Trimble Navigation Ltd. Q2 2008 Earnings Call Transcript

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Trimble Navigation Ltd. (NASDAQ:TRMB)

Q2 FY08 Earnings Call

July 24, 2008, 4:30 PM ET


Willa McManmon - IR

Steven W. Berglund - President and CEO

Rajat Bahri - CFO


Richard F. Valera - Needham & Company

Ajit Pai - Thomas Weisel Partners

Yair Reiner - Oppenheimer & Company

Eli Lustgarden - Longbow Securities

Peter Friedland - Soleil Group

Corey Tobin - William Blair and Company

Scott Sutherland - Wedbush Morgan Securities Inc


Good evening. My name is Solace and I will be your conference operator today. At this time I would like to welcome everyone to the Trimble Navigation Second Quarter 2008 Fiscal Earning Conference Call. 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]. Thank you.

Ms. McManmon, you may begin your conference.

Willa McManmon - Investor Relations

Thank you. Good afternoon and thank you for joining the call today. I am here today with Steve Berglund, our President And CEO and Raj Bahri, our CFO.

Before we review the quarter let me remind you that during the call, we will make projections or other forward-looking statements regarding future events of the future financial performance of the company. The words intend, expects, 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 disclosed in our Form 10-Q, 10-K and other filings of the SEC. The company assumes no obligation to update these forward-looking statements to reflect actual results or changes and assumptions, or other factors.

I'd also like to ask that during the question-and-answer period, you limit yourself to two questions, so that we can cover all of the questions. Thank you. Steve?

Steven W. Berglund - President and Chief Executive Officer

Good afternoon. Trimble's third (sic) quarter financials is reflected continued exceptional performance in our agriculture business, and continued robust international growth outside of U.S. and Europe. It was also aided by further reduction in the tax-rate, most of which is structural and permanent.

Year-over-year revenue growth of 15% was respectable and consistent with our expectations. Year-over-year non-GAAP operating margins could not expand due to some specific short-term factors.

Based on our current expectations and a continuing sober view of the environment, Raj will maintain our baseline revenue outlook for the year, and increase the earnings outlook because of the income tax rate.

Let me begin by characterizing the agriculture business. And then step through the other issues that impacted our results.

The agriculture story remain centered on strong farmer cash flows, the need to mitigate high input costs for fuel and fertilizer, and strong product innovation. Beyond those factors, agriculture continues to develop as an international story with rapid market development beyond our historical core geographies in North America, Brazil and Australia, with new regions such as Europe growing at strong double or triple-digit growth rates.

We believe we can sustain strong performance in this business for the foreseeable future because the underlying market drivers are not likely to subside and since we believe the addressable market remains substantially un-penetrated worldwide.

Out side of Field Solution, the foremost relevant questions for us relates to the revenue growth trajectory and engineering and construction, operating margins in engineering and construction, revenue growth in Mobile Solutions and markings in Mobile Solutions.

Engineering and Construction segment revenue levels reflect a continuing high levels of uncertainty in the U.S. and higher uncertainty in Europe. Our international business outside those regions continues to be very strong, but is not yet a sufficient size to fully contract the U.S. and European conditions.

We continue to believe there are two factors at work. One is the slower economy which translates into fewer constructions of supplier and fewer capital purchases. This is an environment we believe we can sell into.

The other factor is the unprecedented level of uncertainty revolving around financial sector. Small to medium sized construction of survey of firms which are not certain of their... of the reliability of their traditional lenders help for strategic direction, are likely to become conservative on new capital purchases until the uncertainty passes.

While these uncertainties make precise forecasting difficult, we believe what we can see today that the second quarter may have represented an inflection point and that we will see an increased rate of year-over-year growth in the second half E&C.

You see operating margins as a percentage of revenue declined year-to-year. Some of this was a result of net... of a number of external factors such as exchange rates which negatively affected the E&C segment margins. Part of it was product mix. For example; we demonstrate a strong double-digit year-to-year revenue growth in lower price Survey Instruments, and muted activity and high-end Survey Instruments.

While our delay in the long-term mix of high-end and low-end Survey Instruments remains unchanged and is driven by technological substitution, the mix in the short-term has shifted. While some of this shift was undoubtedly cannibalization of the high-end by the low-end in a slower economy, we believe the logic factors that were with the rapid growth in developing economies, which entered the market by acquiring basics Survey Instrumentation, and then move up in capability. And a meaningful increase in Trimble market share in lower and Survey Instruments worldwide.

While our expectations at lower end and higher end instruments with delivery equipment operating margins, the path for achieving that outcome is different. Because the lower end instruments carried a lower gross margin, we have not yet fully adjusted our short term cost model to correspond to the changing circumstances.

In spite of these short term margin issues, the relative strength of the low end reflects a positive strategic shift for Trimble as we gain share in the in trade level Survey Instruments, that in turn becomes the foundation for our future migration to higher technology products. This was an explicit defined objective in 2003, when we established the joint venture with Nikon, and created an alternative brand strategy.

We did take aggressive action early in the second quarter to reduce our cost base, and we'll be taking continuing actions as we bring our E&C model back into alignment.

The Mobile Solution segment produced unimpressive year-to-year growth in the second quarter. While there are some specific business portfolios on operational issues that have impacted the short term growth rate, the fundamental market outlook for this business is the strongest it has been since we entered the market in 2001.

Increases in fuel prices and other costs are putting significant pressure on the economics of manager's of vehicle fleet and mobile work forces. As a result, our sales pipeline and qualified leads were substantially higher than it... at any point in the past.

And the six months since the end of 2007, this perspective sales pipeline has quadrupled and consist of a comparative weight long list of companies. While we need to land these deal against competition, we believe we can demonstrate significant increases in revenues, number of subscribers and profitability in 2009 based on in sales pipeline.

We did not demonstrate the full potential for Mobile Solutions business in the second quarter for a number of reasons. The single largest reason for the lack is significant revenue growth in quarter was the handled field service and direct store delivery business we have discussed in the past.

As we discussed, we effectively withdrew from this market in the latter part of 2007 until we have a compelling solution. We began to rollout our platform product to mobile application platform at the end of 2007, and has been building sales pipeline across that's during 2008.

This is generally an enterprise sale and is dead and it has taken some time to fully develop the pipeline into a revenue stream. Because we have not yet replaced the sales of the old product which was still selling in second quarter of 2007, we saw a substantial revenue drop-off in this product category for the quarter compared to the prior year. Because of revenue drop in this product category, the Mobile Solutions segment would have demonstrated a double digit year-to-year revenue increase in second quarter.

Operating margins for the Mobile Solution segment were also unimpressive. Part of the margin pressure resulted from continuing to run R&D high within the segment. We expect to get relief from the higher spending during 2009.

Overall, we are approaching the issues Mobile Solutions margin improvement, as an exercise in segmentation in which we break that Mobile Solutions segment down into a number of distinct businesses that are operating at different performance levels.

A significant majority of the segment is generating very healthy margin. In the second quarter, the core businesses that accounted for 87% of the segments revenue generated operating margins of approximately 20%. These businesses include construction supply, free productivity, Telco [ph] and public safety.

Three intra segment businesses lost money and drag down the total segments margin into single digits. We're being reasonably patient with these losing businesses because we believe each have significant revenue potential within the next 12 months to 18 months, and because we understand the path to bringing them up to Trimble's average operating margin.

The three businesses that are losing money are the Handheld Field service and direct store delivery business, the transportation and distribution business, and our Asia Pacific initiatives. We believe we have pictures in place for both the Handheld base business and the transportation and distribution business and that we grow... leave 2008 with significant momentum.

In the Asia Pacific business we are... sales pipeline build with expected improvements in 2009 and a significant financial payoff in 2010.

Another source upside in this segment is the potential for significant additional operational improvements at @Road. Although we have already seen meaningful improvements, we can expect to see additional improvements as we continue our initiatives to bring out @Road to the operational and financial standards for the rest of Trimble, by focusing on reducing churn, improving customer satisfaction, establishing clear that balance inflow priorities, decreasing selling productivity and achieving greater synergies with the rest of Trimble.

One outcome of these initiatives thus far is that we have reduced @Road headcount by 20% while increasing revenue by more than 20% since the acquisition.

Company wide the second quarter did not reflect Trimble's traditions of revenue growth coupled with the expansion of operating margins which were flat year-to-year. Some of this was results of external market conditions. Some of it our decision to continue investments in markets that have strong control, strong 12 to 128 months revenue potential, and some it was that our costs and revenue that came inline. We believe we have adjusted exchange certain potential and we'll make further adjustment as required.

Our assessment of our three year prospects remains unchanged. Our continued growth depends on executing in number of key areas. One of these areas is our commitment to international growth. We intend to drive each of our businesses towards an international profile of take advantage of major worldwide trends which includes the massive infrastructure build-out taking place in emerging economies.

The increase in pressure to increase food output, the increase comps for transportation and the growing emphasis on environmentally friendly practices. We are seeing and expect to continue to see very strong growth in China, India, Russia, Eastern Europe, the Middle East, Africa, Central Asia and Southeast Asia.

Another area of focus is the pursuit of adjacencies to our existing market position. The adjacencies take the form of either breaking the new products to our existing customers, or applying our capabilities to entirely new customer groups.

Let me give you one recent example; yesterday we announced a new forestry product that extends the capabilities developed in the Mobile Solutions segment into the E&C market space.

They consists of application software developed in E&C, delivered to the user via the service platform from within the Mobile Solution segment. The size of the addressable market for this recurring service model has the potential to reach tens of thousands of vehicles worldwide, and between $100 million and $200 million a year of annual revenue.

The solution minimizes distance traveled from transporting timber from cutting sites to mills. Our field tests lead us to believe our solution will be used distance travel by 10% to 15%. With the resulting fuel and capital savings, we believe we can generate a significant savings to the customer, while returning strong margins to Trimble.

In addition to extending our addressable market by exploring adjacencies and by pursuing new international markets, we have substantial growth still available to us in our current core markets, which remain largely un-penetrated.

These growth paths enable us to look beyond current economic circumstances with undiminished confidence in growing this company.

Let me turn the call over to Raj.

Rajat Bahri - Chief Financial Officer

Good afternoon. In the second quarter of 2008, revenue was $377.8 million, up approximately 15% or from revenue of $327.7 million in the second quarter of 2007.

Operating income for the second quarter of 2008 was $62.9 million up 1% from the second quarter of 2007. Operating margins in the second quarter of 2008 were 16.7%, down slightly from margins of 17.1% in the second quarter of 2007.

Excluding amortization of intangibles, stock base compensation expense and restructuring expense, non-GAAP operating income of $81 million was up 15% compared to the second quarter of 2007.

Non-GAAP operating margins were 21.4% in the second quarter of 2008, approximately flat compared to 21.5% in the second quarter of 2007, reached out 21%, of the increase in revenue due to operating income line.

Net income for the second quarter of 2008 was $48.6 million up 39% compared to net income of $35 million in the second quarter of 2007.

Diluted earnings per share for the second quarter 2008 was $0.39, up 39% from the diluted earnings per share of $0.28 in the second quarter of 2007.

The tax rate for the second quarter 2008 was 28% compared to 38% in the second quarter of 2007. The lower tax rate is due to the previously announced implementation of the global supply chain structure.

We now expect a full year tax rate to be at 31% versus previous guidance of 33%. This is due to a high mix of international profits versus U.S. profits.

Adjusting for them additional of intangibles and the impact of stock base compensation and restructuring expenses, non-GAAP net income of $61.7 million for the second quarter of 2008 was up 40% compared to non-GAAP net income of $44.1 million in the second quarter of 2007.

Non-GAAP earnings per share for the second quarter of 2008 were $0.49 up 5% from non-GAAP earnings per share of $0.35 in the second quarter of 2007.

In the quarter, 53% of revenue was in North America, 26% in Europe, 15% in Asia Pacific and 6% in the rest of the world. This represents growth rates of 8% in North America, 15% in Europe, 38% in Asia Pacific and 48% in rest of the world. We are clearly becoming an increasingly diversified company, both from a geographical and as from a segment point-of-view.

Excluding our @Road business, international revenue in the second quarter represented 56% of total revenue versus 46% in the... from a couple of years ago. From a segment perspective, in the second quarter of 2008, E&C represented 56% of revenue versus 69%, versus three years ago.

Turning now to the results by segment which I will cover on the underline on a non-GAAP basis. This excludes general corporate expenses, amortization of intangibles, restructuring charges.

In addition for each segment, non-GAAP operating income excludes the impact of stock base compensation expense.

Engineering and construction revenue was $213 million, up approximately 7%, when compared to revenue of $198.9 million, in the second quarter of 2007.

International sales continue to be strong, but were partially offset by store conditions in the U.S.

Additionally, the year-over-year comparison is difficult, because of the second quarter of 2007 at strong revenue growth rate of 18%.

Non-GAAP operating income in E&C was $46.2 million or 21.7% of revenue, compared to $53.2 million or 26.7% revenue in the second quarter of 2007. As in the first quarter of 2008, the decline in the operating margins resulted from unfavorable foreign exchange rates, the impact of recent acquisitions, product mix, and an overhead structure that was not aligned with lower revenue growth rate.

During the quarter, we took a restructuring charge which will reduce the overhead structure going forward, and we expect E&C margins to expand in the fourth quarter and beyond.

Field solution revenue was $90.1 million, up approximately 63% compared to revenue of $55.3 million in the second quarter of 2007. Revenue growth was driven primarily by strong demand from agricultural products.

Non-GAAP operating income in EMS was $25 million, or 38.9% of revenue, compared with $18.6 million, or 33.6% of revenue in the second quarter of 2007. Operating margin expansion came from operating leverage, resulting from increased revenue.

Mobile solutions revenue was $42.3 million up approximately 3% when compared to revenue of $40.9 million in the second quarter of 2007. The revenue increase was driven by @Road partially offset by declined in the Direct Store Delivery business.

Non-GAAP operating income in EMS was $3.1 million or 7.4% of revenue compared to $4.4 million or 10.8% of revenue in the second quarter of 2007.

Operating income was lower due to increase losses from the Direct Store Delivery business, as well as the fact that it continued to invest aggressively in the segment, particularly R&D as utilizes the new products. These effect investments with a backlog stability this year with margin expansion expected in 2009.

An additional point to note is that there are three discrete investments that are driving the lower margin in this business. If we turn these investments off today, this could be 20% margin business immediately.

Advanced Devices revenue were $32.4 million approximately flat when compared to revenue of $32.7 million in the second quarter of 2007. Non-GAAP operating income in Advanced Devices were $6.9 million or 21.3% of revenue compared to $5.7 million, on 17.4% of revenue in the second quarter of 2007.

Improvements in margins were due product mix and overhead efficiencies. Total non-GAAP operating expenses for the company in the second quarter of 2008 came in at $113.3 million or 30% of revenue compared to 31.2% of revenue in the second quarter of 2007.

Non-operating income for the second quarter of 2008 was $4.1 million versus $271,000 in the second quarter of 2007. This improvement was due to lower interest expense and higher profit from the CTCT joint venture.

Now turning to the balance sheet, we finished the second quarter of 2008 with $79.8 million in cash compared to $71.4 million in the first quarter of 2008. In the second quarter, we generated a record $80 million in cash flow from operations, which we used to take $60 million in debts and buyback stock. We now have no debt outstanding on our credit facility.

In the second quarter, net accounts receivable were $267.2 million compared to $280.7 million in first quarter of 2008. Day sales outstanding were down by 8 days to 64 compared to first quarter of 2008 and down by 1 day compared to second quarter of 2007.

Inventory were a $153.4 million compared to $148.5 million in the first quarter of 2008. Returns were 4.5 times slightly higher than the first quarter.

In January, we announced a stock repurchase program for up to $250 million. As far as this program, in the first quarter of 2008, we repurchased approximately 968,000 shares of Trimble's stock, at an average price of $26.71.

In the second quarter, we repurchased approximately 287,000 shares at an average price of $36.25. Subsequent to the end of the second quarter, we have repurchased an additional 741,000 shares, at an average price of $33.18.

Let me discuss our guidance before we take your questions. In the third quarter of 2008, we expect revenue to grow 13% to 15%, compared to the third quarter of 2007, with revenue between $335 million, and $340 million.

We expect third quarter 2008 GAAP earnings per share between $0.26 and $0.28, and non-GAAP earnings per share between $0.34 and $0.36. Non GAAP guidance for the third quarter of 2008 excludes amortization of intangibles of $10.9 million directly with acquisitions, and anticipated impact of stock base compensation expense of $3.8 million.

Both GAAP and non-GAAP guidance use a 31% tax rate, and is due 125.7 million shares outstanding. We have modified our full year 2008 guidance to incorporate the lower tax rate of 31%.

Revenue for the full year 2008 is expected to grow 15% to 17%. Full year non-GAAP earnings per share are expected to be $1.54 to $1.59, versus previous guidance of $1.50 to $1.55.

Thank you. We will now take your questions.

Question And Answer


[Operator Instructions]. Your first question comes from the line of Rich Valera with Needham & Company.

Richard F. Valera - Needham & Company

Thank you, good afternoon. Steve in your prepared remarks, I thought you mentioned that Europe you were seeing some slowness in E&C. And just wanted to clarify if that was the case? And if that is the case, I think last quarter you mentioned that the U.S. exposure of E&C was about 20% of total of revenue. If you added Europe to that, what would that bring as a percentage of your total revenue?

Steven W. Berglund - President and Chief Executive Officer

Relatively to the breakup, I don't have the number readily at hand. But I think what we were... I think last quarter we talked conversationally about UK and Ireland and elements of Spain having seen the effects. I think the environment in Europe is more uncertain today than it was three months ago without a doubt. I think today's data would support.

And so I think that we've become more cautious about Europe than maybe we were three months ago, at least publicly, I think we were already cautious about Europe three months ago and we're hedging our expectations a bit, not knowing what was exactly going on in Europe. So I think it's hard to be definitive about elements of Europe. I think Eastern Europe is one story. I think Germany and France are another story and the UK, Ireland and Spain are kind of suffering from post bubble relative collapse in some ways, although there are elements of within those economies that are still positive.

So I think that for the moment I'll differ on your question in terms of the 20% number until we can formulate that a little bit more precisely. But we are definitely more cautious about Europe than we were three months ago, and I think we're watching in, although it still has elements of buoyancy depending on which country you're talking about.

Richard F. Valera - Needham & Company

That's helpful. And one more if I could on @Road. In the period... sort of the one to two year period prior to when you purchased @Road, they suffered some seemingly pretty significant impacts from an economic slowdown in the U.S. at that time, not withstanding the fact that they are obviously a productivity enhancer, and a fuel saver. Have you seen anything yet in this downturn, that would suggest that enterprises are cutting back or being more judicious about expenditures even on efficiency enhancing products like what @Road provides?

Steven W. Berglund - President and Chief Executive Officer

No. Actually, I think we're probably seeing the opposite at this point. I think that there maybe some element. And I am sure that as the margins of the market in terms of small fleets and whatever is there. So tendency to react by cutting off everything. So I wont deny that probably at the margins, probably in the smaller fleets, there maybe some falloff from either the real economy or a perception of what might be coming down the road in the economy in the terms of the cutback.

But I think overall what we're seeing here is a more blind environment, particularly on what's called the larger fleets. The fleets that are numbered in the hundred to thousands, and I think there is... we may have actually passed through what I would call the inflexion point, and maybe entering at the mainstream. The mainstream sort of thinking at this point of time.

So I think that the... the economics... the economic benefits of our solution are now becoming compelling. So again, I think that what we're seeing here is the economic environment and as much kind of inflation induced as anything. I think we're overall seeing a more positive environment and even though there maybe some, some economic turn at the... at the margins.

Richard F. Valera - Needham & Company

That's helpful. Thank you.

Steven W. Berglund - President and Chief Executive Officer

Thank you.


Your next question comes from the line of Ajit Pai from Thomas Weisel Partners.

Ajit Pai - Thomas Weisel Partners

Hi good afternoon. Two quick questions. The first one is the just looking at your tax rate right now I think you know in this quarter itself it was lower than was expected and you're lowering the tax rate for the year. Could you give some indication as to with the same trends continuing what that could look like in 2009?

Rajat Bahri - Chief Financial Officer

Here Ajit, we have a fairly successful business and we have a supply chain... global supply chain, so we took advantage of that and basically created a structure in Netherlands where our international profits are now residing at a very favorable tax rate. And the reason we lowered our tax rate from 33% to 31% is that international profits... more and more international profits are residing there than what we had forecasted.

And as seen a stock, few times that international... growing internationally is a big part of our strategy. And if that strategy is successful, that mix should continue to be the same or could even get better. So at this point, I would expect 2009 to be between 31% to 30% 31... 31% to 32 % with a carrier thing, the mix can change things going forward. But at this point our expectation is to be... the tax rate to be at 31% to 32% for 2009.

Ajit Pai - Thomas Weisel Partners

Got it. And then just looking at uses of cash because that cash now is going to be a resident overseas. Is the cash... the primary use of the cash as to overseas CapEx, are you planning to grow the company through acquisition overseas? And what is that M&A environment look like overseas?

And then also looking at international... second part of that question I think you talked about sort of weakness in the U.S. and somewhat in Europe... parts of Europe. When you're looking at Asia there is been high inflation there and also set of credit tightening by the governments of there because of that. So do you expect that to impact your business in those areas? Or you don't see that impacting things.

Rajat Bahri - Chief Financial Officer

As such the uses of cash is concerned there is a lot cash will be generated in U.S. But you're right the international profits, the cash will reside internationally. And we have strong pipeline of international acquisitions that we are looking at that will use that cash up. For the rest of the question I'll hand it over to Steve.

Steven W. Berglund - President and Chief Executive Officer

Yes.So as far as the outlook for the stock non-North American non-European sales, most of our sale most of our sale... most of our revenue in those regions comes out of the ENCD segment. Agriculture is building, but it does not represent a significant presence there. Our GIS sales are relatively small, Mobile solution sales are relatively smaller, our comp sales are relatively small.

So it is largely an Engineering and Construction element. At this point in time and we will continue to be that way for the next year two or three. But kind of change that by building up the rest of the company. But then you look to the funding sources for those E&C sales and it is typically infrastructure build, government funding or in certain regions such as Africa, its international funding.

So that funding would not typically be that exposed to our let's call it short term economic fluctuations. So, I think that... I won't be overly confident here. But I think that to a large extend that funding is committed on a multi year basis, with a long term objective in mind, it tend to be government funded. So I think it's relatively immune lets call it short term kind of commercial market fluctuations.

Ajit Pai - Thomas Weisel Partners

Got it. Thank you so much.

Steven W. Berglund - President and Chief Executive Officer

Thank you.


Your next question comes from the line of Yair Reiner with Oppenheimer & Company.

Yair Reiner - Oppenheimer & Company

Hi good afternoon. Have a question on again on the U.S. E&C portion of the business. We're actually on E&C in generally. You mentioned that you thought we may have him in deflection point in this starting next quarter, revenues could actually... growth could accelerate. Is that a reflection of the fact that U.S. E&C has been weak now for I guess some time? Or is it also reflection that you really think we've kind of hit a bottom or close to it here in the States? and I guess the follow up to that would be when you look at Europe, may realize you got to slowed down there, as to really early stages. Do you think we could have as much downside to that market as we've seen here in the U.S.?

Steven W. Berglund - President and Chief Executive Officer

So relative to the U.S., what you should not be doing is using Trimble as declaring that there's a profound change in economic direction here. I think that there are some specific... we believe there are maybe some specific... there are some issues specific to Trimble that allows to show, let's call very guarded optimism here, and we qualify this fairly heavily, and still a very uncertain situation, pretty dynamic. But part of it is yes, just from a calculations standpoint, if you look at... if you look at the last year in particular, first half, second half, second half was materially weaker than the first half in terms kind of revenue robust. And so we do get a need easier comp in the second half of this year then we do to the second period, compared to second half last year.

So we get somewhat from that alone. I would say there are other things that we are doing that we are not necessarily talking about that have the possibility as we get deeper into the second half of the year into 2009 that could provide some lift. So we believe we have the potential to take our own destiny in our hands to a certain extent here.

And... so this represents the bottoms up view of where we think we stand. It's heavily qualified depending on what happens to the U.S. economy in particular. But we... both because we have an easier comp, but also because we think we are taking specific actions that may have, have some effect out there. We do see the ability to start to may be show some of better performance than we have.

Relatively... relative to Europe I just do not speculate. Again I think that the situation is fluid, we're not... our 4-K [ph] as a company is not necessary making great macroeconomic projections. I just do not get into that business. We will react aggressively to what we see in the marketplace and we'll work to succeed whatever the market condition. But aside from that I think I'll dodge that particular question.

Yair Reiner - Oppenheimer & Company

Fair enough. And then if I may have a different follow-up. This is more on the side of competition. I'm just wondering how the conditions here in the U.S., I guess increasing in Europe are kind of impacting the competitive dynamic and potentially pricing and also what is the competition like, in some of newer regions where your growing a lot. Is the same competitors and are you seeing a certain of your rivals doing better than others?

Steven W. Berglund - President and Chief Executive Officer

Yes. So first of all if we restrict it to the Engineering and Construction segment the competitive ground is actually pretty narrow. There is, Topcon, there is a like a flash hexagon [ph] and then in China there tends to be a little more un-grown competition.

But I think it's fair to say that the margins of the market during a downturn pricing become pretty intensive at times. But in both my script and Raj script, what you didn't hear us taking about in terms the reasons for the drop in operating was pricing. Yes there is some pricing pressure. But I believe is largely tactical at this point in time. It doesn't represent necessarily represent a distinct structural strategic change in pricing levels.

So we will of course be looking into in the marketplace. But again, I don't see at this point in time anyway, there has been a structural change in pricing.

As far as the new regions, I think it gets to be a pretty complex... again restricting it to the Engineering and Construction, same group competitors. But I think it plays out country by country, in it's own unique fashion. Some places, one competitor, another has an historical position. But I would say in general, we are pleased in these developing economies. We're pleased with our position. We continue to act very quick at resources in each of those markets. So I would say in general... ask me again the same question, in two, three years, and I'll have a more precise answer. But at this point in time, it is all of these markets are performing well. I don't think there is a... I won't claim absolute a shift for Trimble is what we are targeting. But I think its still early days in all of these markets and the answers are yet to be evolve there.

Yair Reiner - Oppenheimer & Company

Great. Thank you and have software on the nice results.


Your next question comes from the line of Eli Lustgarden with Longbow Securities.

Eli Lustgarden - Longbow Securities

Good afternoon. A very nice quarter. A couple of quick questions, one the ad business. Should we... I know it should stay strong for an extended period of time, but we shouldn't seen normal seasonality in the second half, with some degree that we have versus the first half? And then is that a fair commentary at this point?

Steven W. Berglund - President and Chief Executive Officer

Yes. Raj may have some color, but I would say is that I think we are still a seasonal company. It's getting to be harder. To be honest its getting harder to... its becoming more of an art form to actually determine full effects of the seasonality. But again construction and... the E&C segment will tend to have the strongest quarter in the second quarter that would be tend to be strong as in first quarter and into the second quarter. And... so the second half is generally less blank than first half of the seasonality perceptive. Ral any--

Rajat Bahri - Chief Financial Officer

Yes. The total company perspective that's right on first half tends to have more revenue driven by E&C. But I think your question was on the act side Eli and quarter-to-quarter we are lucky to see strong double digit growth in ads. The ad environment is solid. It continues to be very good for us. So from a value end perspective these solutions should continue to deliver strong digit growth rates. But having said, yes first half is more stronger from absolute revenue point of view.

Eli Lustgarden - Longbow Securities

And there is nothing structural capacity limitation that would prevent showing very good strengths in 2009 at this point. We are in the pipeline filling the product or something like that distributed.

Steven W. Berglund - President and Chief Executive Officer

No I don't think, I think we've seen the market continuing strong and there are no what I would call stressful constraints to meeting that market. So I think the question it's just after relatively predicted results in 2008, the question is what's probably on 2009. But certainly there is nothing that I would identify as being kind of a constraint to continuing robust environment.

Eli Lustgarden - Longbow Securities

We'll follow-up, I mean on their Trimble long enough to know that I wouldn't put a macro environment typically in E&C business. But then alluded to things that you're doing that should make as you look out better... somewhat improving E&C. Can you go through some of those things because from a macro environment E&C and in a high risk construction goes down a lot over the six months to nine months and we actually getting from you're caterpillars and all that stuff is well cutting production in the second half into next year.

So I mean could you disconnected, that we have to appreciate, I don't think you can go through go to some of things that with that perspective?

Steven W. Berglund - President and Chief Executive Officer

Yes. So again how is this in conservative terms since we're not pumping the table, we're not pumping our chests, declaring that we're totally kind of cyclical here. So again residential doesn't tend to be a like third order market force. So it has affected us. In fact that's not a primary driver.

So I think it's less to do with the market than discrete individual actions, we maybe able to take to improve our position in the marketplace. And those, Eli I think again we're not banking big number on these but we believe that there will be something that we can point to not now but in future quarters that will have a lead to a little bit more optimal involved.

Eli Lustgarden - Longbow Securities

I guess, I'm trying to get some color on that I mean I certainly has something to do with the product, product migration, something I just trying to get them feel to what those kind of things may look like as we look foward.

Steven W. Berglund - President and Chief Executive Officer

I mean there are range of actions that we can take. Some have to do with product, some have to do with improving the distribution channel. And I would say that the actions I'm talking about would take place in those two grounds.

Eli Lustgarden - Longbow Securities

Alright. Thank you.

Steven W. Berglund - President and Chief Executive Officer

You bet.


Your next question comes from the line of Peter Friedland with Soleil Group.

Peter Friedland - Soleil Group

Hi. Talk about OpEx it looks like you grew that line of 10% year-over-year in Q2. So what's the best way to think about the growth rate for those lines going forward?

Rajat Bahri - Chief Financial Officer

Sure. On the OpEx side it's grew 10% but there were lot of factors. Foreign exchange, for ForEx the dollar weakened though, of that, OpEx was up $30 million, so $4 million was driven by up by ForEx, $2 million was driven by acquisitions. We also had a restructuring reserve that we didn't have last year that was another $2 million on top of last year.

So on an organic basis, the OpEx was up just 4%, versus prior year. And if you look at our headcount, actually it was down. We have a report, we have a chart at the end of the press release it shows the headcount was 3,627 people at the end of Q2, and it was 3715 at the end of Q1.

We took some specific actions during the quarter to know the headcount. So I think going forward you could expect our moral to be the same. Operating expenses drawing at lower rate than revenue and that just completely give us leverage going forward.

Peter Friedland - Soleil Group

And then a gross margin, I think you should just talk about what it looks like sequentially into Q3 and some of that year?

Rajat Bahri - Chief Financial Officer

Gross margins are, again is back to the performance this quarter, so there is a slight decline in some product mix also impacted this quarter. But I think if you look at from a year-over-year perspective we should see gross margins, plus minus in the range of one point depending upon product mix and product change rate, we should expect it to be in a plus minus, you could expect flattish gross margins on an ongoing basis. Plus minus one point.

Peter Friedland - Soleil Group

Okay. Thank you.


You're next question comes from the line of Corey Tobin with William Blair.

Corey Tobin - William Blair and Company

Hi, good afternoon. Just a couple of quick things, I'll start with a housekeeping question, Raj what's your account are you incorporating into both the third quarter and the full year guidance?

Rajat Bahri - Chief Financial Officer

So for the second quarter, we ended up at $145.7 million shares and we are based on the buyback program that we had. We are basically saying it will offset the dilution that happens during the third quarter, so we are forecasting $125.7 million in the third quarter as well and again if we keep on doing the buyback, you could expect it to be $125.7 million in the fourth quarter and inside that is as you know it expect it also depends on what happens to our stock price and what happens to the out of in the money options. This besides variation for forecasting purposes I would say $125.7 in Q2, $125.7 in Q3, and $125.7 in Q4.

Corey Tobin - William Blair and Company

Excellent, okay. And then shifting gears back to the into seven for a minute. Steve you mentioned in some statistics you gave in your prepared remarks that the company in whole is heavily weighted outside the U.S. when you remove @Road which is there is pretty interesting to see those numbers. Can you give us a little bit more granularity is there anyway to break out a rough geographic mix specifically for E&C?

Steven W. Berglund - President and Chief Executive Officer

I'm not sure that there is a magic formula you can drive from the outside I think that what we've characterized E&C as being as more international than the rest of Trimble and that Trimble currently is roughly a 50-50 deal U.S. to non-U.S. so what we're doing is implying that E&C is larger outside the U.S. relatively larger outside of the U.S. when it is to U.S. and this point of time I'm not sure we're willing to go into much more clarity on that but maybe in the future just make it clear or maybe we won't.

Corey Tobin - William Blair and Company

Is that take that assume out at the percentage coming from outside the U.S. and E&C is significantly up year-over-year at this point?

Steven W. Berglund - President and Chief Executive Officer

Yes, that's a safe assumption, that's a very safe assumption.

Corey Tobin - William Blair and Company

Okay. And then along the same lines you mentioned last quarter and couple of previous quarters that you are ramping enough distribution there. Can you give us a feeling for I guess the number of dealers that you're currently or selling through overseas and where that number was about a year ago or so?

Steven W. Berglund - President and Chief Executive Officer

Not, something I carry around with me, kind of ready to answer. I think in the answer maybe would even if I gave you the answer I think it might be a little bit misleading so for because I think the style internationally is larger more substantial dealers than we see in the U.S. or New York does I think we have lots of dealer in U.S. and lots of dealers in Europe, whereas in China the number of dealers for example E&C would be less than 10.

And a part of this is learning that we've down elsewhere in world in terms its important well financed dealer organizations. So I'm not sure that would be necessarily be a meaningful metric in another self. But I think it's more a matter of quality of dealer, the relative financing of the dealer. The ability of Trimble to the support that dealer and as aggressively as we need to make them successful and I would say that across the world as we're putting with the Trimble we are putting much Trimble players into play and our dealer capability is increasing kind of proportionally.

Corey Tobin - William Blair and Company

Just to wrap up on that point. As you look ahead to the next twelve months, next 24 months, whatever the timeframe might be. Can you give us a sense where the magnitude in increase in number of dealers you hope to take on, or is it something that could grow by 50% double, is there any sort of internal goal you guys have?

Steven W. Berglund - President and Chief Executive Officer

No. I mean again kind of back to characterizing it, and the answer varies from business to business in Trimble. So in the engineering and construction, I think for the machine control and for the high end surveillance for example, that tends to be a relatively exclusive dealer channel where there is a dealer with the geography, and there is a need for that dealer to be relatively muscular in terms of financing, because there is a level of support, there is a level of capability that's required. So it's less the matter of how many dealers we have under that channel than the quality of the dealers.

Now for other businesses, for example, ad tends to be by it's nature a multi tier, multi channel sort of distribution process, and so there the number of dealers would tend to be more meaningful in terms of...its important to have lots of outlets there, for things like GIS and some of these other businesses, again, it come comes back to being more of a quality dealer than anything else, and then again at the low end construction and low end survey realms, I probably shouldn't use the world low end, but for those class of products, it does tend to get back to more of a how many distribution points do you have, and if the user has a need, is there a readily available supply So I think the. I'm dodging the question just because I think if it's, if I gave you raw statistics, it wouldn't necessarily need to a truthful answer.

Corey Tobin - William Blair and Company

Great. Thank you.


Your next question comes from the line of Charlie Anderson with Dougherty [ph] and Company.

Unidentified Analyst

Thanks for taking my question. I wonder to figure if you will just unpack your outlook on Field solution here and then also look at the quarter whether market share gains, whether specific products geographies that really broader that out or is this more of a total macro environment that's allowing you to put up these kinds of numbers?

Steven W. Berglund - President and Chief Executive Officer

I will give you the simple mind of the answer and then I'll to refine it a bit, but the simple minded answer was everywhere and in everything to some extent. So we have what we would consider on internally four internal product classes if you will with any AG. One is the in it, one is the autopilot product, which is a highly automated relatively expensive product offering that had outstanding success and it had outstanding success in kind of all the relevant geographies.

The next class of product is our lightbar class product which the operator key just to turn left and right, same thing based on this easy guiding 500 product that we introduced a year ago. We had outstanding results there and again it was broad based geographically and like... did we have small, much smaller category of water management that gets to be interesting strategically in this water short world of ours. That also promotes smaller base, also should show very good growth. That tends to me a little bit more geographically selective, but there for example we, places like China become much more relevant for that product class right here, right at this moment of time.

But again strong success. And the four categories is a still smaller category that will showed probably the most significant percentage growth. It was triple digit number, but was flow control, so we announced that product in the latter part of 2006, our entry into flow controls, which is extending out taking advantage of the fact that we have GPS receiver on the tractor, and a computer on the tracker and expending it out our farther into the farm operation. But while we have seen in the...certainly the last two quarters was a triple digit growth from a small base but getting significant attraction on that product as well so. Pretty much everywhere and everything.

Unidentified Analyst

Got you. And then I wanted to talk again about ENC operating margins and you guys said that you can see them expanding from here I wonder where that is the revenue growth level, the gross margin levels if the product mix improves and how fast that product mix will improve for you guys. Where do you see the leverage there?

Steven W. Berglund - President and Chief Executive Officer

Well I think we are starting out from the bottoms up and Raj add any color here. But certainly we are on the expense side kind of the lines between gross margin and operating we are definitely in hunter down mode at this point of time. Raj talked to cutting back costs in the early part of the second quarter so what we are doing there very consciously very methodically it is saying okay. With the current product mix that we're generating and the gross margin that results from that what is the appropriate level spending on R&D, marketing, selling, administrative and we are working backwards to it actually define find the missing corporate level spending.

I think that product mix is relatively key here we talked in terms of the fact that the, there has been a shift in product next year ahead is producing at least for the moment, a lower gross margin in ANC. I think there are things that we think we can do over the next six or nine months to improve that product mix, which would tend to lift gross margin. But we will not..., we're not counting on here is necessarily the walking of the [Indiscernible], but what we're not counting down here is a revival in the overall economy.

Unidentified Analyst

Got you and then one question on TMS here. It sounds like you guys, you are making the investments, and you have the horizon of the next 12 to 18 months for those to pay off. I wonder if you can just put the metrics around the what the opportunity is there in terms of mobile workers, the fleet, really where the hockey [ph] stick is for you guys there and what we can kind of think about going forward?

Steven W. Berglund - President and Chief Executive Officer

Yes, I don't know that we want to all that specific in terms of dollarizing this, but I'll give you hopefully a helpful hand. I made the reference to the fact that in terms of opportunities we're sitting in front of somebody whose going to make a bind decision say in the next six months. This... what we're seeing is a unprecedented level of interest in this class of product out there, so we don't; give subscriber... level of subscribers out there but I would say we're currently involved in discussions that involves six figure numbers in total in terms of numbers subscribers out there which would be if you work it through in terms of success rate and all that could be a safe case significant pump to our both out returning revenues as well as the revenues for the segment. overall. Beyond that I think it's characterize it, but too closely but I think the environment is ....has shifted and again I think that we are seeing an inflexion point. I would not describe it is a hockey stick though as we've [Indiscernible] long ago.


Your next question comes from the line of Scott Sutherland with Wedbush Morgan.

Scott Sutherland - Wedbush Morgan Securities Inc

Yes, Scott Sutherland with Wedbush Morgan. Good afternoon, couple of questions. You said in your previous comments you said that there is like a 4X increase in the mobile solution pipeline. Can you talk about where we are on the sales cycle, because we have not seen he revenue yet. Is it along the sales cycles or is it [Indiscernible] in the next few quarters?

Steven W. Berglund - President and Chief Executive Officer

Well again I made a specific reference to the pipeline and talked about 2009 so I don't think it would be smart to assume that there is going to be pop from this activity in 2008. So I can desert activity in 2008 so again these tend to be enterprise level sales so they work to a deliberate process so some of them are relatively link stage, some are relatively early stage but that I well I would say is that I with would expect to fall into 2009 rather than 2008 in terms of volume I most of this pipeline.

Scott Sutherland - Wedbush Morgan Securities Inc

Okay. My same question E&C side we have seen little bit of weakness domestically. You're moving to some pockets of Europe that you mentioned earlier. How would character the isolation I the emerging market from what's happening here in parts of Europe and the U.S.

Steven W. Berglund - President and Chief Executive Officer

Again as I as I said earlier is that I think that emerging market tend work to a different funding source. There is much less what I will call passive and in fact in some country there is virtually no commercial business that tied to private developers and private sources of funding. It tends to be much more even government or international financing and then so I think that again it is in this environment it is hard to say anything categorically but I would say is that the emerging markets will tend to operate to a different rhythm than either U.S. or Europe.

Scott Sutherland - Wedbush Morgan Securities Inc

Okay, great. Thank you.

Steven W. Berglund - President and Chief Executive Officer

You are welcome.


And you have no further questions at this time. At this time I will turn the call back over to leaders' the for closing remarks.

Steven W. Berglund - President and Chief Executive Officer

Okay. No closing remarks. But thank you for attending and talk to you next quarter. Thanks.


This concludes today's Trimble Navigation Second Quarter 2008 Fiscal Earnings Conference Call. You may now disconnect.

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