Trimble Inc (TRMB) — Q1 2015 Earnings Call Transcript

Good afternoon. I'm here today with Steve Berglund, our CEO; and Francois Delepine, our CFO. Before we begin, I'd like to remind you that the forward-looking statements made in today's call and the subsequent Q&A period are subject to risks and uncertainties. Trimble's actual results may differ materially from those currently anticipated due to a number of factors detailed in the company's Form 10-Ks and 10-Qs or other documents filed with the Securities and Exchange Commission. During this call, we will refer to a press release which is available, along with additional financial information, on our website at www.trimble.com. The non-GAAP measures discussed in the call are reconciled to GAAP measures in the tables to our press release. Now let me turn the call over to Steve.

Good afternoon. First quarter results were consistent with the narrative from the fourth quarterly call, although we fell outside of our revenue guidance in the quarter. Three months ago, we expected the first half of the year to be a challenge, which is turning out to be true. We also expect the second half results to demonstrate meaningful improvement, which continues to be our expectation. In this case, the definition of improvement would be a return to high single-digit revenue growth and a return to an operating margin converging on 20%. We had a revenue surprise in the quarter, which is emphatically not part of our historical culture. We are addressing the issue with a series of organizational actions I will explain later. As anticipated, the weakness in agriculture continued, although we believe our ability to forecast the business is better than it was in the second half of last year. We obviously need to be wary of market volatility, particularly among the agricultural OEMs, but we think we are seeing some signs of stabilization. We are currently forecasting our agriculture revenue in the second quarter to be down from last year. But absent the OEM inventory effects of 2014, we see agriculture being closer to flat year-to-year on the second half of the year and into the first part of 2016. Even if agricultural machine sales drop by another 15% in the second half, the dollar further strengthened against the rate we had used to set guidance, which pushed revenue down. It had a differential impact on earnings at the segment level, although the earnings impact at the consolidated level was relatively small. The weather in the Northern and Eastern U.S. in the first quarter had a significant effect on those regions' construction and geospatial sales and postponed the typical search we see in the final 4 to 6 weeks of the first quarter. Against total company revenue, this is not particularly material as it represents about 1% to 2% of revenue, but the exchange rate effect and the weather effect, in combination, pushed us out of the revenue guidance range. The primary driver, which drove our revenue down in the quarter, was a non-anticipated drop in geospatial sales primarily in North America. Some of this was the impact of weather in the Northern and Eastern U.S. and some was exchange rates. Given that the drop was centered in North America, there is no macroeconomic rationale that explains the drop. Market share data shows us being either in stable or improving market position. The decrease is centered in the oil-producing regions, and the oil price decline appears to be the causal factor. Last quarter, we described the primary expected impact of the oil price shock on us to be approximately 1% of total company revenue or $25 million per year. This judgment appears to remain valid. What we did not adequately anticipate were the secondary effects. The oil bust has put a damper on the oil-producing regional economies and has caused a generalized pull-back of investment activity. This has played out, in our case, by a sharp reduction in inventory in the channel in certain regions. Although the market may normalize later in the year, we have added more conservatism to our geospatial expectations. Construction, the other large component of E&C, was also impacted in the quarter by exchange rates, weather, and regionalized secondary effects of the oil price, although the oil price effects are much less severe than in geospatial. The heavy civil component of construction continues to be negatively impacted by the mediocre international economic environment, most particularly in Australia. The fundamentals remain strong, and we expect to regain traction as we work through these short-term issues. The Mobile Solutions segment performance showed improvement in the quarter, and we expect even better performance in the second half, largely based on the Transportation & Logistics business. At the moment, this segment is the best-performing element of Trimble. Europe, both North and South, is showing more buoyancy than we have seen in some time aside from the exchange translation effects. An offsetting factor is the trend for Russia, which continues to deteriorate, and the negative outlook for Brazil. If the European trend develops, this would be meaningful for us since Europe constitutes over a quarter of our revenue and has not been a significant constructive part of our story for years. It is too early to be conclusive since there are competing European positives and negatives, the ongoing Greek crisis being the primary negative, and lower energy costs and a traded damaged euro being the positives. Last quarter, I described the need for improved performance from specific elements of our business portfolio. These are agriculture in the Field Solutions segment; the real estate and workplace solutions business, which includes Manhattan Software and E&C; and construction supply and Field Services management, which are in Mobile Solutions. Beyond the obvious impact of agriculture, the combined effects of these businesses currently represent meaningful trades and current results and create potential future opportunities. We believe all of these are growth businesses that add to the Trimble franchise and expect to see all of them demonstrate meaningful progress in 2015. Manhattan Software should show a lift later in the year as we resolve the initial post-acquisition revenue recognition accounting challenges. The construction supply business anticipates growing strength during the year based on the improving economy in the U.S. and a stronger product portfolio. Field Solutions and the Mobile Solutions segment are looking at a strong orders pipeline, which leads to a trend of improvement in the second half of the year and a stronger 2016. Although we stumbled in the quarter against our expectations, we have several recent examples of strategic progress that foreshadow future revenue. Let me identify three of them. All three of these announcements are based on capabilities that have been assembled over the last several years through internal development and selective technology-focused acquisitions that have created strong franchise effects. The first is the public announcement of our win of the Beijing new airport project for what the customer refers to as a construction information system. Beijing's new airport project is designed with a target of 72 million travelers and 620,000 flights in 2025 and represents one of the most challenging and high-profile projects to be awarded in 2015. The project has an explicit objective of establishing a new standard in digital construction of large strategic projects. Trimble won with a web-based construction workflow management solution that allows construction operations to be monitored in real time. This project should provide meaningful leverage as a reference account and highlights that Trimble has a competitively unique portfolio of capabilities centered on the constructible model that can enhance construction site operations. We also announced during the quarter a new multiyear alliance with Paccar, the manufacturer of trucks, including the Kenworth and Peterbilt brands. This will significantly boost our T&L subscriber base in the Mobile Solutions segment and have a meaningful impact on revenue later in 2015 and throughout 2016. It involves installing Trimble hardware in every Kenworth and Peterbilt truck with an MX engine. Trimble will provide remote diagnostic services for a monthly recurring fee. This opportunity is attractive in its own right. Beyond the base point capability, it provides a significant platform for us to upsell additional fleet management solutions. Just as we discussed regarding the next fleet problem with construction machines, the same problem exists in transportation. The Paccar platform gives us a head start in solving transportation's next-fleet challenge. This win can be attributed to the synergistic effects of Trimble's unique ability to bring together elements of mobility, enterprise, and analytics into one bundle. Another event that has longer-term meaning is related to the announcement yesterday that Microsoft and Trimble are working together to develop a new generation of tools integrated with the Windows HoloLens holographic platform on Windows 10, which is intended to improve quality, collaboration, and efficiency in the design, construction, and operation of buildings and structures. Proof of concept for the solution was demonstrated yesterday at Microsoft's Build Developer Conference in San Francisco. Augmented reality, which Microsoft calls mixed reality, is becoming real and can have a major impact on how work gets done. The ability to juxtapose model information and virtual collaboration in the context of the real world and do this in a natural, comfortable way is all new. The technology is applicable in many of Trimble's markets, but the initial focus will be in construction and geospatial. We contemplate things like facilities managers who can see all of the building model elements and status as they walk through a building or the office designer who can take a workstation out of Trimble's 3D warehouse and digitalize it right in the workspace where it will be used. In Microsoft's published video, you can see SketchUp in use with HoloLens alongside integration with Trimble's V10 imagery capture product. A link to the video is available on Trimble's website. While the demonstrations yesterday highlighted Trimble's technology capabilities and were not a product announcement, they did represent Trimble's leadership in what will be an important applied technology, and our intention to be a leader in the commercial development of that technology. Although we expect some natural lift in the second half of the year, we are not satisfied with our current management performance and are taking actions to improve it. We have therefore launched a number of changes to improve our ability to deliver against expectations, maintain margins, and execute strategically. In the last three months, we have taken significant cost reduction steps by reducing headcount by over 115, with accompanying steps to reduce other costs. The magnitude of the recent cuts is over $15 million annualized. Our business model supports the expectation that we can operate with an aggregate 20% non-GAAP operating margin, and we will take actions to regain that model. In the last three months, we also undertook a significant reorganization. This includes changes at multiple levels of the organization, including senior executives. This change in roles and alignments is intended to improve both our short-term and strategic execution with a singular focus on making the numbers. The organizational changes have concentrated more authority with individuals who have a history of execution. The realignment also recognizes the changing nature of Trimble, which is rapidly becoming more focused on software and solutions, away from hardware, and therefore requires different skills and capabilities within the management group. Although we have had a plan of organizational change, the current challenges helped motivate us to accelerate the process. Our focus is on aligning individuals within the right structure to enable effective execution of a market strategy that remains as robust as ever in terms of producing growth. At the senior management levels, let me identify both recent and pending changes, all of which are direct reports to me. Peter Large, who was responsible for Trimble's distribution channel strategy development, departed in December. Last week, we announced that Chris Gibson, a long-term Trimble sector head focused on the geospatial businesses, will take over the significantly expanded role with specific mandates to accelerate our development in emerging geographical regions, professional services, and key accounts. Bryn Fosburgh, who has led the sector focused on the construction businesses, will add the geospatial business to his portfolio. Mark Harrington, who leads the sector that includes agriculture, will retire as planned in the middle part of the year. We have launched a search for a successor that will include both internal and external candidates. During the last month, Mike Scarpa has joined us as Chief Human Resource Officer. He comes with experience at HARMAN electronics, ABB, and GE. His primary focus will be on developing the skills and organizational processes consistent with a more complex environment. We continue to expect to establish an inflection point at midyear and to reestablish and move into an upward trend in revenue in the second half of the year after three quarters of failing to produce growth. We believe our forecast is sober and possibly conservative, although it needs to be quantified by the possibility of any new shocks from the environment. Let me identify the discrete elements of the analysis for the second half. First, at current exchange rates, we will start out 4% to 5% in the hole from a revenue perspective. Second, acquisitions already enhanced should produce 4% of growth. Third, we are assuming our agricultural sales to be basically flat in the second half of 2015 year-to-year. We believe this is an objective view after 18 months of declines in our agriculture revenue. It does not assume any kind of recovery in commodity prices or the equipment market. If we can achieve stability in our base business, we can then start to reintroduce the concept of incremental growth in 2016 through the development of new product categories. Fourth, we are anticipating strong growth in the Mobile Solutions segment in the second half, much of which is already in backlog. For the rest of the company, we are forecasting relatively modest organic growth, at least until we better understand the full secondary effects of the oil price impact. The combination of these effects leads to a view of the year that is consistent directionally with the outlook we described last quarter. Exchange rates and the full effect of the oil price shock have added additional headwinds, but the signs from Europe and a sense of stabilization in agriculture may offset some of that. We have stumbled recently on short-term results, but the three-year view on potential remains unchanged. We simply need to execute. Let me turn the call over to Francois.

Thank you, Steve. Good afternoon, everyone. Before getting to the numbers, please note that unless otherwise indicated, the operating results I will discuss will be on a non-GAAP basis. The reconciliation from GAAP to non-GAAP numbers is in our earnings press release along with the financial data by segment. Unless otherwise indicated, growth rates are meant to be year-over-year growth rates. So now let's first cover the first quarter results. Q1 total revenue was $583 million down 4% year-over-year. Currency translation added approximately 4% year-over-year unfavorable effect roughly offset by growth from acquisitions. Relative to our original expectations for the quarter, the shortfall in revenue came primarily from FX deterioration during the quarter, combined with softness in our E&C segment, largely driven by weather and oil and gas weakness. We estimate that this weather and oil and gas weakness added a 3% to 4% year-on-year unfavorable effect. Our Field Solutions segment was also soft, as expected, with agriculture showing some signs of stabilization. Now looking at our revenue by segment. Engineering and Construction segment revenue was down 3%. Currency translation added approximately 5% unfavorable revenue effect year-over-year, roughly offset by growth from acquisitions. While some of the portfolio did well, our results in E&C, particularly in geospatial and, to a lesser extent, in heavy civil, were severely impacted by weather and oil and gas weakness. More specifically, Trimble Buildings growth was strong. Geospatial revenue was unexpectedly down in the mid-teens, impacted primarily by FX, weather, and weakness in certain regions with significant oil and gas exposure. Heavy Civil was down single digits impacted by FX, lower sales in Canada, also largely attributable to oil and gas, as well as continued weakness in Australia. Overall, the estimated effect of weather and oil and gas was approximately 7% to 8% unfavorable on the E&C segment. The divestment of a distributor also added an unfavorable impact on the E&C segment of approximately 1% year-over-year. Field Solutions segment revenue was down 17% year-over-year, due primarily to weakness in the agriculture business. Agriculture was down in the mid-teens but showed signs of stabilization in the market that remains quite difficult. The agriculture weakness was widespread but continued to be more pronounced in OEM factory-installed technology. Currency translation had approximately 5% unfavorable year-over-year impact in the Field Solutions segment. Acquisition had a minor positive impact. GIS was also down significantly year-over-year in that segment. Mobile Solutions segment revenue was up 8% year-over-year and would have been up double digits without the 3% negative FX impact. The Transportation & Logistics business growth was strong in the mid-teens. Segment results were also modestly impacted by the divestiture in Q4 of a non-strategic business. Advanced Devices went up 3% in the first quarter. Now looking at our revenue by geography: 53.1% of Q1 revenue was from North America, 25.2% from Europe, 15.2% from Asia-Pacific, and 6.5% from the rest of the world. North America was down 4% year-over-year. The largest impact in North America was the agriculture weakness in the U.S. with the Field Solutions segment down over 20% year-over-year. E&C was down single digits in North America, driven primarily by weakness in regions with significant exposure to oil and gas and, in particular, Canada. Europe was down 5% year-over-year, primarily impacted by currency. However, we're seeing improving trends within Europe in constant currency terms. Currency had an approximately 14% unfavorable impact year-over-year. Adjusted for this impact, Europe grew approximately 9%. E&C, Field Solutions, and Mobile Solutions in Europe all grew year-over-year in constant currency terms, with a positive shift in particular for our agriculture business. Russia, as expected, continued to be down significantly overall. Asia-Pacific was up 1% year-over-year. China continued with solid growth. India grew, albeit from a relatively low base. On the flip side, Australia remained weak and was down significantly year-over-year. Currency also had an approximately 2% unfavorable impact year-over-year on Asia-Pacific. The rest of the world was down 10% year-over-year. The Middle East and Africa were down due to a challenging comp from the first quarter of 2014. South America was up, positively impacted by a rebound in agriculture results. The impact of currency on the rest of the world was minor. Now turning to revenue by type. We're continuing to see a shift in our portfolio towards a more significant mix of software recurring revenue and services. In Q1, product revenue was 69% of total, service revenue was 17% of the total, and subscription revenue was 14% of total. Product revenue, which includes both hardware and software licenses, was down 9% year-over-year. Within that number, however, software license revenue grew. Service revenue, which includes maintenance support, extended warranties, and professional services, was up 8% year-over-year, with growth driven primarily by Gehry Technologies, Manhattan, and Amtech, which were acquired in the second half of 2014. Subscription revenue, which includes SaaS and other subscription services, was up 18% year-over-year. The subscription revenue strengths reflect the combination of organic growth and the impact of acquisitions. The majority of our service and subscription revenue is recurring in nature, and recurring revenue overall was also up significantly year-over-year. Non-GAAP gross margins decreased to 56.8% in the first quarter compared to 57.6% in the first quarter of 2014. FX had a negative impact as some of our products sold in foreign currencies are sourced in U.S. dollars. Product mix also had a negative impact on gross margins, particularly in E&C, where the positive impact of higher subscription revenues was negated by unfavorable mix in the product revenue category and an increase in professional services. Q1 non-GAAP operating income was $96.8 million or 16.6% of revenue, as compared to 21.2% of revenue in the prior year. Total company operating income percentage was negatively impacted by a number of factors. The major impacts were lower revenue in E&C and agriculture and, to a lesser extent, recent acquisitions. The impact of currency translation on company operating margins was small. We have a large cost base in Europe and other countries, which mitigates the impact on operating income. As we discussed last quarter, recent acquisitions are performing to business expectations and the negative impacts of acquisition accounting will dissipate after the first half of 2015. The non-GAAP tax rate for Q1 2015 was 24%, which we currently expect to see for the remainder of 2015. Q1 net income of $72.7 million was down 29% as compared to Q1 '14. Diluted earnings per share were $0.28, down 28% as compared to Q1 '14. As Steve mentioned, we've been taking steps to reduce expenses which should materialize mostly in the second half. Q1 operating cash flow was $107 million and up 29% from Q1 '14. Strong cash flow performance relative to net income resulted from lower working capital. Turning to the balance sheet. We finished the first quarter 2015 with $146 million in cash. Account receivable was $383 million with day sales outstanding of 60 days, and ending inventory was $276 million. Deferred revenue increased to a record $282 million, an increase of 22% year-over-year. The increase in deferred revenue primarily reflects changes in the mix of our revenue towards more software and subscription offerings and include the impact of acquisitions. That decreased by $75 million in the quarter ending at $663 million versus $738 million at the end of the fourth quarter 2014. Our debt-to-equity ratio and leverage ratio, the gross debt to trailing 12-month EBITDA, remained at comfortable levels in the quarter at 0.3x and 1.35x, respectively. During the first quarter, we repurchased 478,000 shares of Trimble common stock for a total of $12.6 million. We repurchased a total of 3.7 million shares for $110 million over the trailing 12 months. From a capital allocation standpoint, our first priorities remain to fund the business both internally and through acquisitions. With a combination of strong operating cash flows, our near-term acquisition pipeline, and a comfortable leverage ratio, at this point we expect to be more active with share repurchases in Q2. Our stock repurchase program has a remaining authorization of $237 million. I will now turn to our guidance for Q2 2015. We expect second quarter revenue to be between $570 million and $600 million and non-GAAP earnings per share of $0.23 to $0.30. Non-GAAP guidance excludes the amortization of intangibles of $40 million related to previous acquisitions, estimated acquisition costs of $4 million, the anticipated impact of stock-based compensation of $13 million, and $5 million in anticipated restructuring charges. Second quarter non-GAAP earnings per share guidance assumes approximately 262 million shares outstanding and a 24% non-GAAP tax rate. This non-GAAP tax rate assumes that the R&D tax credit will be reenacted for 2015. Our Q2 revenue guidance assumes that we continue to see the headwinds we experienced in Q1 with the agriculture market and the oil and gas market. Q2 revenue guidance also assumes an unfavorable currency translation impact of approximately 5%. In addition, Q2 '14 benefited from a positive revenue recognition event involving a distributor, also creating an unfavorable revenue growth impact of approximately 2%. As Steve discussed, we're taking a number of cost actions to ensure that we can better manage operating margins. We expect these actions to have a minor impact in Q2 and a positive impact in the back half of 2015. We expect larger-than-normal restructuring charges in the quarter associated with these actions, as I mentioned above. With that, we'll now take your questions.

Steve, could you just kind of walk through maybe the setup here a little bit on the mobile side of the business, in particular T&L? Obviously, these EDL mandates that have kicked in this summer feel like we should be quite well positioned there with PeopleNet, TMW, and some of our relationships that we have had in place. So maybe we could just talk about how you see that unfolding and if your enterprise-level approach gives you an advantage in that market.

Yes, I think you're right. I think that we consciously attempt to build what's called a franchise about mobility and enterprise and actually analytics. Within this mix, we have a pretty robust and growing analytics business, which gives us, I think, in many cases, a differentiated advantage as well. Up until quite recently, it's taken time to bring together the elements, so we were operating maybe more at the PowerPoint level than the reality. I think the Paccar deal, for example, shows the relative power of kind of having all the elements within one umbrella and being able to speak to mix and match to situations. In terms of capabilities, we are unique as a company. I think that as this mandate and just the drives for productivity and driver safety in general play out, we have the ability to craft better solutions than anyone else. And in reality, over the last 6 to 9 months in particular, at the product level, we have integrated the PeopleNet and TMW capabilities. You will see more over the next 12 to 18 months: a more unified, more integrated approach to the marketplace. We think we have an advantage, we're executing on that advantage, and we still have some things to do, but I think we're in good shape.

Okay. Can I just have one follow-up? Can I clarify a comment that I think you made at the beginning of your presentation, Steve, regarding returning to normal footing in the second half of the year? You mentioned mid-single-digit second-half revenue growth, including FX, and operating margins around 20%. Is that the goal for the second half?

Yes, I was on script. I said, high-single-digit revenue growth, not mid-single-digit revenue growth. Yes, and that's inclusive of the FX effects.

Right. And the 20% was a moving towards 20%.

Okay. And Francois, just one question for you and then I'm off. But in the E&C segment, can you give us a sense of what the amount of revenue that was deferred off the acquisitions either in dollars or potentially, or possibly, can you tell us what the operating margin would be exclusive of the deferred revenue, in other words, if you include the deferred revenue in an adjusted number?

Yes, so let me try to answer that. I'll give you some elements for the answer, which is that we continue to have a little bit of deferred revenue from the acquisitions on the balance sheet. But Q1 was a much more normal quarter compared to Q4 in that respect. Overall, the acquisition had about a 2-point negative impact on the sector operating income.

Just wanted to talk a little bit about some of the changes that you made at the executive level. Can you maybe give us a sense of what those changes might bring in terms of either strategic or execution changes and sort of the timeframe for those to have an impact on the business?

I believe this may not provide a complete overview. However, my main point is that we aim to achieve both immediate and long-term impacts. This approach combines tactical and strategic elements. We have experienced several missed quarters over the past year, and part of our goal is to regain the traditional Trimble culture of clear accountability for results. Changes within the organization include realigning sales management to ensure stronger accountability from individuals capable of accurately forecasting and delivering on those numbers. This is about enforcing short-term accountability and emphasizing its importance. Regarding Chris Gibson's reassignment, it is also strategic as we seek to have a strong focus on emerging markets like China and India, where previous responsibilities were spread too thinly among various people. Chris will now oversee the country managers in those regions, allowing us to concentrate our resources more effectively. I also think that in this period of missed targets, it’s a good time to reassess whether we have grown too comfortable with our existing management styles. It might be appropriate to shake things up. As for Mark Harrington's retirement and his successor, we may consider bringing in an outsider to enhance the diversity of perspectives within the senior leadership team. While these changes are not drastic, they aim to sharpen our focus and increase accountability regarding our performance metrics.

Got it. And then just as a follow-up. As we look at the agriculture business, both the results this quarter and your expectations for improvement towards the second half of the year, what kind of surprised you this quarter outside of the currency impacts? Can you explain some of the delta between your internal forecast and maybe the outcomes? How do you think about this across both the aftermarket and OEM channels? How do you sort of reconcile the revised guidance with that perspective?

You're talking about agriculture alone or...?

Specific to agriculture.

Okay. We were on our number for the quarter. So, if you will, there were no net changes. We were on the number that we have forecasted for agriculture. What gives us some confidence is that we're getting control of our market model in agriculture. So I don't think there were any significant negative surprises either coming out of the OEM realm or elsewhere. It was more or less as expected, with some pluses or minuses. Peeling back the onion without expressing a premature kind of optimism here, there are a number of things happening within agriculture that provide some level of improving confidence. If you look at the performance of channels within agriculture, the best-performing channel is our own aftermarket. Second comes the OEMs' channels, and third comes OEMs. In a sense, it's our own channel that gives us a more accurate picture of what is really possible in the market, not for technology, not for equipment; that channel is performing relatively better again. The emerging markets geographically are also outperforming the rest. There are a lot of moving pieces here and some of them are actually positive. It’s still volatile and uncertain. We are still assuming that equipment sales will be down in the second half of the year year-to-year. But we think that our set of circumstances enables us to play flat year-to-year, and we anticipate that continuing into 2016. We can hopefully start to engineer some upside movement once we achieve stability.

Steve, you had this big win in Beijing. What was the magnitude of it? What can you tell us about the pipeline of software-related sales, and to what extent do hardware sales come attached?

Yes, so given the sensitivity of this one, let’s just describe it as being 7 figures with what I would call meaningful tag-along capability. We've arrived at the top-tier project here, and there will be a lot of tag-along with it. We're well positioned to capture that as well. Seven figures there. I would say the software pipeline in terms of the number of points of engagement around the world for this kind of project is growing. It’s not a needle-mover in 2015. Hopefully, in 2016, it becomes a much more significant part of the conversation. Trimble has the ability to walk into a C-level suite of a contractor and offer a comprehensive solution that involves software and hardware. The majority of these arrangements would involve both hardware and software simply because it's all bundled together. The pipeline is growing, and we are organizing more aggressively around pursuing big project deals, such as the Beijing deal.

Going back to the pipeline, if I may. Do you have dozens or hundreds of potential deals in the pipeline? If there's a medium size to these deals, what would it be?

I think probably in any given 6-month period, there are hundreds of conversations. But to bring some reality to it, if you counted the number of large to medium projects globally at any point in time, there are probably dozens in some sort of serious conversation where there's some level of planning. And again, medium size would be variable, typically 7-figure numbers depending on scope and circumstances.

You had a big win with Paccar. I'm wondering if you could talk about how you expect the timing on the Navistar sourcing decision. When do you expect that to play out? Can you broadly touch on your opportunities to get on other platforms as the factory default?

My comfort level is not particularly high here. Any conversations we’re having is confidential, and I don't want to create a dynamic here where we're irritating the other side. So I’m going to take a pass on the question to avoid any problems here. Let’s just say that we are engaged with a number of players and some elements are not able to be disclosed, but just wait for the press release.

On Field Solutions business, the outlook for flat agriculture revenue in the back half of the year, can you talk about what kind of tractor production environment you're calibrated to? CNH, I know you're in lockstep with them. They're talking about a 40% production cut in large ag and meaningful excess inventory at the dealer and company levels. Can you calibrate us when you say flat ag in the back half of the year?

In terms of tractor environment, the numbers seem to shift over time in terms of if you listen to the major producers. The year typically leads to down in the first half probably in the 30% to 30%-plus range for tractors. The second half should be around a 15% to 20% down range. Our market model assumes that, in general, tractor sales will be down on the order of 15% in the second half of the year. There seems to be a consensus that maybe the numbers haven't been quite as bad as originally forecasted in terms of tractors out the door. There is still too much inventory in the channel for the manufacturers, but this is not a secondary consideration for us since we had our own channel inventory adjustment in the second half of last year. That’s what our market model assumes, and we've got a whole model built around the aftermarket. Right now, the aftermarket is significantly outselling the factory, in terms of technology.

The 15% to 20% end market outgrowth you're looking for to support your flat ag in the back half of the year, are there any new product contributions in there? Is there an irrigation piece? Any new products rolling out on the aftermarket side, since it's been a while since we’ve seen this level of outperformance in ag?

We are seeing some points of life, although there are not enough, and they're not large enough, to wave the flag too much. For example, we came out with a new display in the first quarter, the TMX. We did outperform our expectations in Q1 on that product. We have the Connected Farm Advisor, which is a piece of software we put out there. It's a subscription-based service. That is still very small, not necessarily worth quoting numbers just yet. However, we are seeing uptick there. We now have built out our direct sales force on irrigation. There's a lot of engagement, and we’ll see how quickly that monetizes. This is all resonating in the second half assumption or forecast. They are not big numbers yet, but all of that is relevant to our overall numbers. There are a lot of moving parts, but in aggregate, we think it provides upside. The year-to-year comparison during the second half of 2014 will be easier because of significant OEM inventory adjustments that led to demand dropping almost to nothing overnight. We'll have a much easier comp situation in the second half of the year.

I want to discuss the aftermarket versus OEM dynamic you've described. There’s a lot of talk about a shift from traditional aftermarket sales and precision agriculture into more of an OEM embedded model. Much of this happened in the automobile industry, for example. You're noting that the aftermarket is strong. What's your view on that shift? Is it happening in the industry? If so, what is the impact on the business?

Certainly, from a secular strategic standpoint, this has been our assumption all along: That in terms of base capability, the box and receiver GPS receiver in agriculture, it's not nearly as true as in construction. Yes, so the base capability and the ability to, the box, the receiver will continually move towards a factory installation. Our long-term strategy is to participate with the OEMs. The bigger dollars down the road are selling software and data-related services that utilize the factory-installed capability for positioning and computing power. That’s the long-term trend we acknowledge and accept. In the short term, significant parts of the emerging world are still aftermarket. If you go to China and places like that, it's aftermarket. Those are actually the more dynamic markets. Our OEM channels were down in the quarter more than 20%, whereas our channel, the Trimble channel, was down single digits. Currently, if farmers feel stability, they may choose to defer the investment in new tractors. With the new features technology and Trimble's continual development of new features, a farmer might choose to retrofit an existing tractor with a new version of the technology. In this regard, the aftermarket is performing reasonably well. We will continue to have an aftermarket either for selling extended versions of the technology or for software and data services.

That's helpful. Then my other question had to do with the management changes. You specifically tied the management shakeup to execution and internal accountability. Yet external headwinds remain significant, such as oil prices, Forex, a strong dollar, and cyclical issues in agriculture. Can you elaborate on the rationale for the management changes considering these factors?

You're right. We could be pointing to the external factors as the prime drivers. At the same time, if you look at Trimble today versus Trimble five years ago, the complexity is much higher than we were five years ago, with much more software content, professional services, different elements. We've always maintained we need to step up to a new level as a company for executing on projects like the Beijing job, which requires a level of focus and collaboration within the company that we haven't had historically. There's been a historical view that we needed to transform. The current situation showed us that we need to connect better with the market than we've demonstrated recently. We should have been more informed about the agriculture and oil and gas issues. It's a good time to accelerate things, and we need to be ready for whatever the world presents in the next few years.

I need a clarification because you said something in the end which struck me as interesting. Francois, you said you are assuming the R&D tax credit is reinstated. Does that give you about a 1% lower tax rate? Is that the magnitude?

Yes, roughly. That's about right.

Can we talk about the profitability of Field Solutions? I'm impressed by the profitability in Q1 with weak volume, almost a baseline profitability. Do you know where that's coming from? If you hold the improvement you expect in the second half, can those margins return back to historic levels?

We saw strong gross margins, which were pretty much in line with last year. We also worked on reducing expenses a little bit, and the run rate reflects drops in revenue. In Q1, we had some new products come in, some associated with price increases that helped maintain those gross margins. There are no other big factors I would point to.

If indeed you can get the volume you’re looking for in the second half, do you focus on restoring profitability back to historic levels?

In Field Solutions, we're at the 35% operating income level, and we feel that it’s a good level. We want to maintain that, staying north of 30. I’m not sure we plan to go back to the high 30s or 40% level we once had.

Can you give us some magnitude about your agreement with Paccar and what that could mean? You talked about 7 figures when you spoke about Beijing. The Paccar deal has two parts: the hardware installation and then the software package that can go along with it. Can you give us some idea of the top line and bottom line impact from that project? Are we looking at several million dollars in the quarter?

Yes, let me characterize it broadly. I don't want to share Paccar's business with the world. The expectation is tens of thousands or significant tens of thousands of units of subscribers with the possibility of more. Then there is a recurring piece there, let’s call it a respectable ARPU. Our strategy aims to upsell and increase the ARPU. That's about the best I can offer.

Can you provide more color on the profitability shortfall at E&C? They were more dramatic than expected, and I know weather and other factors impacted them. We are seeing positive trends in non-res construction as March brought strong results. Are we looking at natural business driving profitability back to normal levels, or are restructuring and improvements outside the U.S. crux to the matter?

Within E&C, the profitability story has a number of moving parts. The impact of revenue dropping out of geospatial, which had high gross margins, is one. There are acquisition effects dragging down profitability, and once we get revenue recognition straightened out, we will have some natural adjustments. If I had to point fingers, I'd point at volume effects mostly from geospatial, and the acquisition accounting and FX have affected historical trends.

Can you return to your targeted second half metrics with recovery in geospatial?

Hopefully, I was specific in my answer: Until we get this figured out in terms of secondary effects, we are being conservative on geospatial. If it turns out to be inventory effects that reverse up quickly, that will be additional upside.

I'm dialed in on behalf of Andrea James. You've done a great job assembling a BIM suite that nobody else has. What's your pipeline on that? Are you seeing any inflection point in the growth?

The pipeline has a lot of engagement. I want to be careful about providing overly optimistic insights. We're engaging at the big project level or at the enterprise level, working with large contractors and owners, realizing the need to embrace technology. I do believe we are at a strategic inflection point, but I'm cautious about predicting exact timing. I think it should be meaningful during 2016. The fact we were able to make the Beijing win public holds huge reference value and endorsement.

Great. And just one more— I know predicting what Congress is going to do is kind of a fool's errand, but can you provide any color on the Highway Bill?

I'm waiting. Not really, they're caught up in other things at the moment. But for now, we’re just waiting to see what happens.

Okay, thanks for attending. We'll talk to you next quarter.

Thank you.

Thanks, everybody.