Trimble Inc (TRMB) — Q4 2018 Earnings Call Transcript

Thanks Mark. Good afternoon everyone, and thanks for joining us on the call. I'm here today with Steve Berglund, our CEO; and Rob Painter, our CFO. I would like to point out that our earnings release and the slide presentation supplementing today's call are available on our website at www.trimble.com, as well as within the webcast and we will be referring to the presentation today. In addition, we will also be posting our prepared remarks on our Investor Relations website at investor.trimble.com shortly after the completion of this call. Turning to slide 2 of the presentation, I would like to remind you that the forward-looking statements made in today's call and the subsequent question-and-answer 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-K and 10-Q or other documents filed with the Securities and Exchange Commission. The non-GAAP measures that we discuss in today's call are fully reconciled to GAAP measures in the tables from our press release. With that, please turn to slide 3 for an agenda of the call today. First, Steve will start with an overview of the quarter and the year. After that, Rob will take us through the remainder of the slides, including an in-depth review of the quarter and the year, and our guidance, and then we will go to Q&A. I would also like to briefly mention that during the month of February, we will be attending the Goldman Sachs Technology and Internet Conference on February 12 in San Francisco, as well as the Morgan Stanley Technology Media and Telecom Conference on February 25 also in San Francisco. With that, please turn to slide 4 and I will turn the call over to Steve.

Good afternoon. In most respects, the fourth quarter and total year 2018 results represent record levels in Trimble's 40-year history and provide a strong platform for 2019 and beyond. Fourth quarter revenue grew by 13.1% and total year revenue by 18.2%. The changing company model with growing software and services was reflected in a significant gross margin improvement, which expanded 4.2 points in the quarter and 2.3 points for the year, with the gross margin of 58% for the total year. Together with tight cost control, this improvement drove remarkable operating leverage at 56% in the quarter and a strong 36% for the total year. As a result, operating margin grew 4.6 points in the quarter and 2.8 points for the total year. On the surface, the quality of our financial model compares favorably to the levels we achieved in 2013 and 2014, before we encountered the negative impact of agricultural and energy commodity price changes. In reality, the portfolio of today represents significantly more balance, resiliency, and growth potential. In particular, we are much less reliant today on the Resources and Utilities and Geospatial segments. In 2013, the combined revenue of those two segments accounted for 53% of the company total. In 2018, it was 41%. More importantly, during the same period the two segments moved from 65% of total operating income in 2013 to 46%. The portfolio is also demonstrating rapid progress in business model conversion with over 50% of 2018 revenue coming from software and services. This change is reflected in our closing 2018 ARR balance of over $1 billion. Clearly, 2018 was a year in which the stars were well-aligned. Every vertical market generated revenue and margin growth and demonstrated strategic progression. Almost every region produced robust growth, and our OEM sales added incremental growth to our core end-user markets. The year was also notable for the substantial progress we made in creating that strategic and state in the Buildings & Infrastructure segment with the acquisitions of e-Builder and Viewpoint. These aggressive actions reinforce the unique position around a strong bundle of value in the construction market with an enhanced position in project management, extensive relationships with project owners, and an information backbone that enables real-time access to all the information needed to operate a construction enterprise. We received validation of the strategy in the fourth quarter through our flagship users conference, Dimensions. We had more than 4,800 participants, with over 2,000 of them attending our off-site hands-on demonstration area with 60 machines from 28 OEMs. We took the opportunity to demonstrate operational examples of autonomous compactors and dozers as well as numerous examples of practical mixed reality and machine learning. Beyond the objective merits of the e-Builder and Viewpoint acquisitions, I'm gratified by the rapid engagement with, and intense participation in, our efforts to execute unified strategy. Together, we continue to discover both strategic and budgetary synergies, which create a much augmented ability to establish a unique and enhanced solution for the construction industry. As we noted last quarter, the relatively unique positive environmental alignment in 2018 began to show some cracks as the year came to a close. The fourth quarter provided some key points to watch in 2019, including the impact of trade policy on U.S. farmers, reduced or deferred demand from the U.S. government, the combined effects of Brexit, and slower Chinese growth on European exports and growth, and reduced demand from OEMs. Two additional effects impacting 2019 will be the accounting effects of our accelerating conversion to subscription models and the impact of the stronger dollar. Pending better clarity, we have adopted a generally conservative forecasting stance on these issues for 2019, with potential upside if any of these issues are resolved early. Rob will speak more specifically to each of these points. A point of differentiation between us and many companies that have reported recently is that we are not attributing a change in growth trajectory to the Chinese market. Although Chinese revenue growth was disappointing in 2018, partly as a result of the reaction to U.S. trade policy, other regions have grown much more rapidly than China in the last few years, and current Chinese revenues in 2018 represent less than 3% of total revenue, with diminished potential impact on the aggregate result. Resolution on trade tensions will create a net upside for us. We remain committed to the long-term model we described last year with organic growth of 6% to 9% per year over a cycle, plus an additional 3% per year from acquisitions. Our targeted operating leverage can be expected to convert this revenue growth into increasing EBITDA margins. This view on growth is shaped by our central strategic concept of performance to potential, which focuses on the penetration of underserved markets. This moves us beyond simple considerations of GDP or industry growth and leads to the expectation of growth rates larger than standard economic or industry metrics with increased resistance to cyclical downturns. Our strategic focus remains on the end-user, not on OEMs, which represented approximately 15% of 2018 revenue. Our OEM strategy is either opportunistic or an element of a more extended go-to-market strategy. We remain bullish on the building and infrastructure segment with some puts and takes regionally. We continue to see the civil engineering end-user market as a double-digit growth worldwide market supported by a generally positive economy and reinforced our initiatives and under-penetrated market segments and machine types. We are also marginally more optimistic than we were three months ago that the U.S. Congress could move on in infrastructure bill. The growth outlook for vertical construction also remains attractive, although we are faced with two factors more impactful to that business and other Trimble businesses; one, being unfavorable exchange rates in 2019; and the other, being the multi-year revenue accounting effects as we convert more of the business to a subscription model. The Resources and Utilities segment's short-term outlook will be determined to some extent by the duration of the U.S. Chinese trade dispute. U.S. farmers are demonstrating nervousness about the effects of lower Chinese demand for agricultural products and are showing some hesitancy about investing in their operations without more clarity. Longer term, we are confident about the agricultural market potential, driven by worldwide demographics, the potential of variable rate technology, and the convergence of hardware and software and to complete workflow solutions. The Transportation segment's short-term outlook is positive, driven in part by the second phase of the ELD mandate. We anticipate longer-term growth as we address the industry's remaining challenges, including the improvement of transparency between the shipper and fleet operators. We also have additional growth potential available through worldwide expansion. The Geospatial segment may have more moderate growth prospects than the other segments but nonetheless, it has meaningful three-year growth potential, driven by the technology replacement cycle, the creation of new classes of product through innovation, alternative business models featuring hardware-as-a-service, and the inclusion of Trimble technology in autonomy solutions. Our view on the regions also remains generally positive. We view our U.S. markets positively through 2019 with the qualification relative to the trade-induced ambiguity in agriculture. Europe, although still producing double-digit organic growth is accumulating more questions, and our outlook has become somewhat more conservative. Russia remains a country with significant potential but brings with it some volatility and challenges. Brazil is a significant and attractive market for us currently, driven by agriculture, but with new potential in transportation enabled by our Veltec acquisition, although too soon to tell if the Brazilian regime change has potentially improved three-year prospects for construction. India had a very strong 2018, and we expect the country to be a significant contributor to results in the next three years. Africa is a small contributor at this point and is inherently a complex market but with meaningful three-year potential. China is a significant three-year question pending improved clarification of trade policy and rules of engagement. In summary, we are coming out of the most successful Trimble year ever with excellent strategic positioning, significant market momentum, and an organization focused on performing to our potential. Let me turn the call over to Rob.

Thanks, Steve. In my commentary, I will review the results for both the fourth quarter and the total year of 2018 before closing with guidance. Starting on slide 5, fourth quarter total revenue was $793 million on a non-GAAP basis, up 13% year-over-year and at the lower end of our guidance range. Breaking that down, currency translation subtracted 1% and acquisitions net of divestitures added 10%. Organic growth was 4%. ARR or annualized recurring revenue grew to $1.05 billion in the quarter, up 36% year-over-year. Gross margin in the fourth quarter was 59.5%, up 420 basis points year-over-year reflecting favorable pricing dynamics as well as favorable product mix, which was driven both organically and inorganically. Gross margin was clearly a standout dynamic in the quarter. For the year, we delivered a 230 basis points year-over-year improvement in gross margins. The adjusted EBITDA margin, which includes income from joint ventures and equity investments, was 23.6% in the fourth quarter, up 430 basis points year-over-year. Operating income dollars increased 43% to $172 million with operating margins increasing 460 basis points to 21.7%. Our non-GAAP tax rate declined from 23% to 19% year-over-year driven by U.S. tax reform. Net income was up 31% and non-GAAP earnings per share in the fourth quarter were $0.48, up $0.11 or 30% year-over-year. Commensurate with our low capital intensity and attractive cash generation profile of the business, deferred revenue was up 40% year-over-year and net working capital inclusive of deferred revenue was approximately 3% on a trailing 12-month basis. Cash flow from operations was $102 million, down 5% year-over-year, which was driven by the timing of a $30 million cash interest payment. Otherwise, cash flow from operations would have been up year-over-year. We closed the quarter at a gross debt level of over $1.9 billion, a net debt of just under $1.8 billion representing about 2.5 times net debt to adjusted EBITDA on a trailing 12-month basis, which is more than three quarters ahead of our original deleveraging plan. If a full 12 months of EBITDA from e-Builder and Viewpoint were incorporated, that metric would be lower still. Our balance sheet remains demonstrably strong and provides us with flexibility to simultaneously consider a range of capital allocation actions. We expect to continue to delever and pursue modest share buybacks while having dry powder deployable for attractive acquisition opportunities. During the fourth quarter, we also completed the acquisition of Veltec, and we repurchased 1.1 million Trimble shares. Next, let's put the fourth quarter into context of the overall year as the performance in any singular quarter is incomplete by definition. Turning to slide 6 when looking at the total year for additional perspective, we view 2018 as a very strong year. Revenue grew 18% overall and 9% organically. Gross margins expanded 230 basis points to 58%. With approximately 36% operating leverage for the year, operating margins expanded 280 basis points to 20.6%. EBITDA margins expanded 240 basis points to 22.6%. And EPS grew $0.49 or 34% to $1.94, exceeding the guidance ranges that were previously provided at our Analyst Day and during our third quarter earnings call. Lastly, our 2018 cash flow from operations was up 13% on a year-over-year basis and near $500 million, driven by the growth in net income and deferred revenue, partially offset by increased working capital. Turning to page 7, the eight listed metrics are financially representative of our identity as a technology company. From revenue mix, growth, contracted backlog and our low capital intensity, our metrics demonstrate the strength of the Trimble financial model. Turning now to slide 8, let's go to the revenue details at the reporting segment level, which is presented on a year-over-year basis. Buildings and Infrastructure delivered 7% organic growth with double-digit growth in the building construction business and the civil construction business down slightly. Our BIM-centric building construction businesses continued growth across the portfolio and across all major regions. In civil construction, the discrete negative impact was from U.S. government sales, which we expect to continue into the first part of 2019. The underlying end-user field sales growth remains strong in the business, reflecting the strength of our distribution network and new product introductions. Geospatial delivered 3% organic revenue growth with end-user demand exceeding this number and OEM-centric business slightly down. Resources and Utilities was flat on an organic basis. Our OEM business was up based on new OEM partners. Variable rate technology was also up. The end-user business was down and is a story of geography. North and South America were both up, benefiting from go-to market actions, whereas Asia Pacific was down driven by the drought in Australia. Our Europe business had a tough comp as well as some discrete issues in Ukraine. Put into context to of the year, the business had a solid year of growth. Finally, the Transportation business produced 4% organic growth with growth in subscription revenues above this level offset by lower new unit hardware demand that drove the comparable number in the fourth quarter of 2017. Moving next to slide 9, let's give an update on our Viewpoint and e-Builder acquisitions. Steve covered the strategic rationale in his commentary in how these capabilities are enabling us to strengthen our reach to contractors and owners as we link the construction model to the project delivery. Both businesses have outperformed expectations since acquisition, including strong bookings growth in 2018 that provides us a high degree of visibility into 2019 financials. In the e-Builder business, we moved Trimble's program management solutions under the e-Builder management team to rationalize our product and go-to-market strategies. In the case of Viewpoint, the transition from license to subscription is ahead of plan. The customer-driven strategy of selling an integrated office team and field offering, which is packaged as Viewpoint 1, is demonstrating that general contractors value having mobility and project delivery capabilities bundled with their construction management system. Further, we announced the transfer of the MEP business from Viewpoint into the larger Trimble MEP business to help us drive a unified workflow between the job costing system resident in an ERP solution with the estimating and constructible design capabilities of the Trimble MEP software. Looking at our combined capabilities, we are driving customer success by integrating workflows and we have made tactical progress to motivate joint selling efforts across the businesses. Next, slide 10, for an overview of the geographic revenue mix. Between the relative strength of the U.S. economy and the North American centricity of recent acquisitions, we again see the portfolio mix tilting towards North America in the quarter. The trailing 12-month performance reflects the strength we've also seen out of Europe. In Asia-Pacific, Steve commented earlier on China and I commented on the impact of drought in Australia. India outperformed both in the quarter and for the year. And Rest of World, Brazil was the standout performer. Let's turn to slide 11 and look at our trailing 12-month revenue mix by type. We grew to a level of 52% or $1.6 billion of software services and recurring revenue and 48% hardware. This is a significant milestone for Trimble as this is the first year we have crossed the 50% threshold. Within the software revenue elements, recurring revenue, which is mainly comprised of subscription revenue and support and maintenance agreements, stands at $935 million, or 30% of total revenue. Software and services, which is mainly comprised of perpetual and term licenses as well as professional services, represents $680 million of revenue. Each software-oriented revenue type grew double-digit revenue with hardware growing high-single-digit reflecting strength across the entire business in addition to acquisitions. Moving on to slide 12, let's go through the operating income details at a reporting segment level. Operating income growth drivers were similar across each of the reporting segments with gross margins expanded based on product mix and pricing. When combined with operating expense management, this enabled us to significantly expand our operating margins in every reporting segment and over 460 basis points at the company level as compared to the fourth quarter of last year. I will now close with guidance, which excludes the impact of any future acquisitions or divestitures. Overall, we believe the company is positioned for solid growth in 2019 following a very strong 2018, with a continued shift towards software and subscription revenues and margin expansion ahead of the target model we set out at Investor Day. The margin expansion we are seeing reflects the resiliency of our model and the actions we have taken over the last few years to balance our market exposure, exit non-core activities, shift our business toward software, and control our operating expenses. Turning to page 13, for the first quarter, we expect non-GAAP revenue of $795 million to $820 million, an EPS of $0.44 to $0.48 per share. The first quarter revenue range assumes total company growth of 7% to 10% with organic growth in the 3% to 5% range plus a 6% to 7% from acquisitions less 2% from currency fluctuations due to the strengthening of the U.S. dollar. The earnings per share range also incorporates an updated 20% non-GAAP tax rate reflecting our expectation on geographic profitability mix. To bridge this revenue range against our long-term model as Steve discussed. Our strategic focus as a company is centered around end-users, where we believe the growth drivers are secular in nature. Throughout 2018, the growth of our end-user businesses fit the target model and we expect this demand pattern to continue into 2019. In the first quarter, three discrete elements moderating total company revenue growth expectations include: one, government orders and our OEM-centric businesses; two, agricultural weakness in some markets which we largely attribute to trade and tariff considerations; and three, the acceleration toward subscription revenue, primarily in our construction business and secondarily in our transportation business. In fact, our SketchUp business officially launched their subscription model today. This revenue conversion is definitively the right thing to do for the business and we believe will further fuel our ARR growth. With the first quarter as context, our current full year view of 2019 total company growth is estimated at 6% to 10% with organic growth in the 4% to 7% range, plus 3% to 4% growth from recent acquisitions less 1% from FX impact. Please note that in the second half of 2019 that Viewpoint flips to the organic category and positively moves the needle on total company organic growth. With the incremental uncertainty, as we mentioned, our view is that the prudent course of action is to remain cautious here at the beginning of the year and continually assess patterns as we progress through the year. We expect gross margins overall to be slightly up on a year-over-year basis and we expect to manage operating expenses to deliver 25% to 30% operating leverage. We expect a strong year from a cash flow perspective with cash flow from operations above non-GAAP net income and reduced working capital. We currently anticipate about half of our cash flow will be directed towards debt paydown, which will keep us well ahead of our deleveraging plan. On that basis, we expect interest expense to decrease as we progress through the year, with overall interest expense in the range of $80 million. Equity income is expected to grow to approximately $35 million. Under those assumptions and using a 20% non-GAAP tax rate for the year, we expect EPS growth in the high single digits for the full year, delivering single-digit growth in the first half of the year and double-digit growth in the back half of the year. Where if not for the subscription conversion, operating leverage and EPS growth would be higher. Let me close, as Steve began, 2018 represented a record year of performance for Trimble and provided a strong platform for 2019 and beyond. Let's now take your questions.

Hi, everyone. Thanks for taking my question. The first one I have is just in terms of the business model transition. Rob, you mentioned that it's definitely having an impact on organic growth for next year. Can you give us – have you thought about maybe trying to quantify how much of that would be the impact on organic growth when you kind of look at the guidance for the year? And then as a follow up, I just have one question on the incremental income margin.

Sure. Hi, Gal. I'd call it a plus or minus range. If we look at about, call it, $30 million of revenue converting to subscription and I call it an incremental $30 million of revenue converting to subscription in 2019. At a total company growth or an organic growth view that has a 1 point impact on the top line. Of course, that $30 million also goes directly to the bottom line. And so what you would see from an operating leverage perspective is, call it, 5 to 8 points of a drag on operating leverage and therefore, an impact on EPS as well.

That's very helpful, thank you. The second point is that you've pointed out how in the first quarter, software and services have surpassed the hardware side of the business. You seem to have a strategy in place to achieve around 55% by FY 2021. If the current conditions persist, can we assume that percentage could be even higher? My question revolves around your revenue exposure, particularly concerning margins in the software versus hardware sectors. Have you considered this? Specifically, if hardware growth slows, how much can you expand your margins?

As we consider the future direction of our model, I believe that if the current trends persist, we would expect the software percentage to exceed 55% at that point. In fact, we are likely already on a path to surpass that figure, although it would only be a modest increase and not a fundamental change given the overall revenue size. Regarding margins, the growth of hardware versus software in the upcoming years will not significantly impact our margins. The hardware business currently maintains a solid profitability level, so any shift in revenue mix would not lead to a notable change in that regard.

Okay. Thank you. Great help.

Yes, hi. Maybe you could give us a little bit more color on the government slowdown in orders? I think you mentioned that in both the Buildings and Infrastructure or the civil side, but also on the Geospatial side. So if you could just provide more color, that will be great?

Hi Ann. So we've seen it in a couple of areas and as you said in Geospatial and civil construction. The dynamic has more or less been as follows; we've had some orders that have pushed out, and then we've had some orders that just didn't come. Of course, it doesn't help that government was shut down, but this was actually prior to that. One of the dynamics we've seen, and I think I probably underestimated it, was actually the lack of appointments we have in some of the government positions. And so as those positions have been slow to get appointed, what we often have is the new person comes in and wants to review programs and that slowed the machinery down, so to speak. So it's not at all about competitive issues at all. It's really just to say that the straight demand from the government business.

And is it any department in particular? Or any appointments we're waiting for? Or the department just been mean and we’re just waiting for projects to get back on the table?

It's really not limited to any specific department. I would say it's somewhat distributed across various areas. We work with both the civil side of the government and the Department of Defense, with a somewhat greater focus on the DoD compared to the civilian sector. Generally speaking, we believe that by the second half of the year, we will be on track. The third quarter is particularly significant for government sales as it coincides with the end of the budgetary year, marking a critical time for us. At this point, we feel optimistic about that business in the latter half of the year.

Okay. And if I could, I'd like to ask a follow-up on the transportation side. You've been reading a lot how competitive the industry there is for Telematics and for just offering the fleet beyond Telematics and beyond the ELDs. As we transition away from ELDs what's your view of how competitive that industry is and how competitive might get going forward? And what are the ramifications for your business either at the margin side or the revenue side?

Yes, that's a good question, Ann. The ELD mandate, primarily a compliance requirement, has certainly increased competition in the market, especially among low-end providers focused on basic compliance or catering to very small fleets. In contrast, Trimble's approach is centered on delivering comprehensive enterprise solutions. Today, many trucking companies have started embracing technology due to the mandate. We anticipate that some of these companies may experience regret over their chosen solutions, which might lack the capability to evolve into robust enterprise systems, leaving them stuck in basic compliance mode. This trend may actually work in our favor, as a larger portion of the market adopts technology that ultimately does not fulfill their broader needs as effectively as our solutions can. While competition in the enterprise trucking segment has intensified, Trimble remains unique because we can integrate enterprise back-office operations with mobile solutions, mapping technologies, and real-time shipper visibility. Our ability to connect these elements sets us apart in the North American market. Furthermore, with our acquisition of Veltec, we are expanding into Brazil, the largest market in South America, and we also maintain a presence in India and Western Europe.

Okay, I'll leave it there and get back in queue. I appreciate the color, helpful.

Thanks Ann.

Good afternoon. Steve, could you clarify where the revenue guidance stands for the fourth quarter? It seems we're primarily looking at the B&I civil business and the Resource & Utility Ag business. Can you provide some details on the $10 million plan related to those two sectors? Additionally, could you explain how those businesses are performing and what the progression looks like throughout the quarter? It sounds like the civil side, being government-focused, might be clearer by October, but I’m interested in the progression in those areas that might not align with the plan.

Sure. In relation to the original guidance we had for the quarter, our focus was on the Resources & Utilities and the Buildings & Infrastructure markets. Overall, sales to the government and OEM sectors were lower across these business areas. Additionally, geospatial revenue also decreased within the OEM segment. Civil construction primarily affected government revenue, but when we examined the underlying field sales growth, which constitutes the majority of our business, we observed that field sales grew organically by double digits during the quarter, surpassing our initial expectations for the end-user segment. In the Resources and Utilities sector, particularly in agriculture hardware, we didn't run a promotional program this year that we had last year in Europe, which impacted our revenue. Furthermore, we experienced lower stocking orders in the Asia-Pacific region, although both of these issues have since reversed as we entered Q1.

Okay. And against the 4% to 7% core for the year, maybe expectation, how do the four segments kind of line up here? It sounds like towards the higher end would be trans and maybe the vertical construction? Could you just kind of put those on a relative basis here to the 4% to 7%?

Yes, sure. So, from record, there's the 4% to 7% that we've talked about for the year. I could also probably index that against what we've talked about at Investor Day for the reporting segments. Now if we take the transportation business and the Buildings and Infrastructure, those two would be, I'd say, right in line with what we talked about at Investor Day with B&I at an 8% to 10%, expectation transportation at 7% to 9%. Geospatial has dialed down a bit and that's from the OEM parts of the Geospatial business. And then the Resources and Utilities business, that's also dialed down and we've tempered expectation a bit here, especially relative to the tariffs and trade. And I mean, as Steve mentioned, certainly that if these things get resolved, that's a net positive for us.

Okay. And then just probably last question for me. For Steve, I'm just curious, we narrowed down the list of many small wounds or negatives out there to kind of just list the 4. And I think can you just kind of look at this list of 4, the trade policy, the reduced demand by U.S. government, Brexit and the OEMs reduced demand? And just kind of give order of magnitude as to the impact on the business if one or all of these start to clear?

I think the most pressing concern is the trade situation, which is affecting U.S. farmers. The demand from China has significantly decreased, creating a lot of uncertainty in the farming sector. Farmers are at a point where they need to make planting decisions for this season. In terms of the effects in 2019, the indirect impact of trade on U.S. farmers is a major focus. Additionally, U.S.-China relations are promoting economic nationalism in China, which could have a secondary effect that, while not our primary concern, is still noteworthy. U.S. agriculture appears to be most directly impacted. Regarding Brexit, there are a lot of unknowns; while it will surely impact the U.K., the effects on Europe are still unpredictable. We believe these impacts could be substantial, but we share this uncertainty with many other companies. The decreased demand from the U.S. government seems like a short-term issue; it may not significantly affect the entire year of 2019, potentially impacting the first half more than the second. Similarly, the reduced demand from OEMs likely reflects caution due to various uncertainties faced in late 2018 and early 2019. Overall, the main concerns are the impact of trade on U.S. agriculture and potential fallout from Brexit; other factors are not as critical or fundamental as these two.

Very good. Thank you.

Hi. Good afternoon. I just wanted to see, if you could give us a little bit more color on the impact from China? And to what degree there are offsets for the U.S. demand? Do you have products that are subject to tariffs? Just wanted to get a little bit more of a sense of what's driving that?

Yeah. So first of all, just to clarify, we're not pointing necessarily at tariff effects as the primary kind of issue in China. I think it's the relative license that's maybe growing around the world for kind of a higher degree of economic nationalism kind of enabled by talk of tariffs and protection of industries. So I think there's always been implicit in China a level of economic nationalism, our preference for national champions and such. So I think there is – okay. It's more of that element in terms of kind of a bias shown in the Japanese – sorry, Chinese market than necessarily a direct effect of kind of tariff outcomes. I think also that clearly the Chinese market has slowed with kind of primary effects and secondary effects, so some of the demand in China has just slowed because the market has slowed. But I think there's also if you will a more defined, more apparent bias towards, let's call it national champions of one sort or another, even if they've got an inferior product. So I think again, we've been dealing in this environment for some period of time. It's intensified clearly in the last 12 to 18 months, but I think that's the issue in China more so than just straight calculation of tariff effects or anything like that.

Got it. And Rob, how should we be thinking about maybe ARR growth for 2019?

Yes. So we had the 36% growth year-over-year in 2018. Of course, some of that was aided by the acquisitions we grew in the teens and mid-teens in 2018. As we look into 2019 I expect that pattern as well to be somewhere in the low-teens growth in ARR which is obviously a significant element for us now.

Yes, good afternoon and good evening. I wonder if we could start in Resources and Utilities where you mentioned farmers feeling the impact of the tariff situation. Are you saying that in the first quarter we will see OEM production cuts? Or are there significant year-over-year declines in North America aftermarket inflation? Can you elaborate on that for us? We're discussing various headwinds yet still expect reasonable organic growth in the first quarter, so I want to ensure I understand your message about whether there is downside risk. Or are you suggesting that organic growth would have been stronger without the headwinds you've mentioned throughout this call?

Well, this is Rob. By definition, the organic growth would have been better were it not for the headwinds we faced. Looking into Q1 of 2019, we notice the same information as you about OEM expectations on new machine units, which need to be considered in terms of dealer inventory versus retail demand. The majority of our business is in the aftermarket, not heavily focused on OEMs, although that remains significant in the agriculture sector. We're also examining our business outside of North America. In the past, we had a larger share of the North American agriculture market, which today accounts for less than 30% of our revenue in this area. Several factors contribute to this situation. For example, U.S. farmers are under pressure from tariffs and the decline in Chinese demand for soy, as China is now sourcing soy from Brazil. Thus, our strategy has been to capture business in Brazil, which has been growing well in recent years. We sometimes observe this pressure in North America, but we need to focus on the U.S. specifically, as we have seen strong performance in Canada. As we consider agriculture at the start of the year and for the entire year, we are looking at our upcoming product introduction cycles. We are also focusing on our go-to-market initiatives, enhancing enterprise sales, bundling our hardware and software, expanding OEM relationships, and always striving to improve our distribution partnerships. All these factors help shape our perspective on agriculture and reinforce our belief that there are good business opportunities to be pursued.

And Rob, just a clarification, are you expecting your aftermarket inflation in the U.S. to be down year-over-year in the first quarter? Or are you just talking about a slowdown in the pace of growth?

I'd say it's more kind of flat, which would be a slowdown in the pace of growth. Well, I'd say last year was a strong year and we'd expect this year to be a good year as well for e-Builder. And we're continuing to look for further breakout on that business as we look for additional acquisitions along that line that would help strengthen that segment. I think we should remain cautious but confident in our growth expectations. I think relative to the e-Builder business it's encouraging growth, but it's too soon to call it a trend at this point. I think we've done a good job in adapting to those market challenges. Our model remains resilient. In my commentary, I will review the results for both the fourth quarter and the total year of 2018 before closing with guidance. In the e-Builder business, we moved Trimble's program management solutions under the e-Builder management team to rationalize our product and go-to-market strategies. In the case of Viewpoint, the transition from license to subscription is ahead of plan. Further, we announced the transfer of the MEP business from Viewpoint into the larger Trimble MEP business to help us drive a unified workflow between the job costing system resident in an ERP solution with the estimating and constructible design capabilities of the Trimble MEP software. Let's turn to slide 11 and look at our trailing 12-month revenue mix by type. We grew to a level of 52% or $1.6 billion of software services and recurring revenue and 48% hardware. This is a significant milestone for Trimble as this is the first year we have crossed the 50% threshold. Thank you for your questions. I appreciate the insight and engagement.

Thank you everyone for joining us and we look forward to speaking to you again next quarter.