Trimble Navigation Q3 2007 Earnings Call Transcript

Trimble Navigation Ltd (TRMB)

Q3 2007 Earnings Call

October 23, 2007 4:30 pm ET

Executives

Willa McManmon - Director of IR

Steve Berglund - President and CEO

Rajat Bahri - CFO

Analysts

Paul Coster-JP Morgan

Jeff Evanson-Dougherty & Company

Yair Reiner-CIBC

Corey Tobin-William Blair & Company

Scott Sutherland-Wedbush Morgan Securities

Noelle Swatland-Lehman Brothers

Andrew Spinola-Needham & Company

Presentation

Operator

Good afternoon. My name is Dennis, and I will be your conference operator today. At this time, I would like to welcome everyone to the Trimble Navigation Third Quarter 2007 Earnings Conference. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). I will now turn the call over to Ms. Willa McManmon. Please go ahead, ma'am.

Willa McManmon

Thank you. And thank you for joining Trimble’s third quarter 2007 earnings call. I am here with Steve Berglund, our President and CEO, and Rajat Bahri, our CFO.

Before we begin the call, let me remind you that during the course of this call, we will make projections or other forward-looking statements regarding future events or the future financial performance of the company. The words "intend," "expect," "plan," or similar expressions are intended to identify forward-looking statements. We wish to caution that such statements are subject to risks and uncertainties that could cause actual events or results to differ materially.

Important factors relating to our business, including factors that could cause actual results to differ from our forward-looking statements are described in our Forms 10-Q, 10-K and other filings with the SEC. The Company assumes no obligation to update these forward-looking statements to reflect actual results or changes in assumptions or other factors.

With that, I will turn the call over to Steve.

Steve Berglund

Good afternoon. Trimble’s third quarter performance fit our standard operating model of revenue growth, tight control of costs, and extending operating margins. All Trimble segments demonstrated progress including good progression for @Road, which I will speak to later. Revenue grew by 26% year-over-year. Non-GAAP operating margins grew by 1.5 points, and operating leverage was 25%.

The E&C segment revenues for the quarter grew 12% year-over-year. This was less than the 18%, 12 month rolling growth rate for the segment and presents an obvious question. The growth rate was impacted by two effects.

The first is that as our software and services content increases, the deferred revenue recognition accounting is making it more difficult for us to predict the specific period when revenue will be recognized on the income statement. Besides [reinforcing] the need, as I did in the last quarter's call for analyzing Trimble's performance over a multiple quarter baseline, I will leave it to Rajat to describe the effects.

The second effect impacting the E&C’s growth rate in the quarter has been that despite very strong international growth, we continue to see pockets of slowness in the US, as we are since the beginning of the year. The uneven conditions we saw in the US survey instruments market in the first half of the year continued into the third quarter

Our construction product sales, which had strong US growth in the first half reflected a slowdown in July and August with a sharp bounce back in September, which seems to be continuing into the fourth quarter. There is not an easy analytical base as to account for the relatively sharp change of behavior in construction buying.

From a strong second quarter to a slowing in July and August, with the rebound in September, our belief is that we saw something of a headline factor in July and August in which contractors reacted to intensifying speculation on the effects of sub-prime meltdowns and resulting economic slowdown by cutting back on non-mandated expenditures.

We believe the underlying market dynamics kicked in again in September and will lead to stronger E&C growth performance in the fourth quarter. US conditions are highly variable across the country with some areas demonstrating significant year-over-year growth, while other areas are slower. For 2008, we anticipate, based on what we can see at this point, E&C growth that is roughly consistent with that of 2007.

The Field Solutions segment demonstrated strong performance in the quarter with another exceptional performance in agriculture resulting from a robust worldwide, farm economy and a strong, Trimble product portfolio. The other business in the segment, the Geographic Information Systems, grew at a double digit rate driven by new products.

The Advanced Devices segment also demonstrated significant growth in the quarter with the components business reflecting continuing strong demand, particularly for timing products.

The Mobile Solutions segment continues to progress in line with expectations. The historical business, centered on ready-mix concrete delivery, continued to build recurring revenues and underlying margins, and public safety demonstrates a strong year-to-year revenue growth.

In prior quarter's calls, we described the direct store delivery businesses trade on our segment results, while we await a new version of the field service product platform. The rollout on that platform is underway and we are seeing promising signs of market acceptance in the beginnings of an orders pipeline. The product provides the capability of extending a worker centric, field service software products into new areas to complement our vehicle centric fleet management products.

@Road, which we acquired eight months ago, remains either on track or ahead of the expectations at the time of acquisition and demonstrates good revenue and profit progression in the quarter. The integration with the rest of Trimble has proceeded well. As an example, @Road is in the process of taking products from TMS or other parts of Trimble to market in a number of countries around the world.

Overall, @Road is also delivering significant productivity increases with @Road related headcount down over 10% since the acquisition. We have seen significant margin improvements in the Mobile Solutions segment year-over-year with the expectation for more in 2008, as @Road continues its progression, as we turn the top corner in the direct store delivery business and as we continue to build recurring revenues in the legacy businesses.

We continue to believe in a robust 2008 consistent with our earlier expectations, while we must respect the increased uncertainty in the US economy. We believe that the underlying drivers for success in 2008 remain in place. They include continuing strong international growth, the potential for significant growth of revenues and margins in the mobile solutions segment as we moved from the transition related activities in @Road to a top line focus.

There is a continuing strong outlook for agriculture with international growth in new product categories contributing more. Continuing growth within the E&C segment, as we take specific actions inside the US to counteract regional slowness, as we extend our international reach, as we extend our product reach within the connected construction site initiative and as we reinforce our underlying belief that productivity sales even in uncertain markets.

Let me turn the call over to Raj.

Rajat Bahri

Good afternoon. Third quarter 2007 revenue was $296 million, up 26% year-over-year. At the same time, deferred revenue was up 170% year-over-year from $24 million to $66 million. In the third quarter alone, our deferred balance grew by $14 million or 27% sequentially.

Let me take a minute to discuss this. Over time, an increasing proportion of Trimble products are being sold at total solutions including hardware, software, subscription services and training. This leads to accounting, which tends to results in deferral of revenue streams that a portion of overall solution is under level.

With the acquisition of @Road, the revenue in hardware has been deferred and recognized over the term of the contractual software subscription period. Additionally, increased support and maintenance services have driven deferred revenue growth in our E&C business.

For example, E&C delivered hundreds of thousands of dollars of new survey products at the end of September. However, since fair value could not be established for an undelivered element within the solutions, the entire revenue stream was deferred. We expect to fully deliver and recognize revenue on these solutions in the fourth quarter. It is also important to look at a cash flow this year.

In many transactions we have received cash from our customers before the related revenue recognizing the P&L. The good news is that we will be able to recognize the revenue over time. The flip side is that the moves up revenue, into and out of a given quarter, make it difficult to forecast results on a quarterly basis within a tight range. Subsequently, when timing revenue, recognition depends on relatively subtle variation in contractual language.

The revenue breakout by geography was 56% in North America, 25% in Europe, 13% in Asia Pacific and 6% in the rest of the world. This represents a 19% increase in North America, 35% increase in Europe, 28% increase in Asia Pacific and 69% increase in rest of the world.

Turning now to EPS, GAAP earnings per share were $0.22 flat with the third quarter of 2006. When looking at year-over-year comparisons, it should be noted that third quarter 2007 GAAP earnings were impacted by $0.05 per share due to amortization of purchased intangibles and $0.02 per share due to impact of FASB 123 (R).

Adjusting for these expenses, non-GAAP earnings per share were $0.29 up 16% over the third quarter of 2006. The tax rate for the third quarter of 2007 was 39% compared to 35% in the third quarter of 2006, which impacted the comparative year-over-year EPS growth.

Operating income for the quarter was $44 million, up 21% compared to the third quarter of 2006. Operating income in the third quarter of 2007 was impacted by amortization of purchased intangibles of $10.2 million in the third quarter of 2007, which represents an increase of $7.3 million over the third quarter of 2006 due to acquisitions. There was a $3.8 million impact from stock-based compensation in the quarter versus the $2.9 million impact from stock-based compensation in the third quarter of 2006.

Adjusting for these factors, non-GAAP operating income was $57.8 million in the third quarter of 2007, up 37% from the third quarter of 2006. Operating margins for the third quarter of 2007 were 14.8% compared to 15.5% in the third quarter of 2006. Again, adjusting for the above factors, non-GAAP operating margins for the quarter were 19.5%, up from 18% in the third quarter of 2006.

This quarter, non-GAAP operating leverage was 25%. This would have been much higher without the impact of acquisitions. The margin improvement was driven by a slight expansion in gross margins and leverage of operating expenses. Now, I will turn to segment results, which exclude revenue, less cost of goods sold and operating expenses excluding general corporate expenses, amortization of intangibles and in-process research and development.

In addition for each segment, non-GAAP operating income excludes the impact of stock-based compensation expense. Third quarter 2007 E&C revenue was $182.1 million, up approximately 12% when compared to revenue of $162.4 million in the third quarter of 2006.

In the third quarter, E&C experienced strong international growth, but lower US growth than in recent quarters due to certain pockets of weakness in the US market. We believe at this point that this is a short-term phenomenon, as Steve discussed during his comments.

Operating income in E&C was $42.8 million or 23.5% of revenue compared to $38.3 million or 23.6% of revenue in the third quarter of 2006. Non-GAAP operating income in E&C was $43.7 million or 24% of revenue in the third quarter of 2007 compared to $39.2 million or 24.2% of revenue in the third quarter of 2006.

Third quarter 2007 Field Solutions revenue was $44.8 million, up 53% compared to $29.2 million in revenue in the third quarter of 2006. Sales of both agricultural and geographical information system products were strong, a particular strength driven by the continued worldwide, robust farm economy.

Operating income in TFS was $11.9 million or 26.7% of revenue for the third quarter of 2007 compared to $5.6 million or 19.3% of revenue in the third quarter of 2006. Non-GAAP operating income in TFS was $12.1 million or 27% of revenue for the third quarter of 2007 compared to $5.9 million or 20.1% of the revenue in the third quarter of 2006. Margin improvement was mainly due to leveraging results from increased revenue.

Third-quarter 2007 Mobile Solutions revenue was $39.2 million up 139% from revenue of $16.4 million in the third quarter of 2006. Revenue growth was primarily due to the acquisition of @Road. Operating income in TMS was $2.9 million or 7.3% of revenue for the third quarter of 2007 compared to $1.1 million or 6.8% of revenue in the third quarter of 2006.

Non-GAAP operating income in TMS was $4.3 million or 10.9% of revenue for the third quarter of 2007 compared to $1.3 million or 7.9% of revenue in the third quarter of 2006. Margin improvement was largely due to improvements in the @Road model as well as increases in subscribers in ready-mix offsets by softness in the direct store delivery products.

Third quarter 2007 advanced devices revenue was $29.9 million, up approximately 12% from revenue of $26.8 million in the third quarter of 2006 due to the sales of timing products. Operating income in advanced devices was $4.9 million or 16.4% of revenue for the third quarter of 2007, compared to $4.1 million or 15.3% of revenue in the third quarter of 2006.

Non-GAAP operating income in advanced devices was $5.2 million, 17.5% of revenue for the third quarter of 2007 compared to $4.6 million or 17% of revenue in the third quarter of 2006. We are now a full year into the Nokia agreements. Margin impact from that revenue has been normalized.

For the overall company, gross margins for the third quarter of 2007 were 49.6%, and excluding the amortization of intangibles and stock-based compensation, non-GAAP for gross margin were 51.6%. This compares to GAAP gross margins of 49.5% and non-GAAP gross margin of 50.1% in the third quarter of 2006.

Total operating expenses for the third quarter of 2007 came in at $103.2 million or 35% of revenue compared to 34% of revenue in the third quarter 2006. On a non-GAAP basis, operating expenses in the third quarter of 2007 were 32% of revenue, flat compared to the third quarter of 2006.

In the underlying business operating expenses as a percent of revenue decline, this is offset by dilutive impacts of acquisition, where operating expense is a percent of revenue higher. Non-operating income for the third quarter of 2007 was $1.1 million versus $2.7 million in the third quarter of 2006. As this was the case last quarter, higher profitability from the CTCT joint venture was offset by higher interest cost related to debt for the @Road acquisition.

Looking at the balance sheet, we finished the third quarter of 2007 with $84.1 million in cash compared to $73.8 million in the prior quarter. Our debt levels, primarily from @Road acquisition at $81.1 million, are down from $123 million in the second quarter of 2007. Hence, our net debt position is zero at this point of time.

In the third quarter, net accounts receivable were $242.6 million, compared to $235.2 million in the second quarter of 2007. Inventory was $142.2 million compared to $137.7 million in the second quarter of 2007. Its turns were essentially 4.3, flat to the prior quarter. Cash flow from operations for the first three quarters of 2007 was $129.1 million, an increase of 51% over the first three quarters of 2006.

Turning now to our guidance for the fourth quarter of 2007. In the fourth quarter of 2007, we expect revenue to grow 26% to 28% compared to fourth quarter of 2006, with revenue between $295 million and $300 million. We expect fourth quarter 2007 GAAP earnings per share between $0.17 and $0.19 and non-GAAP earnings per share between $0.24 and $0.26.

Non-GAAP guidance for the fourth quarter of 2007 excludes the amortization of intangibles of $10 million related to previous acquisitions and anticipated impact of stock-based compensation expense of $3.8 million. Both GAAP and non-GAAP guidance is at a 39% tax rate compared to an actual 25% tax rate into the fourth quarter of 2006 and assume $126 million shares outstanding.

We will now take questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question will come from the line of Paul Coster with JP Morgan.

Paul Coster - JP Morgan

Thank you. Raj, perhaps you could just elaborate a little bit on the deferred revenue, I think I missed it slightly. You started off, it sounded like it was software related and in the end, actually the conclusion if it’s more related to the @Road service. Can you just sort of clarify a little bit that please?

Rajat Bahri

Sure. Actually, Paul, it is both. It’s related to @Road as well as, it's related to the fact that our increasing portion of our products are becoming more software oriented and as being sold as the bundled solutions. So, both of those factors are driving growth in our deferred revenue balance.

Paul Coster - JP Morgan

It would therefore make sense that what is in the deferred revenue balance probably is higher than the average margin for the Corporation, is that correct?

Rajat Bahri

Well, the hardware margin tends to be a little bit lower than the base. But the other portion, yes, the remaining portion should be at much higher margin revenue.

Paul Coster - JP Morgan

Okay. Any currency effect that we should be aware of this quarter?

Rajat Bahri

Yes. The dollar did weaken against most of the currency. So, we did get slight revenue uplift because of that. And on the operating income, we had a slight hit because a lot of our expenses are in Europe, the R&D expenses, New Zealand. So, we had a slight positive impact on the revenue and a slight negative impact on operating income.

Paul Coster - JP Morgan

Can you share with us the subscriber growth rate for the Mobile Solutions business and the churn rate, if possible, and how that's trending?

Rajat Bahri

No. We’ve decided long ago that we wouldn't disclose the subscriber related numbers that we prefer to be graded on our financial performance not on subscriber performance.

Paul Coster - JP Morgan

Okay, got it. And then my last question; you mentioned that some regions in North America are a little bit soft at the moment. Can you provide us with a little bit of granularity there please, Steve?

Steve Berglund

Yeah. So, it is variable. They are the logical places such as Florida, which right now is down, as you would expect. And then in certain areas in the Southwest, but it's actually quite catchy as to on a regional basis. Now the other factor is that if you really dissect the data and look for meaning in the data, it's not just regional, it's actually different customer groups are reacting differently as well. And some are actually down; some are up sharply.

So, I think there is a fair amount of opportunity for us to exploit that data to focus on the areas one that are still doing quite well and to put more attention on those. And then to go and look at some of the areas both regionally and from a market segment standpoint, where we could probably do a better job of pinpointing responses to those.

So, there isn’t an overall story for the US, it largely depends. But the one region that’s logical that I would offer up being Florida as a pretty tough environment at this point in time. I don't necessarily want to give away too much pretty action data here in terms of where we may be looking at regionally

Paul Coster - JP Morgan

Okay. Thank you.

Operator

Your next question will come from the line of Jeff Evanson with Dougherty & Company.

Jeff Evanson - Dougherty & Company

Good afternoon. Thanks for taking my question. Steve you mentioned that you might be looking to make some adjustments in E&C business considering the environment in the US. Could you elaborate on what types of things you might be looking at doing?

Steven Berglund

Well, I don't want to overdo that. But given the market data that we were looking at particularly on survey instruments, is they are – our things like due to and on both the distribution channel side and relative to our market focus to exploit the data if you will.

Again it’s a very uneven picture, as it has been since the beginning of the year. We’ve been comparing 2007 against an extraordinarily good year in 2006. And so some of that is just a comparison issue year-over-year, but I don't necessarily want to again give away marketing programs before we launch them or actions before we undertake them.

But again looking for where we could do better, some of this is fundamental, some of this is tactical. But I don't think we have to be passive victims to market conditions, again underlying promise here is that even in a software market or an uneven market, we can saw productivity and still our intention is that. We think that we can sell our way through this until things get better.

Jeff Evanson - Dougherty & Company

So, I know you track your distributors very carefully and with a lot of granularity. It sounds like you're working through where the patterns are, but it seems like maybe the patterns are coming through. Do you think this is a distributor performance issue?

Steve Berglund

I would not call it a distributor performance issue. I would call a distributor focus issue. Now, we all make choices on a daily basis in terms of where we put our activity and I would say is that the relative focus of a year ago, which may have been totally appropriate a year ago and where people are going to look for business.

In a changed market situation it may not be as appropriate as, say, today. And where we can help our distribution and therefore help ourselves is by refocusing on those areas, where we think there is a higher potential for results in the next three to six months. And that we are developing a better insight in terms of what those points of focus should be and what the actions are that we should take.

Jeff Evanson - Dougherty & Company

And I guess I’m encouraged by the fact that you are taking a strategic view this is oppose to a cost cutting you would suggest that you don't see this as a systemic issue?

Steve Berglund

No, we actually don't see it as a systemic issue. Now, we are watching for signs that the world is changing all the time, a little bit of paranoia serves our interest here. But no, we do not see it has systemic. We've been pretty consistent on that message all year long.

The market is, for lack of the better word I would call, uneven at this point in time and certainly not as robust as it was. That the survey instruments market is not as robust in the US as it was a year ago. Now, going into 2008 we get a little bit of relief just because we have a lower baseline to measure ourselves against in 2007. And so the year-to-year performance becomes somewhat easier going into next year having gone through a full year of this. But I think, we’ve a belief is that we can take actions to counteract whatever market forces are out there at this point and time, and that this was not as you say a systemic problem.

Jeff Evanson - Dougherty & Company

Okay, good. A few questions on TMS and is probably goes more to Raj to start. Raj, in the sense, I guess what you told us is as you are getting your hands around the accountings for the TMS division; it’s little bit challenging to forecast. Could you talk about your ability to improve your visibility there in time?

Rajat Bahri

Well. I think I was referring to that on the E&C side of things versus on the TMS side of things. On the TMS side, we’ve got the hardware, deferred revenue and that gets amortized over certain period of time. So, that’s relatively easier to predict. The issues come, when you have in E&C, for example, a multiple contract, which includes hardware, software, training, subscription services and what we’ve done into this when you have, we may have delivered 90% of the value even if you have delivered 100% of the value you need to establish on each element what is the fair value.

In other words, what would that element be if it starts to standalone on its own merits? And if you're not successful in establishing that fair value, you end up deferring the whole streams of revenue. And that's what happened in the Q3 on a few hundred thousands, I mean, in a lot of products that we sold in September. So, the lack of predictability is more from those types of things. Hardware is actually and it’s relatively easier to predict.

Jeff Evanson - Dougherty & Company

Okay. So, sales of this nature always going to make it difficult for you to forecast at quarter end?

Rajat Bahri

Yes. Within the $5 million range, we gave a range of $5 million and there may be $3, $4 million growth of value which if you don't establish the fair value could move into next quarter or the following quarter. And so that causes certain variation in the forecast just within that range. So, the margins have become very difficult, which happened this quarter. We moved some E&C revenue into Q4 because we can’t establish some fair value on some elements.

Steve Berglund

So, Jeff, let me step in here too and just to emphasize another, well emphasize two points maybe. One is the business is changing and during the last year has changed significantly on us both because of what we are doing in the product range, we’ve gotten. So, we’re adapting to that change. We will get better out of it. We are not going to (inaudible) rate. But I think that there is naturally more volatility in the business.

The other thing beyond just called the technical revenue recognition aspects of whether exactly, when a contract is going to be recognized as demand is getting lumpier and at the margin in this company, as we add @Road, as TMS scales up even in E&C, when we are in operating internationally we are taking in more tendered business.

So, there are kind of more binary elements of large contracts that are either in or out and given again the requirements of tech even if we substantially performed on many of those contracts they may against the total fallout of the quarter just because we’ve only accomplished 98% of what we need to do.

So, the numbers are larger and are either in or out. It tends to be a fairly binary world. So, it’s a new world for us. We are adapting to it. Clearly we don't have the equation fully dealt in related forecasting. It will work out. But I'm not sure that is going to be possible necessarily be as accurate as we have been historically on revenue during the given quarter.

Jeff Evanson - Dougherty & Company

Okay. Thanks a lot. I will get back in the queue.

Operator

Your next question will come from the line of Yair Reiner with CIBC.

Yair Reiner - CIBC

Good afternoon. The question first on in the Mobile Solutions. It appears that revenue was down sequentially for the first time in quite a while, any kind of granularity about what’s behind that?

Steve Berglund

Yeah. In general the issue that we are highlighting here is that, if you look at the fundamentals, we are at the moment and we will be for probably another quarter getting comparatively, well hammered on the Direct Store Delivery business, while we await the full arrival of the new products,

So all other aspects of the business are performing what I recall on-target, the Direct Store Delivery business is dragging us down. So that point on a sequential basis, we had some issues, but it was all related to Direct Store Delivery.

@Road is showing sequential improvement there. Recurring revenues are growing in the historical business. So, they are getting stronger as this Direct Store Delivery issue that is dragging us down at the moment. But again, we believe that we have a fix in process and that is we move into 2008 and should get better.

Yair Reiner - CIBC

You expect that part of the business to come back that was in two or three quarters?

Steve Berglund

Yes. I think, for two reasons. There is a kind of strategic ground here and there is one that relates to the specific revenue associated with that segment. So, this new software product, we call it V4, internally I guess stands version four. But it's a field service, field support platform that will be initially used in Direct Store Delivery and give us a shot of adrenalin in the Direct Store Delivery. But it also provides, it's a platform product that is going to be a significant for other elements of Trimble including @Road. And so as we roll this software out progressively it will come out in an initial version and then we'll add functionality progressively over the course of the next year.

This enables us to go access. Well, reinforce the presence in Direct Store Delivery with very strong in product and then also allows us to, here because it’s a platform product to bring into other markets round as well. So, this must be a reason to be hopeful and specifically in the Direct Store Delivery, but also I think we're getting ourselves in a strategic platform to bring to the marketplace in general.

Yair Reiner - CIBC

Fair enough. And now several months into the @Road acquisition, how do you feel morale was doing at @Road?

Steve Berglund

Morale, morale is good. That the transition has gone well. Again what we’ve done in the first, six, seven, eight months is, we have installed the new management group. And they are very engaged and very energetic. Most of those were promotions from within @Road.

Only the HR function and the financial function have been staffed from outside of @Road. We have organized @Road into a number of new income statements from one kind of a [morfis] income statement into a number of income statements. Consistant with the way Trimble operates and I think that each month that goes by those new income statement are taking on new meaning and influencing decision making.

So, and I think everyone at @Road drove the same progression. Now again, we’ve taken a couple of specific kind of rifle shot on efforts to reduce headcount. So, obviously those are never easy, but I think those have gone well. So, I think pretty much on a worldwide basis for @Road is, I would describe morale has been good.

Yair Reiner - CIBC

Okay. One final question before I get back into queue. Speaking of headcount reductions you had actually a nice drop off in total operating expenses to the tune of about $8 million. Were there any one-time items there, or it’s just basically the new base kind of moving forward?

Rajat Bahri

Clearly on @Road we’re making progress. But other things that we’ve some trade shows in Q2 that will not repeated in Q3. So, in certain ways, those tend to be more of a seasonal impact. I would say those are the two things that are driving the drop off.

Yair Reiner - CIBC

Great. I’ll get back to queue.

Rajat Bahri

So, Q4 will come back a little bit because we’ve couple of user conferences and things going on in Q4.

Yair Reiner - CIBC

But if you look at Q4, it should return kind of to that normal seasonal pattern relative to Q3?

Rajat Bahri

That's right.

Yair Reiner - CIBC

Okay. Thank you.

Operator

Your next question will come from the line of Corey Tobin with the William Blair & Company.

Corey Tobin - William Blair & Company

Hi good afternoon. A couple of things if I could please; Steve, in your comments you mentioned July and august being soft in the E&C business. Can you just give us a little bit more clarity there perhaps some feeling for the size of the slowdown, was it negative in terms of absolute growth in those two months and now it’s bounced back or was it just sort of flat?

Steve Berglund

I don't necessarily want to characterize it too closely. Let’s just say, it was against the backdrop of April, May and June. It was a little bit of a shocker because there was a real break in the trend line. And I'm talking specifically about construction here; I’m not talking about survey instruments; I’m talking specifically about construction here. And it came back characterizing and usually it's roaring back in September.

But it was a definite break in the trend line and it couldn’t really be explained by what I would call macro market data or anything else and then September, some September came, they came back strongly. And through that’s far that the September trend seems to be continuing into October. So, a bit of a mystery very hard to identify specifically why but it's just kind of slowdown there for a while.

Corey Tobin - William Blair & Company

And again that churn was just in the United States, right?

Steve Berglund

Only the US. International is pretty much everywhere internationally at this moment is strong to extremely strong.

Corey Tobin - William Blair & Company

And along the same lines. I think in your comment, just want to make sure, if I heard this correctly you said E&C growth in 2008 should be consistent with ’07, so the growth rate should be consistent in ’08, is that correct?

Steve Berglund

Yeah, plus or minus is too early to call terribly closely. But I think, what we are trying to communicate here is that this on the even states exist in the US, as we look globally, as we look to the specific actions we can take, our sense is that overall, when it comes to E&C is we should be delivering in'08 largely consistent with '07 as it comes to growth rates. Obviously, there is a plus minus factor there and it’s way too early to try to quantify that. But our view of the market hasn't necessarily been displaced from what it was three months ago or even six months ago.

Corey Tobin - William Blair & Company

Okay, great. Two more, if I may quickly. Can you quantify how much of the increase in sequential increase rather in deferred revenue was from the E&C and AEC segments?

Rajat Bahri

So the sequential increase was around $14 million. And I'll give you -- just give you rough numbers. So, let me talk year-over-year. Year-over-year increase, we increased $66 million of that, in around $24 million was @Road and the rest was spread against E&C in other segments.

And of the $14 million increase that we saw sequentially, again I giving you rough number. I don’t have exact numbers with me that probably around $3 to $4 million was driven by E&C.

Corey Tobin - William Blair & Company

In the most recent quarter?

Rajat Bahri

Yeah.

Corey Tobin - William Blair & Company

Okay great. And finally just with respect to visibility I know it’s typically only a couple of weeks. But if you seen the notable change either in terms of becoming longer or in terms of decreasing visibility in the business. Thanks.

Corey Tobin - William Blair & Company

Can you repeat that?

Yair Reiner - CIBC

Is in terms of visibility and in terms of revenue visibility do you seen any change, what you would think of typical amount of visibility which you have in the revenue stream?

Rajat Bahri

I’d say it’s unchanged. It’s never good in this business, outside of places like @Road, where there is an actual, there is a kind of more of a contractual flow, but in E&C and AEC and GIS for that matter is a broken burned business.

And so, we are not working after the contractual backlog. Revenue visibility is never particularly good in each business in a classical sense of terms, not exactly for the next set of revenues that are coming. But in terms of relative confusion, clearly we had some issues in July and August.

But in terms of clarity and in terms of visibility at this point in time, we returned to what I would call a normal pattern at this point in time.

Corey Tobin - William Blair & Company

And just to be quite typically if memory serves there are two to three weeks is the typical pattern, is that right?

Steve Berglund

Yeah. In terms of kind of backlog in place it’s again, it’s not the question, I can’t answer because I don't even worry about backlog because it’s a non-factor in the company. But, it's probably on that order of magnitude.

Corey Tobin - William Blair & Company

Great. Thank you.

Operator

Your next question will come from the line of Scott Sutherland with Wedbush Morgan Securities.

Scott Sutherland - Wedbush Morgan Securities

Great. Thank you. Good afternoon.

Steve Berglund

Good afternoon Scott.

Scott Sutherland - Wedbush Morgan Securities

I had a couple of questions here (inaudible) asked you. But when you could tell might be in the prepared remarks you said 39% tax rate for Q4?

Steve Berglund

That's right.

Scott Sutherland - Wedbush Morgan Securities

Okay. Steve, can you talk about how you are seeing different markets within the US, the non-residential, public residential if you're seeing differences in those types of markets?

Steve Berglund

Yeah. So, the story remains kind of unchanged from prior quarters is clearly residential is under pressure, well it’s under pressure everywhere in the US. It’s certainly under more extreme pressure in places like Florida. And I think in Florida, there have been some flow over into, let’s call it, at least a small scale commercial development, and in some cases, even to large scale commercial development.

I think the market for commercial development isn’t as hot as it once was, but it’s still comparatively wide. And then the market that tends to be statistically most important for us is heavy and highway. And I think that the environment may have changed from a standpoint that contractors a year ago, a year and half ago were probably looking after the multiple year backlog of business, that backlog is probably chunked.

But overall we see for us and we look at market differently than a heavy equipment manufacturer obviously. But for us there is a -- it remains on historical terms comparatively healthy and something we can sell into, they’re still a lot of cash flow there maybe against a different perspective is that there has been some change to year-over-year, but still comparatively healthy environment overall from our perspective.

Scott Sutherland - Wedbush Morgan Securities

Okay. And Steve, as you mentioned, the sequential decline was mostly Direct Store Delivery. When you go out to potential customers or types of potential customers is it that they know the new solution is coming? They are waiting to buy the new solution, or is that the reason, or it’s another reason why it’s holding up some of the sales there?

Steve Berglund

No. It’s fair to characterize it that way, maybe I embellished that a little more, is that to a fair extent. We acquired the 11 now sometime ago, but the version three product just wasn’t substantial enough, wasn't muscular enough, wasn't functional enough.

And so we have not actually been actively marketing the version three. So what we kind of only [quality] 11 where a whole lot of contraction commitments and built around this version three software that we needed to meet. And we have spent some significant effort meeting the contractual commitments around version three.

In other words we’ve been deploying resources on what it’s a kind of a dead end from a strategic standpoint, while we prepare version four. So, yeah people have been expecting something to come, but I think its more matter of the fact that we haven't been actually marketing a product that was, that we didn't intent to support. So we have been holding back a bit waiting for version four. Version four is now in the process of rolling out. So, we now have something to go out and sell. There will be a ramp up time obviously. But we’re feeling much better about the prospects for this business than we were three to nine months ago.

Scott Sutherland - Wedbush Morgan Securities

Okay. And the last question for Raj maybe in the TMS, you mentioned that @Road grew sequentially. Are you guys still showing a revenue number there for @Road?

Rajat Bahri

We’ve given the early number of around a range of $80 to $85 million. We are going to hit that range.

Scott Sutherland - Wedbush Morgan Securities

That’s great. Thank you.

Operator

Your next question will come from the line of Noelle Swatland with Lehman Brothers.

Noelle Swatland - Lehman Brothers

Thanks guys. Two questions; maybe first could you just comment was there any particular strength in international markets you can pointed on the E&C side any new contracts that are expected to continue to build into the fourth quarter?

Secondly, you have given some thoughts on the E&C business for 2008. Can you comment or provide any thoughts for the Field Solutions business. And then also just for Raj any updated thoughts from a tax perspective some of the work that you may have been doing there over the last three months found in your comments that you would say with respective to lowering that rate? Thanks.

Steve Berglund

Okay. So, first of all on the international side. I’m trying to recall whether there are any points of note in international in the last few months to point to. Let me characterize it by saying that we’re showing into infrastructure through E&C. So and there is great deal of money being spent on the infrastructure in any number of developing areas of the world. So, for example not going to resolve that significant [the country benign]. We just are in the process of installing the infrastructure solution there to give them the infrastructure that actually do a better job surveying property lines, as a way of establishing ownership rights.

So there are a lot of those across the world, but let me just characterize by saying the international growth is widespread, in some cases coming of the relatively small base. So the absolute dollar numbers may not be all that significant, but the percentage growth rates are significant. So what we are seeing is both in South Africa and increasingly other parts of Africa, where there was a great deal of the infrastructure development going on.

The Middle East is very strong for us at this point in time. India from a small base is growing rapidly. China from a larger base is growing rapidly. Europe at this point in time is strong for us. So I’d characterize widespread during the whole lot of necessarily specific examples that I could point to that would account for anything that's meaningful or material or relative to be and see results internationally.

Now as far as 2008 in field solutions, breaking that into its two components; GIS Geographic Information System is a strong financial model. It’s growing in the double-digits. It’s growing in the teens. Typically we would expect that to continue. The one elements that new there, is with the acquisition of Spacient, we will be getting a little more, more strongly in to utilities as a market focus in GIS. We would expect that to continue into 2008.

The dollar amounts in 2008 from revenues should have may not be always significant but we are positioning ourselves going forward. Agriculture is having a phenomenal 2007 [across] a challenge baseline for 2008. But going into 2008 what we are seeing in my view is still very strong environment in general.

In North America, we are seeing some very strong growth internationally there as well. That’s far that business has been largely focus on North America, Brazil and Australia. We are starting to see growth in other places such as Europe from agriculture that have not necessarily been all that significant for us.

So, we are seeing a robust environment in that matter. We are seeing a robust environment internationally in agriculture. And then we hope to improve on that picture by continuing to expand the functionality of our products. So, we would also expect some product booster as well. So, overall just aggregating those two together, we are expecting a good 2008 in Field Solutions.

Rajat Bahri

Well, on the tax rate what we're doing is as our international growth is growing is phenomenal at this point as you are seeing the growth rate. And we looking at how we streamline our supply chain overall for the company and support this international growth rate.

And by looking at that we are looking at things what it does do to our legal entity structure and what are the tax implications of those things. But it’s too early for me to say they will be successful in it or not. So, I'm probably three to six months away telling you whether I was successful in doing something or not.

Noelle Swatland - Lehman Brothers

Okay, great. Thanks guys.

Operator

Your next question will come from the line of Andrew Spinola with Needham & Company.

Andrew Spinola - Needham & Company

Raj, should we then stick with the 39% as the tax rate for 2008?

Rajat Bahri

At this point I’d range it, you know 37 to 39.

Andrew Spinola - Needham & Company

Okay. Just one question, if I look at the expenses in the corporate and other segment is sort of the plug between the segment, operating incomes and your corporate operating income, it looks like that was down to negative $7.5 million in the quarter, which was just 2.5% of revenue that's typically run around 3.5% of revenue.

So anything related to corporate expenses that was lower this quarter or just potentially sort of a new lower trend line going forward?

Rajat Bahri

Q1, Q2 were on the high side of thing. Q3 is probably on the lower kind of thing. I’d say somewhere in the middle going forward. There were some legal expenses, one-time legal expense in the first half that we will not incurred that's why Q2.

Q3 dropped significantly and then obviously there is a issue of bonuses, how we grew for bonuses in the first-half versus second half, proper conjunctions change also have been impact on quarter-to-quarter results, but clearly first half was in the higher side.

Andrew Spinola - Needham & Company

Okay. And actually last question do you by any chance how the revenue from acquisitions in the quarter?

Rajat Bahri

We have not disclosed @Road given the yearly number and excluding @Road we are running at a normal rate of, if you look at historically we depending upon, which quarter we have ranged from around 3% or so on rest of the stuff.

Andrew Spinola - Needham & Company

Okay.

Rajat Bahri

With minor acquisitions.

Andrew Spinola - Needham & Company

Thank you.

Rajat Bahri

And there is no reason to think that would be different.

Operator

Your next question is a follow-up question from the line of Yair Reiner with CIBC.

Yair Reiner - CIBC

A quick follow-up, you said a lot of new survey instruments by the month and half ago. I just wondering if you can give us some kind of feel for how those are being accepted by your channel and by the marketplace?

Steve Berglund

I think the product that you are probably talking about is the new intermediate scanner, half of the VX platform, which is the extension of our S6 underlying platform. So, I think on reality is probably too soon to characterize the market acceptance one way or another.

I think that over all the platform is success and this latest product is really intended to if you work fit in between in an upper end and lower end product and provide users in a specific niche with the solution. So, I’m anticipating that will be successful. But at this point in time, I think, it’s too early to really characterize it one way or another honesty.

Yair Reiner - CIBC

Thank you.

Operator

(Operator Instructions). And at this time, there are no further questions.

Steve Berglund

I appreciate you attending the call and talk to you next quarter.

Operator

Ladies and gentlemen, this does conclude the Trimble Navigation third quarter 2007 earnings call. You may now disconnect.

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