michael Cox – Piper Jaffray

Correct.

Steven Berglund

So at this point in time, I don’t think – I may have to look at my watch today to make sure I’m being accurate here. But I don’t think there is a – I think the – let’s call it, the reaction of, let’s call it, exposure to euro concerns and all the rest of it. I don’t think it’s of the same magnitude as it was three years ago. As of three years ago, September 15, it was very much the same as September 11, 2001. There was an instant precipitous step function drop in demand where every – kind of three years ago, every CEO in the world I think went in on that Monday morning and said, I want to see all expenditure requests and oh by the way, I’m not approving any of them. I think it was a step function and it was precipitous.

I would characterize the environment at the moment as being one where, okay, there is some more deliberation, people are scratching their heads and saying, okay, do I really want to put out the money? But ultimately, they’re still spending. So I would say that the two years do contrast with each other and this one is much less severe than it was three years ago. So it’s – yeah, it’s different. I’m not saying that it couldn’t end up being the same thing (inaudible) but I think it is a different environment today as compared to three years ago.

Michael Cox – Piper Jaffray

Thanks a lot.

Steven Berglund

Okay. Thanks.

Operator

Your next question comes from Ajit Pai Stifel Nicolaus.

Ajit Pai – Stifel Nicolaus

Yeah, good afternoon and congratulations on a very solid quarter.

Steven Berglund

Thank you.

Ajit Pai – Stifel Nicolaus

Couple of quick questions, I think the first one is just looking at Europe. Could you give us some qualitative comment on the growth that you saw in Europe, how much of that was acquisition, how much of that was organic? And then going into the fourth quarter, how do you expect that to be changing?

Steven Berglund

Well, let me make a general comment and then maybe Raj can speak to – of the numbers. So there was a significant organic component in the European growth in the quarter. Some of it was primarily the Tekla effect in the quarter. But I would say Europe is – breaks down into a number of different cases. We have got Mediterranean Europe obviously which is suffering and I’d, for the moment, include Ireland as part of Mediterranean Europe.

Then you’ve got what I’d call Nordic and Germany which are actually still quite reasonable, quite strong. France is in between, U.K. is a little in between. So I’d say it all comes down to cases within Europe. But I would for the moment say we wouldn’t necessarily anticipate, based on recent news here, wouldn’t anticipate a change in the fourth quarter at least yet, but I think Nordic in particular is relatively strong and Germany is relatively strong and I wouldn’t necessarily expect that to change here in the short term the rest is so-so.

Rajat Bahri

Yeah, so Ajit, if you quantify that a little bit, as I said in my prepared remarks, Europe on a reported basis was up 35%, but that included the Tekla acquisition. If I exclude the Tekla acquisition, Europe was still up 22% and the countries that drove the growth were, Germany is continuing very strong for us; France, continuing very strong for us; Russia, very strong for us; Belgium, good for us. So – but the other countries have been kind of soft for a long time, so that didn’t hurt us, the Greece, the Spain, the Italy, so those countries have not been generating any growth for us for a long period of time. So, basically, Germany, France, Russia drove that growth for us.

Ajit Pai – Stifel Nicolaus

Got it. And then the second question is just looking at your stock buyback and cash generation and acquisitions, given the current sort of climate of fear and what’s happened with valuations in the end markets. Could you give us some color as to how you prioritize your uses of cash and whether the acquisition environment has become more attractive for you or less?

Steven Berglund

Okay. So, I would say in – our position has been pretty much unchanged for quite a while which is if we generate cash, the primary priority would be to use it within the business. So, I’d say if we could beneficially make an acquisition that would enhance the strategy of the company and ultimately create shareholder value. That’ll be the first priority.

I think this environment – well, first of all, I think that the last year or two the acquisition environment has changed from the standpoint, there are more assets that have become available in the last 12 to 24 months than seemed to have been available before. So, whether it be private equity assets coming out of that form of ownership or longstanding family owners of businesses that have kind of resolved that – okay, there may not be a whole lot of value enhancement possibility over the next few years and therefore putting their assets on the market. I would say is that the availability of assets has probably changed in the last 12 to 24 months. Clearly, we’ve demonstrated some level of appetite for those.

So I would say it is really no change from the fundamentals on our part and maybe a somewhat improved environment for gaining access to assets. So I would say is our profile will remain relatively unchanged when it comes to acquisitions.

Ajit Pai – Stifel Nicolaus

And then the last question is just looking at both the competitive environment and the potential disruption in the supply chain out of the flooding in Thailand, et cetera, have you seen any change in either your supply chain right now the impact from the floods, or any change in competitive dynamics in terms of pricing in your larger markets?

Steven Berglund

No. Don’t think so. I think if we’re going to be exposed to the Thai flooding from a supply chain, it’s going to be effects deep in the bill of materials. We haven’t been able to identify any, let’s call it, primary or even secondary suppliers that have been significantly affected. We may not have visibility yet. Anyway, there may be deeper in the bill of materials. There may be components or modules that may end up in short supply but thus far it either has had a minimal effect on us or will have a minimal effect on us or it is not yet seen. But so far, and we’ve asked the question, so far we seem to be coming through the Thai supply chain issue in reasonably good shape. And as a result I wouldn’t necessarily expect to see any (inaudible) through the competitive dynamics at least in the markets in which we participate.

Ajit Pai – Stifel Nicolaus

Got it. Thank you so much.

Steven Berglund

Thank you.

Operator

Your next question comes from Jonathan Ho William Blair & Company.

Jonathan Ho – William Blair & Company

Great quarter guys. Can you hear me?

Steven Berglund

Thanks. Yeah.

Jonathan Ho – William Blair & Company

Okay, just starting out with Tekla, can you talk a little bit about how the business performed relative to your expectations this quarter and just a broader demand environment for the BIM product?

Steven Berglund

Sure. So I think, the company – aside from the accounting nuances Raj spoke of, the company is performing very much as expected. They are a quality company. They have long – long before they knew us put emphasis on financial performance, so their margin structure is actually quite strong. And so far, I think that in terms of what they’ve been delivering from financial performance standpoint has been very much in line and as I said, we have been very much encouraged, let’s call it, on a collaborative strategic basis how quickly Tekla and the rest of Trimble have found each other and whether it be joint selling or concepts of collaborative products going forward and all of that I think has contributed to, let’s call it, a great deal of optimism over the next two, three years in terms of what can be accomplished by the combination.

In terms of short term expectations, I think Tekla would one of the cases where – let’s call it, they are encountering a little bit more of the deliberative decision making. So, while still – while the word is still growth for them, I think maybe there’s been a little bit of, let’s call it, a more deliberative time consuming process involved with them.

Many times they’re selling into large accounts and I think I’d call slower, not – the business isn’t disappearing, it’s just taking a bit longer to land. So I would say the fundamentals are still very positive. They are seeing some of that deliberative decision making but what we still see is a worldwide expansion and a growth environment for them. So, still very much consistent with what we expected to see when we made the acquisition.

Rajat Bahri

And the other point I would make just to understand the underlying, we have reported $15 million of revenue and basically a slight loss but there’s $7 million revenue in profit that was just accounting in nature that will appear back in Q1. So if you put that numbers back Q1 is where you see strong double digit operating margins from Tekla.

Steven Berglund

So in reality I guess they are to some extent in the banks for next year, simply when the accounting comes back we’re going to get a bit of a step function from the accounting effects of Tekla.

Jonathan Ho – William Blair & Company

Got it. Got it. And just in terms of the double-digit growth that you talk to with regards to the guidance, should we be thinking along the lines of your longer term growth targets and how much should we think about acquisitions contributing for next year?

Steven Berglund

Well, I think it’s too early to talk much about last year. It was October last year where we put the kind of, I guess, we used the words neighborhood of 20% growth down for 2011. Okay, we’re doing that. I think given the environment we’re going to be a little careful. I think certainly with what everything we can see and kind of the early target setting within the company, we’re certainly expecting double digit growth, but just how much of it. I think acquisitions of these – the partial-year effects (inaudible) full-year effects from some of these acquisitions will certainly kind of be gravy or frosting on the cake relative to next year. But I think discussions about next year are at least three months premature at this point. So we’ll see what’s happening with the overall economy but certainly Tekla is going to be one of the net-net contributors both legitimately and through the accounting effects next year.

Jonathan Ho – William Blair & Company

Great, thank you.

Steven Berglund

Thank you.

Operator

Your next question comes from Rich Valera Needham & Co. LLC.

Richard Valera – Needham & Company

Thank you. In the Mobile Solutions group, I think you mentioned double-digit growth in the fourth quarter. I’m presuming that’s not just year-over-year since you’ve obviously got it quite easy compared with the acquisition. Can you clarify was that sequential or what did you mean by that double digit growth for TMS?

Rajat Bahri

As we gave numbers versus prior-year, right? We were up 54% versus prior-year. And we talked about growth – double digit growth rate versus the prior-year numbers in our prepared remarks, Rich.

Richard Valera – Needham & Company

Okay, what’s the prior-year number in the fourth quarter?

Rajat Bahri

No, this is third quarter versus third quarter of last year.

Richard Valera – Needham & Company

Yeah.

Rajat Bahri

That’s what we talked about in our comments. So we had a 54% growth versus last year.

Richard Valera – Needham & Company

Right. Okay.

Rajat Bahri

And we had double digit growth rate in our core business and we had PeopleNet contributed as well. And we’ll see the same phenomena in – and then we had to offset – consciously getting out of some businesses where we’re not making money. And then basically Q4 you will see the same phenomena. There will be a sequential increase also and also increase versus prior year as well.

Richard Valera – Needham & Company

Okay. That’s what I was trying to get at. So Q4, you are expecting a sequential revenue increase?

Rajat Bahri

We are. We are.

Richard Valera – Needham & Company

And then you mentioned I think for next year you’re expecting I think strong double-digit growth but again I guess with the acquisitions clearly in the first half that would be sort of a layup. Is there any other way we can think of next year sort of adjusting for the acquisitions?

Rajat Bahri

Well, I think what you’re going to get just trying to characterize with situation in a form that gives you some comfort here. So I think that – there are a fair number of moving parts in the business at this point in time because we are pruning the portfolio, so I think we are no longer focusing on some aspects of the business that we inherited from that road. So there is going to be a let’s call it a decline on let’s call it the baseline.

At the same time, even though we can’t necessarily talk about them openly, let’s just say that there’ve been a string of wins – contractual wins here recently that will generate growth next year and then okay, there is the net-net acquisition effect as well. But I think maybe there’ll be revenue growth but I think for next year, what the relative focus on our part is to demonstrate let’s call it that the financial model we can generate out of Mobile Solutions begins to converge on the rest of Trimble. So what we are looking for out of Mobile Solutions as a first priority next year is let’s call it a significantly better profit performance than we’ve been able to demonstrate this year. So I think that’s the first priority.

There’ll be a net revenue increase but within that, there will be what’s call it a fairly significant shifting of the business away from one category kind of more horizontal businesses to vertical businesses which won’t reflect the long term in terms of growth potential but – yeah, so I think what you’ll see next year is, yeah, a larger revenue number driven by the acquisitions but then you’ll see organic growth on top of that. But the organic growth, there’ll be a plus and a minus together and it’ll be 2013 when I think that the, let’s call it, the full steady state business will emerge. So in the latter part of 2012 and into 2013 it’ll become much more of a revenue story, but next year I think it’s going to be more of a profit story than necessarily a revenue story.

Richard Valera – Needham & Company

(Inaudible) nice to see the progress there. And one more, if I could, just on the Tekla revenue for the quarter, I think you said $15 million total revenue, Raj, can you say how that was split between E&C and Field Solutions?

Rajat Bahri

Sure. Just give me – start the next question, I’m looking up the numbers, we’ll give you the precise numbers. Just give me one minute.

Richard Valera – Needham & Company

Okay.

Rajat Bahri

Well, it’s probable – just on – in the rough terms, it’ll be kind of probably three-quarters E&C; one-quarter, Field Solutions, that’s probably kind of close enough (inaudible).

Richard Valera – Needham & Company

Okay. And I just wanted to also clarify on the lost deferred revenue from Tekla. You said $7 million, was that just in the quarter or that was how much you expected to lose for the year?

Rajat Bahri

That’s just this quarter. In Q3, the numbers will be more like $5 million – Q4, it’ll be $5 million.

Richard Valera – Needham & Company

Okay. So that’s perfect. That’s what I thought. Okay. All right. Thanks very much, gentlemen.

Steven Berglund

Thank you.

Operator

Your next question comes from Tavis McCourt. Morgan Keegan.

Tavis McCourt – Morgan Keegan

Hey, guys. Nice quarter. First, a clarification Raj, you did not include that $7 million back into non-GAAP earnings right?

Rajat Bahri

I did not. No, no. We take – and then we’ll recover it in Q1 of next year.

Tavis McCourt – Morgan Keegan

I just want to make sure.

Rajat Bahri

Other companies do take it into account but we decided not to do it.

Tavis McCourt – Morgan Keegan

Yeah.

Rajat Bahri

It’s much clearer from that perspective.

Tavis McCourt – Morgan Keegan

I agree. And then can you tell us where the – when the PeopleNet acquisition closed in the quarter?

Rajat Bahri

It was the first part – early part of the quarter. So it was – I’m trying to think – it’s somewhere late July.

Tavis McCourt – Morgan Keegan

Okay. So we at least got a solid two months of revenues from PeopleNet?

Rajat Bahri

Yeah, yeah, definitely.

Tavis McCourt – Morgan Keegan

And then if I look at the cash flow statements and then back out the Tekla acquisition, it looks like about $180 million or so in acquisitions in the quarter. Was that all PeopleNet or were there other acquisitions in the quarter?

Rajat Bahri

Say that again. What was your question?

Tavis McCourt – Morgan Keegan

In the cash flow statement for acquisitions in the quarter.

Rajat Bahri

Yes. So we had PeopleNet. We had Tekla. Those were the majority of it but we had a couple of more. We had company called Ashtech and company called OmniSTAR that we paid for. I’m taking about the first nine months. But yeah, for the quarter, those were the two big ones, because the cash flow shows the first nine months. That $763 million in cash flow…

Tavis McCourt – Morgan Keegan

Yeah.

Rajat Bahri

...you see that that’s for the first nine months of the quarter.

Tavis McCourt – Morgan Keegan

No, I understand. I back out. I get a…

Rajat Bahri

Yeah. So for this quarter, those are the two big ones.

Tavis McCourt – Morgan Keegan

Two big ones, okay.

Rajat Bahri

Yeah. Those are the big ones; there is nothing I can think of.

Tavis McCourt – Morgan Keegan

And then Steve, kind of further in the commentary relative to 2008, I presume the channel inventory is in probably a pretty different state now versus 2008. But can you talk about that a little bit?

Steven Berglund

Yeah. I’m going to have to do this kind of – I’m not sure I’ve got – nor the access to a whole lot of data on the subject but let me give you my impression. So I think what happened in latter part of 2008 and early part of 2009, without a doubt there was what’s called the dealers bled off a whole lot of inventory in the fourth quarter of 2008 and first quarter of 2009. And my belief is that that never came back and this is a positive. This is demonstrating let’s call it improved operations and greater trust in Trimble to deliver. So I don’t think those inventories ever came back to close to what they were in the latter of 2008.

So I think yeah contrasting the two environments, I suspect is that net dealer inventory in the channel is meaningfully less than it was in 2008. Again, I don’t have data specific to that but that would be my sense but I don’t think there is any inventory overhang in the channel at all. I think people learned their lessons back in 2008 and made sure that they never – that they implemented those lessons. So I don’t think there is any concern on our part about channel inventory at this point in time.

Tavis McCourt – Morgan Keegan

Got you. Thank a lot.

Steven Berglund

Thank you.

Operator

Your next question comes from Jonathan Goldberg Deutsche Bank Securities.

Jonathan Goldberg – Deutsche Bank

Hi.

Steven Berglund

Hi.Jonathan Goldberg – Deutsche Bank

Thanks for taking my question. I had question – I wanted to ask about your operating expenses, your fixed costs, and whatnot. There are a few moving parts here. You’ve given a good amount of clarity on that related to the acquisitions. But, I wanted to get a sense for how you think you can continue to grow revenue without adding too much to OpEx, your organic OpEx please?

Steven Berglund

Yeah. So, I think the core concept in the company is really this concept we keep talking about of operating leverages. We run all the businesses in the company to this concept of operating leverage, which is okay, how much of our incremental revenue dollar are they dropping to the operating income line and the designated target for the whole company is 25%. That will vary from business to business. So, I think the rough formulation would be out of every dollar, with a 50% gross margin, they on average would put 25% back into either channel development, marketing and sales, or R&D; hopefully, not G&A. And so, I think that would be the longer-term expectation going forward.

Now, what is happening, in large part because of the acquisitions, is the structure of the company is changing somewhat, is the growth margin is tending to increase as we get more and more software content into the company. And, as a result, the OpEx as a percentage of revenue is probably tending to be a bit higher, still aiming for the net result of 25% incremental on the operating line. But, it is a strong ethic within the company as to leverage revenue growth into the bottom-line and at the same time is also encouraging people to think about developing their businesses internationally and extending the product line. So, we’re attempting to find the right balance between building out the channel and expanding the product line. And so, the sub-concept to 25% operating leverage I think is the key concept that we use and that we would expect to be held accountable to.

Jonathan Goldberg – Deutsche Bank

And so that was – you think you’re on that run rate on an organic basis in the quarter?

Rajat Bahri

Yeah, if you take Tekla out, our operating leverage was 26%. So, our margins would have been 18.5% versus the 17.5% that was reported.

Jonathan Goldberg – Deutsche Bank

Great. Thank you.

Steven Berglund

Thank you.

Operator

Your next question comes from Paul Coster, JP Morgan.

Paul Coster – JP Morgan

Yes, thank you. Just a couple of quick ones, most of – have been answered. First, in terms of the SITECH distribution channel, where do we stand in terms of completing that transition state? And, in – looking at Tekla, I assumed throughout that a good part of the synergy here is taking the Tekla BIM products and going global with it. Where do we stand on that?

Steven Berglund

Sure. So, the SITECH still continue to be built out. Actually, for the moment, I forget the exact number but the total number that we are expecting to have is somewhere around the 105 or something when we’re completely built out. We are putting them in place at a fairly rapid rate. So, I would say that the expectation still by the end of the year is to have the SITECH network pretty much built out. There’ll be some gaps on the map.

But, if you look at the map, it’s getting to be reasonably well covered, and then there’s an in-between category that will probably be the last to flip over to SITECH. There are actually nine Caterpillar dealerships that have been – sorry, Trimble dealers for a number of years that have not yet converted to SITECH but if you look at those already completed, plus those nine, we are 70-plus-percent complete at this point in time, and by the end of the year, we should be substantially complete. So, I think that it’s getting pretty close to – we’re going to have a steady state model here, I think, around the end of the year with a little bit of additional build-out yet to come, but by the end of the year, it will be substantially complete.

As far as the Tekla synergies, yeah, you’re right; we are – synergy is a word we tend to be relatively suspicious of in Trimble, but here is a case where we think we have a strong synergistic combination where Tekla brings, first of all, a strong platform that we can build on. We can build other product functionality on top of the Tekla platform, which would be our intent, but then they bring structures. We have mechanical, electrical, plumbing with Accubid and QuickPen. We have what’s called emerging generation smart tools. We have Meridian which was an acquisition from six or seven years ago, which is focused on scheduling. So, against the elements of what is called BIM 5D which is the three physical dimensions plus schedule, plus cost, we have large parts of the solution.

So, I think there is strong synergy from a product standpoint; right now, it exists. We, over the next year, will make it more elegant. But, I think – as you point out, I think the ability to project ourselves worldwide has just gone up by a step function. What Tekla brings into the mix is already existing international distribution. They bring into the mix a strong direct sales force that is capable of making a key account sale to a major contractor for example. There is absolutely no reason why that was called impressive direct sales force when they go in to make a key account corporate sale, couldn’t bring along what’s called the other elements of Trimble along with them and essentially sell the entire package and then reverse goes as well. So, I think that the early leverage will come from the channel side, a later leverage to come from the product side.

Paul Coster – JP Morgan

It is, though, a pretty high-touch sale I imagine, requiring a certain type of salesperson and I would imagine a fairly lengthy sale cycle.

Steven Berglund

Right.

Paul Coster – JP Morgan

Can you talk about that and how long it would take before you believe that international progression can really gain traction?

Steven Berglund

Well, I think the assumption is probably overall right then. When you’re selling into a major product – project it will take some time, and the runway is going to be relatively long in terms of complete a sale. At the same time, there is a high-degree of opportunism also loose in the world, and we have already seen cases where, let’s call it – we have had some success already on an international scale, doing what I described. So, I think, yeah, we won’t see the full effect for some period of time, but I think we are seeing positive effects now.

And if nothing else, I think we – what we are seeing relative to the longer term as we are seeing much better access than we’ve had before. So, for example, taking Meridian the scheduling software – project management software would be more appropriate, we are seeing significant activity on their part in the Middle East now. So, we’re getting, let’s call it – already seeing leverage from, let’s call it, the geographic scope of Trimble and that’s just being one example. So, I don’t want to overdo this but I think that the story will emerge but it doesn’t – it’s not – here’s the case where I’m not saying it’s a year off; I’m saying it’ll be progressive and we’re seeing effects right now.

Paul Coster – JP Morgan

Thank you.

Rajat Bahri

Thank you.

Operator

Your next question comes from Eli Lustgarten, Longbow Research.

Eli Lustgarten – Longbow Research

That was close. Good afternoon, everyone. Hello?

Rajat Bahri

Hi, Eli.

Eli Lustgarten – Longbow Research

Yeah. I just need some clarification; could, one – could you break out how much acquisition was in the Mobile Solutions versus – looks like it’s about $15 million, $16 million of acquisitions which (inaudible).

Rajat Bahri

We don’t break acquisitions out by segment as Tekla is the one we’re doing it because of substantial and part of the purchase price. As I said, acquisition was a big part of the growth and than a big business.

Eli Lustgarten – Longbow Research

Yes. You said Mobile was up double digit, which would – we put it in the low 40s and the difference between that is the acquisitions. Is that a fair way of characterizing it?

Rajat Bahri

No. We’ve never – we never go there, so –

Steven Berglund

But, Eli, I think you’d be correct in attributing a large part of the step function growth to the acquisition, but there are a lot of moving parts and we don’t want to get into trying to describe the point.

Eli Lustgarten – Longbow Research

Well, the point is that’s going to continue for the next four quarters, at least.

Steven Berglund

Yeah.

Eli Lustgarten – Longbow Research

Is it fair?

Steven Berglund

Yeah. It will.

Eli Lustgarten – Longbow Research

That’s sort of what I’m trying to drive at. The profit – it looks like if you strip out Tekla from E&C, that the Engineering – the E&C business profitability was off a little bit from last year, but probably pretty close to what we’ve been seeing. Is that what we’re expecting that the profitability will hold there for...?

Rajat Bahri

Yeah, the E&C business is – if you look at Q2, it was in the 20s. We were fairly close to 20% if you (inaudible) Tekla out of the business as well. So we should see that level of profitability continue for E&C business.

Eli Lustgarten – Longbow Research

And we’re expecting seasonality in Trimble Field Solutions, it will be a little weaker in the fourth quarter than the third quarter, is that fair? Is that what’s holding your forecast down?

Steven Berglund

Yeah, so I mean again maybe less so than we were but we are still a reasonably seasonal business and fourth quarter will tend to be down for Construction, and it won’t be until late in the quarter that we start to see the uptick on Ag. So I think, yeah, what you said is correct.

Eli Lustgarten – Longbow Research

Got you. And the tax rate, which is running around 10%, is that going to continue next year or would it go back up a little bit?

Rajat Bahri

I think that for prudence, I think we should probably – we’ll give more guidance when we give the full year guidance. But at this point, I think 13% to 15% is where we should start with next year.

Eli Lustgarten – Longbow Research

I’m sorry?

Rajat Bahri

13% to 15%.

Eli Lustgarten – Longbow Research

13% to 15% for tax rate next year, so still the same number. And can you just real quick – can you give me the breakdown of sales by geographic region because I sort of missed it? I know that you said Europe was 34% and North America was 51%. I wasn’t quite sure.

Rajat Bahri

Sure, sure, sure. North America we – 51% of the revenue came from North America; 24% from Europe; 15% from Asia-Pacific; and 10% from rest of the world.

Eli Lustgarten – Longbow Research

All right. Thank you very much.

Steven Berglund

Thank you.

Operator

And your final question comes from the line of Jeff Rath, Canaccord Adams.

Jeff Rath – Canaccord Adams

Hey guys, just getting in under the wire. Steve, I wondered if you can talk about the general demand trends and how you’re thinking about 2012 for Ag? I know you don’t guide but there’s been a lot of volatility in commodity prices recently and sort of schizophrenic in some degree. How are you thinking about the tone of agriculture as you look out into sort of macro indicators? And then, Raj, I was just – I had a tax-related question. Thanks.

Steven Berglund

Yeah, so I think – first of all, I think the comp next year for Ag 2012 versus 2011 is just going to be generally difficult. So I think that’s actually my – contemplating the business that’s my – probably my first in point of consideration. I think, yeah, there is volatility in commodity prices, but at the same time, as long as it stays within certain bounds I don’t see it as really being a factor for us. Again, we’re selling productivity to farmers. We have an – range that contributes the same thing. So unless there’s a, let’s call it, a meaning – let’s call it, a significant degeneration of commodity prices that make farmers feel significantly less well off than they are at this point in time, I don’t think it’s going to be a real factor for us.

Again, my theory on Ag when it comes to commodity prices is that there is some sort of threshold value or if they are at or above that threshold value we’re fine. But we – beyond that threshold value a 20% or a 30% increase in commodity prices won’t affect us simply because farmers are going to make the right decision as long as they feel enabled. And I think that threshold value of commodity prices gives them that enablement.

So at this point in time I don’t think kind of the macros are of particular concern to us per se. I think we’ve looked to floods, we’ve looked to droughts, we’ve looked to those sorts of things as being equally – of equal importance to us. So I don’t want to be – here but at the moment I don’t think we’re particularly concerned with the macros one way or the other.

Jeff Rath – Canaccord Adams

And then just last one Raj on tax rates. Again, I don’t want to pin you down too much. But is there any reason to think that we shouldn’t be kind of in the same tax rate range sort of 9% to 11% as we think about mix in 2012?

Rajat Bahri

You know, a safe assumption at this point is 13% to 15% as I mentioned. It’s very possible we may be lower but at this point we are finalizing the plans. We don’t know where exactly the profits are going to come from, which country, which part of the world. So I’m not comfortable going to 9% to 11% at this point.

Jeff Rath – Canaccord Adams

Okay, thank you very much.

Steven Berglund

Thank you.

Operator

And sir, you have no further questions at this time.

Steven Berglund

Okay, thank you. Talk to you all next quarter. Thanks a lot.

Operator

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

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