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Edited Transcript of TRMB earnings conference call or presentation 30-Oct-19 9:00pm GMT

Q3 2019 Trimble Inc Earnings Call

SUNNYVALE Nov 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Trimble Inc earnings conference call or presentation Wednesday, October 30, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Michael Leyba

Trimble Inc. - Director of IR

* Robert G. Painter

Trimble Inc. - CFO & Senior VP

* Steven W. Berglund

Trimble Inc. - President, CEO & Director

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Conference Call Participants

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* Andrew Lodovico DeGasperi

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Ann P. Duignan

JP Morgan Chase & Co, Research Division - MD

* Colin William Rusch

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* James Eugene Faucette

Morgan Stanley, Research Division - Executive Director

* Jerry David Revich

Goldman Sachs Group Inc., Research Division - VP

* Jonathan Frank Ho

William Blair & Company L.L.C., Research Division - Technology Analyst

* Richard Charles Eastman

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Robert Cameron Wertheimer

Melius Research LLC - Founding Partner, Director of Research & Research Analyst of Global Machinery and Cannabis

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Trimble Third Quarter 2019 Earnings Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand the conference over to your speaker today, Mr. Michael Leyba. Thank you. Please go ahead.

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Michael Leyba, Trimble Inc. - Director of IR [2]

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Thank you. 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.

First, Steve will start with an overview. After that, Rob will take us through the remainder of the slides, including an in-depth review of the quarter, our guidance and then we will go to Q&A. With that, I will turn the call over to Steve.

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Steven W. Berglund, Trimble Inc. - President, CEO & Director [3]

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Good afternoon. This will be my 83rd and final quarterly conference call. To put things in context, my first call for Trimble for the first fiscal quarter of 1999 reported revenue of $68.8 million and operating income of $3.7 million. Today, I will leave the discussion of the quarter to Rob and I will focus on today's CEO succession announcement.

Rob's appointment represents the outcome of a multiyear process. Virtually every board meeting for years has featured a discussion and evaluation of talent, with an emphasis on individuals with short- and long-term CEO [role] capabilities. The evolution of the company has made this a dynamic process. As the company has changed, so has the CEO specification. This progression has included the shift from product to solutions, increasing role of software and most recently, the emphasis on recurring revenue and services. As a result of the process, the Board came to the conclusion that an inside candidate would generally be preferable for 2 reasons.

First, we are a relatively complex company with a nuanced strategy and growing numbers of common platforms that would be a challenge for an outsider to assimilate. Second, our company culture is central to our success, and it was important to find an individual that represented both the continuity of that culture while acting as an agent of healthy change.

Both the Board and I believe we have found the right blend in Rob. In his 13-plus years with Trimble, he has performed a number of roles that have ranged from the strategic to the operational. In his last almost 4 years as CFO, he has developed a deep understanding of Trimble's opportunities and challenges.

He has also been a champion for a number of needed initiatives, including the conversion of SaaS, improved rationalization of our portfolio and margin expansion. Another important consideration is that he is well known to the financial community and trusted.

As indicated in the press release, we expect to fill the CFO role in the near future with a veteran CFO. As Executive Chair, I do not expect to play out direct role in company operations. Rob and I have developed a flexible range of targeted activities that will enable me to support him.

Activities will include leveraging the external network I have established over 20 years and playing targeted roles to help develop specific strategies, initiatives and people. Beyond that, I hope to be able to provide him generally useful advice as he settles in.

Let me now turn the call over to the soon to be third CEO in Trimble's history.

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Robert G. Painter, Trimble Inc. - CFO & Senior VP [4]

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Thank you, Steve. I'll say a few words on the transition and then get back to the business. I joined Trimble 13 years ago because of our mission to transform the way the world works. What we do is substantive and inspiring. I feel a real sense of purpose. Appreciate both the people around the world who work here and the endless opportunities that are available to learn and contribute.

Looking forward, my message is one of optimism. We are poised to continue leading the digitization of the end markets we serve. Our fundamentals are strong: our people, our strategies and our technologies. There's nowhere else I would rather be.

I also want to express my gratitude to Steve, the Board and my fellow Trimble colleagues for the vote of confidence. Steve joined Trimble in 1999 when we had $271 million in revenue. We're now over $3.2 billion in revenue. Our enterprise value when Steve joined was about $150 million.

As of today, that stands at over $11 billion. His financial track record speaks for itself and his leadership legacy, which runs deep, has set a solid foundation for years to come. So on behalf of 11,500 Trimble colleagues, we thank Steve for his 20 years of service. The bar is set high.

As for what comes next, I'll say just a few words here today as we don't transition until January and we have a fourth quarter to deliver. Our overall focus will be to prepare Trimble for an era of increased connectivity. This includes respecting 40 years of approaches that got us to this point in addition to taking a fresh look at the portfolio, along with the strategy, structure and systems in our businesses.

Now to the business of the quarter. I'll start by summarizing the quarter in 3 aspects, starting with an overall financial narrative on the third quarter results. Revenue fell short of our expectations and EPS came in ahead of expectations. The market environment is challenging, and revenue was largely impacted by the same factors we have been talking about over the last couple of quarters.

Revenue mix, including ARR, remains attractive, and cash flow was strong. That, combined with cost control and lower incentive compensation expense, delivered EPS slightly above expectations, which demonstrates that our team is reacting to the environment.

Structurally speaking, in the last few weeks, we have implemented over $30 million of annualized structural cost reduction, which we will see the full benefits of by the second quarter of 2020. We have also exited or are in the process of exiting a small number of discrete efforts and businesses. In aggregate, these portfolio actions are not financially material. However, they do increase our focus and sharpen the impact of resource allocation.

Strategically speaking, we will continue to execute on our long-term plans with an intention to exit any period of uncertainty on a stronger competitive footing. To say it another way, short-term results do not change the fundamentals of our strategy or the long-term financial model.

Our mission remains the same: to transform the way the world works. Our vision remains the same: to deliver products and services that connect the physical and digital worlds. And our financial model ambitions remain the same: to profitably grow the business while creating sustainable competitive advantage.

Let's get into the financial details, starting on Slide 5. Starting with the top line, third quarter total revenue was $784 million, down 2.5% year-over-year. Breaking that down, currency translation subtracted 1%, acquisitions added 1% and organic growth was down 2.5%. ARR was $1.1 billion in the quarter, up 9% organically.

Gross margin in the third quarter was 57%, down 90 basis points, which was primarily driven by revenue mix in the quarter. Adjusted EBITDA margin was 23% in the third quarter, flat year-over-year.

Operating income dollars came in at $162 million with operating margins of 20.7%. EPS at $0.48 was ahead of expectations. EPS was down 2% year-over-year, driven by revenue and partially offset by lower operating expenses and lower interest expense. For context, on a trailing 12-month, or TTM, basis, revenue was up 6.5%, EBITDA is up over 12%, EBITDA margins have expanded by 120 basis points and EPS has increased 7%.

Cash flow from operations was $137 million in the quarter, up 17% and up 20% year-to-date. Free cash flow, which represents cash flow from operations minus CapEx, was $121 million in the quarter, up 21% and up 23% year-to-date. Cash flow growth has been driven by EBITDA growth and favorable working capital dynamics as our business continues to move towards higher levels of software and recurring revenue as well as lower M&A expenses and lower tax payments.

Moving to the balance sheet. Deferred revenue was $419 million, up 15% year-over-year. This correlates to the increased recurring revenue mix in the business. Net working capital inclusive of deferred revenue stands at less than 3% of revenue on a TTM basis.

Net debt to adjusted EBITDA is 2.13x on a TTM basis. In the third quarter, we repurchased 121 million of Trimble shares. With $496 million of free cash flow on a TTM basis and full availability of our $1.25 billion revolving credit facility, we are well positioned to weather any economic disruptions and to continue our disciplined capital allocation strategy.

Moving to reporting segment details and starting with revenue on Slide 7. For context, last quarter we called out 3 challenges, including our OEM sales with a significant influence from the China market, the impact of the trade dispute on the agriculture market and short-term pressures in the transportation market coming at the tail end of the ELD conversion.

These factors largely played out again, albeit amplified, as compared to our expectations with the combined impact of government orders pushing out of the quarter and higher mix of subscription bookings pushing us below the expected range.

Total company organic revenue growth was minus 2.5%. Within that, the discrete impact of OEM results reduced that growth by approximately 2% in the quarter. Buildings and Infrastructure, or B&I, was largely in line with expectations as was Viewpoint, e-Builder and the majority of our software businesses. To illustrate this, recurring revenue in the B&I reporting segment was up in the mid-teens.

Moving to Slide 8 for operating income by segment. Performance largely correlated to the revenue factors. Of note, Geospatial margins were primarily impacted by the weakness in our OEM components business in China. Transportation margins were negatively impacted by spend associated with the increased customer support to engage our customers through the software conversion to ELD compliance as well as continued compression on hardware margins.

Further, we are seeing bookings on our enterprise business starting to shift towards subscription. This dynamic is great for the long-term metrics yet a drag on short-term profitability as we saw in the quarter.

The standout positive performer in the quarter was B&I. Overall, the team demonstrated an ability to manage variable costs as the environment became more uncertain throughout the quarter. This was a result of managing net attrition and tactically executing on cost reduction activities.

In addition, at the company level, incentive compensation expense was lower compared to the prior year quarter by more than $15 million. Our incentive compensation plans reflect our pay-for-performance culture and are tightly aligned with the financial performance at the divisional and company levels.

Turning now to Slide 9, an overall geographic commentary. We experienced a decline of 3% in North America, where B&I and Transportation grew, but were more than offset by resources in Utilities and Geospatial.

In Europe, we experienced growth of 1%, driven primarily by the B&I segment. In the Asia Pacific region, we saw a headwind of negative 18%, driven primarily by difficult conditions in China, while other major regional markets were mixed on a year-to-date basis. Lastly, in other regions, we were up 27% year-over-year, driven largely by growth in Brazil.

Please now turn to Slide 10 for a review of our revenue mix by type, which is presented on a TTM basis. Software, services and recurring revenues continue to grow, up 20%, with organic growth rates in the high teens and now represent 56% of total Trimble revenue. Within that recurring revenue, which includes both subscription as well as maintenance and support revenues, grew 25% year-over-year and now represents 33% of total Trimble revenue.

Software and services grew 14% year-over-year, and hardware contracted by 7%, reflecting in large part the recent headwinds in our OEM-related businesses, particularly in China.

Returning to Slide 4, let me next overlay a strategic lens onto the financial and structural commentary. The fundamentals of Trimble remained strong. Our markets and the value proposition of our solutions provides a compelling context. Our people, our innovation pipeline and our go-to-market capabilities are enablers of our competitive advantage. Our business model produces compelling cash flow and enables us to assert our strategy.

Three categories of comments to build on this. First, we will responsibly use our balance sheet to pursue compelling acquisitions. In the third quarter, we acquired 3LOG in the forestry business. 3LOG is a leading supplier of timber management software solutions and is a strong complement to our forestry business.

On October 18, we acquired Cityworks as part of our utilities business. Cityworks is a leading provider of enterprise asset management software for utilities and local government, and its solutions address the global challenges associated with maintaining and replacing aging utility, transportation and infrastructure assets. We believe this platform is extendable across Trimble.

Combined, the acquisitions represent a purchase price of over -- of slightly over $200 million, with the majority associated with Cityworks in the fourth quarter. Both businesses are in the Resources and Utilities reporting segment, and we expect approximately $40 million of combined revenue contribution next year. The businesses are 100% software and services with significant and growing recurring revenue streams, and we expect profitability for these acquisitions above the Trimble average.

Second, we will continue to transition licensed software businesses to subscription business models. We won't chase short-term optics at the expense of long-term value creation. We will also experiment with hardware-as-a-service models.

Third, we will continue to invest in our customer relationships and in innovation. As evidenced in the third quarter, we held 3 user conferences with the e-Builder, Viewpoint and Transportation teams that had over 3,500 collective attendees.

On the innovation front, in the last few weeks, we launched WeedSeeker 2 in agriculture. WeedSeeker is a spot spray system that senses if a weed is present and signals the spray nozzle to deliver a precise amount of chemical, spraying only the weed and not the bare ground. The value proposition includes the reduction of input costs, increased yield on crops and lower environmental impact.

In our survey business within Geospatial, we launched the X7 3D laser scanner, which we believe leapfrogs the market in terms of performance and value. In addition, the focus on ease of use for the X7 scanner and the accompanying Trimble Perspective software has already opened new customer segments, such as public safety.

We're also investing in autonomy, which we generally think of as automation, as the next phase to link the industry continuums we serve in construction, in transportation and in agriculture. Much of the IP and know-how for automation comes from our Geospatial segment.

Our industry knowledge and intimacy with the workflows of our industries enables us to automate an industry process as well as a machine, a tool or a tractor. We believe we are uniquely advantaged to revolutionize this automation because of our industry and technology competencies.

Finally, we appointed a Chief Data Officer in September as connecting the data within our life cycles is an important part of our strategy going forward. Overall, we're optimistic about our ability to deliver a compelling set of connected innovations.

Let's close with guidance and move to Slide 11. First, a reminder that at our 2018 Investor Day, we put forward a model that would produce 23% to 24% EBITDA margins by 2021. We reaffirm our commitment to being within this range in 2021.

For context, current EBITDA margins on a TTM basis are 22.8%. Working backwards to 2020, it would be premature to talk at any level of specificity, but it is safe to say that we're preparing for the revenue environment to continue to be challenging, given the relative economic and political instabilities. We plan to play offense on our strategy, while making progress towards our business model targets.

Finally, working backwards again to fourth quarter guidance. We expect non-GAAP revenue of $770 million to $800 million and non-GAAP EPS of $0.46 to $0.50 per share. The fourth quarter revenue range implies total company growth of minus 3% to plus 1%, with minus 1% organic growth at the midpoint, plus about 1% growth from acquisitions and 1% of headwind from FX.

Note that our fourth quarter this year is a 14-week quarter, and the extra week is expected to bring an additional 2.5 points of growth. Please further note, we expect restructuring charges of $12 million, which goes in line with the greater than $30 million of annualized cost reductions we mentioned.

Projecting a balanced tone for the fourth quarter, I'll highlight a few areas of caution and optimism. We're cautious on a few fronts: one, similar conditions in agriculture, pressure on OEM businesses and the tailwind of ELD conversion push; two, Brexit uncertainty and the potential follow-on impacts; and three, the aggregate weight of trade-related uncertainty.

On the other hand, we're optimistic in a few specific areas as well: one, continued growth in ARR and our strong cash flow generation, which provides visibility and liquidity in the business model; two, we expect that cost reduction and containment measures that we have implemented will begin to show in the fourth quarter and more so as we come into 2020; three, we believe customers are ready for the innovations that we can uniquely deliver, and we believe our investments in customer-driven innovations are done in the context of managing short- and long-term pressures and opportunity.

With that, let's now take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from the line of Jonathan Ho from William Blair.

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Jonathan Frank Ho, William Blair & Company L.L.C., Research Division - Technology Analyst [2]

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I just wanted to offer my congratulations on the new roles and hopefully, Steve, you have a little bit of time to enjoy your retirement as well.

But yes, let me go ahead and just go with the questions. When we look at some of the macro factors that are impacting the business, I guess, what's baked into your revised guidance assumptions at this point and what are some of the puts and takes around the macro? I know you've just gone through sort of the positives and negatives there, but what could maybe swing the results a little bit better or a little bit worse from that perspective?

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Robert G. Painter, Trimble Inc. - CFO & Senior VP [3]

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Well, on the -- I think the biggest factor would be where we land on trade, if it was to move meaningfully to the positive or the negative. I think the sentiment there would be the singular factor that I'd point out, Jonathan.

To get more micro, it'd be a little bit of a repeat of what we -- what I went through at the end. I think Brexit would probably be also on the list and how this unfolds here in the coming weeks would probably be another one I'd put forward.

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Jonathan Frank Ho, William Blair & Company L.L.C., Research Division - Technology Analyst [4]

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Got it. And then just in terms of the OEM headwinds, are those going to be temporary in nature? In other words, will this sort of come back to you over time? Or do you guys have any sort of visibility on the time frame that it would take for some of this business?

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Robert G. Painter, Trimble Inc. - CFO & Senior VP [5]

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Yes, there's a couple of ways to think about that. At one level, there is the mathematical lapping effect, which, say, kind of Q2 next year or so, we would -- we'd start to lap when we started really seeing the drawback on the OEM businesses, call that a mathematical answer.

A more fundamental answer, stepping back to Trimble overall, we have talked before about 15% of our revenue being OEM-oriented and 85% being aftermarket-oriented. Not all of that 15% is the exact same type of OEM revenue. But I'll use that quantitative bit to say that to the extent that OEMs come back, that is in the ag market or the trucking market or the construction market, there's a natural benefit from us, a natural correlation we have to that.

So if they don't go up, I think we would correlate to that. And if they do recover or if aspects recover or certain geographies or machine types will recover more than others, then that could be a catalyst for us.

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Operator [6]

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Our next question comes from the line of Colin Rusch from Oppenheimer & Co.

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Colin William Rusch, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [7]

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Guys, we've seen a lot of consolidation in the Buildings and Infrastructure space over the last 18 months or so. How have the competitive dynamics changed? And how are you feeling about pricing and market share opportunities at this point?

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Robert G. Painter, Trimble Inc. - CFO & Senior VP [8]

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Colin, you're correct that there's been a decent amount of consolidation. I think if you play rearview mirror on the strategy and the moves that we made, particularly with Viewpoint and e-Builder, we were on the right side of that curve.

We thought that, that was a -- there was a context for consolidation that was likely to occur. We were on, I'd say, pretty near front end of that and then, in fact, did happen. So I think we sort of feel empathically positive about the timing of the move in addition, of course, to the businesses themselves.

In terms of, let's say, the nature of competition and how that's changing since there's been a bit of consolidation, I actually wouldn't say that there's been any fundamental changes at this point, and maybe there's an element where people are digesting the activities that they've done. But I think also if you really put it in context of the end markets, these markets are, let's say construction, are a large, global, underserved, underpenetrated and fragmented markets.

And so I think that there's a fair -- I think what it also shows is there's a fair amount of room for a number of players. With respect to pricing dynamics, I wouldn't say there's anything specific to point out there at this point, but I certainly understand where you were going with the question. I think time will tell.

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Colin William Rusch, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [9]

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Okay. And then just following up on the discussion around automation and the recent announcement about the partnership with Qualcomm. You talked about some autonomy aspirations and it's primarily been focused on off-road. Is that changing? And how quickly is that changing?

There's obviously a large opportunity set on the over-the-road market. But would love to understand kind of how your strategy and thought process is evolving as those markets develop as well.

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Robert G. Painter, Trimble Inc. - CFO & Senior VP [10]

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Yes, good question. I think it is fair to say that we have -- are incrementally moving more towards the automotive market, especially at the, I'll say, the intersection points where efforts in automotive support what we're doing in the off-road market.

So for instance, with the -- if we take the Qualcomm announcement, it's -- essentially, it has our software on the chipsets such that customers can utilize our RTX correction services, whether those correction services are agnostic to whether something's on the road or off the road.

So to the extent that we are enabling, let's say, an on-highway market, we believe that's in support of what we're doing off-road. And we believe there's elements that play the other way, where the work we're doing off-road could be a benefit to opportunities on highway. So I do think it's a fair characterization to say a bit of those incrementally have us moving more towards thinking on and off-road.

One of the areas where we've been active in on-road autonomy, but I wouldn't necessarily call it autonomy per se, kind of an indirect way, is we provide high-definition mapping engines, data collection devices that autonomous companies are using to build their own HD maps.

So maybe that's selling the axes and shovels for those creating the business. And then you have areas where we're participating with the correction services on-highway meets what we're doing off-highway. So quite a bit of activity at the moment.

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Operator [11]

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Our next question comes from the line of Ann Duignan from JP Morgan.

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Ann P. Duignan, JP Morgan Chase & Co, Research Division - MD [12]

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My question, I guess, is around the Transportation business, since I got to spend some time with that group, which was very informative. With the decline in hardware sales and also the transition to ELD, can you quantify the impact on Q4 margins from the increased costs? And are they one-and-done in Q4? Or will they bleed a little bit into 2020?

And then how do you think about that business in 2020? Do OEM customers take some time to digest ELD, get used to it and see what they want to do? Do they take a little bit of a breather in 2020?

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Robert G. Painter, Trimble Inc. - CFO & Senior VP [13]

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It's a good question, Ann. So let me break that into a couple aspects. So if we think about the fourth quarter and the ELD conversions, I think there could be upwards of a couple points of headwind to the margins we might have otherwise expected to see in the business. And I think about that almost relative to Q4 2018 when I say that.

Now normally, we see a sequential growth in the margins in Transportation in the fourth quarter, and we would definitely expect to see that again in the fourth quarter. Some of that actually is just policy with the way the PTO is accounted for in that particular part of the business, and some is just the nature of the recurring revenue growth. But there's a multiyear pattern that you can see in terms of expansion of margins on a sequential basis, and so we would expect to see that.

We think it could have been perhaps a couple points higher were it not for some of these pressures coming at the -- towards the end of the mandate. And as you know, it's part 2 of the 2-part mandate going into effect.

To step back and put it in a little more context, I know -- we talk a lot about -- we've talked a lot about ELD, and that becomes a bit of, let's say, the highlight or the headline for the Transportation segment. We do many other things, as you know, in the Transportation segment. If you really start to break down what's ELD specific, it may be 15% or so of the reporting segment. We do many other things in that segment.

So as we turn to 2020, and you asked about how that -- this might impact margins as we come into 2020, that same pressure I'm talking about at the moment and then to the rest of the year, I think, could come into -- we think could come into the beginning of Q2. So more first half dynamic as those implementations, we think, will bleed into the beginning of next year, the first 3 or 4 months of next year. At least we're planning for that to happen.

Relative to IT budgets and where spend may go for transportation companies, I think it's fair to say that there may be some degree of fatigue on ELD spend as we come into next year. And that becomes the good news for the rest of the portfolio that's not ELD. We do many other things, both on mobility technologies, enterprise technologies, the mapping and routing engine technologies.

And so we have a conviction that we'll see those IT budgets move to other areas, and that would inform our point of view on next year and where we see growth opportunity in the segment.

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Ann P. Duignan, JP Morgan Chase & Co, Research Division - MD [14]

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Okay. That's helpful color. I appreciate that. And then on the other businesses, on Building and Infrastructure, that business organically was up nicely.

And then there was an article that you cosponsored earlier in the quarter around all the different inefficiencies in that whole supply chain, whether it's between the contractor and the builder and the building owner. What's the go-to-market strategy in that business? And what's the outlook for just putting all the different disparate brands together in that business for marketing and go forward?

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Robert G. Painter, Trimble Inc. - CFO & Senior VP [15]

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Well, first, I'm glad you saw the report. Second, it does serve as a good forcing function internally to help us work towards a common vision. And in a tactical level, so the third thing, in a tactical level, we look at the ENR 400 as a proxy for where there's the best fit for the aspects we talked about in that report with owners, contractor, subcontractors coming together and the benefits of that.

So that naturally, when you take a list of an ENR 400, you can imagine taking the various Trimble capabilities, what we're already doing in these different businesses, mapping them across the ENR 400 and then stepping back from that and then looking at from a, if you may call it, a key account type go-to-market strategy, how do we think about engaging those customers than, I'll say, in a more effective manner than we're doing perhaps independently, doing that more together.

And then it's just working them at some level one by one, getting off the spreadsheets and just getting on the street and doing the work.

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Operator [16]

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Our next question comes from the line of Jerry Revich from Goldman Sachs.

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Jerry David Revich, Goldman Sachs Group Inc., Research Division - VP [17]

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I'm wondering if you gentlemen wouldn't mind talking about your strategic priorities in your new roles, maybe top 1 or 2 that you're thinking about over the next 12 months. Obviously, strong continuity with the management team as a whole over the company's history, so I'm sure we're not talking drastic changes.

But I'm wondering if you're willing to talk about any areas that are maybe moving up the priority scale just to help us understand the flavor of any changes or modifications in the direction from here.

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Steven W. Berglund, Trimble Inc. - President, CEO & Director [18]

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Well, let me start because I think -- and then I'll look to Rob to carry the substance of the question. Because I think, again, Rob represents kind of a combination of continuity and change in a single package.

So I think that on the one hand, I think in terms of the businesses and what we're trying to achieve with them in a large scope, it's going to remain unchanged. And I think my relative priority is, okay, the -- if you look at Trimble's 40 years, Trimble has had 2 CEOs: Charlie, who's founder, and he had a unique relationship with the Board; and I came in during its period of great stress and, okay, attempted to provide some leadership.

But I think there's an opportunity to -- for the Board to sit back and kind of reflect on what its role is. So I would hope that in combination with Rob, that we define maybe a more robust relationship between management and the Board and get the Board more engaged with strategy, find the mechanisms to get the Board more engaged constructively with strategy. So I think that's not a strategic in and of itself, but I would say that would be one of my priorities in the coming year.

But otherwise, I think the broad strokes remain in place, and then Rob puts his own unique spin and emphasis on those. And certainly, he's demonstrated that -- well, he has been the principal leader within the company on the SaaS conversion, the conversion of the SaaS model. And I suspect when I throw it over to him, that's going to be a point of emphasis, which was certainly a consideration in this whole decision-making process. So I'll let him talk now.

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Robert G. Painter, Trimble Inc. - CFO & Senior VP [19]

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So Jerry, I mean, there's one element of -- I'll stay somewhat high level insofar as I'm still the CFO until January. But to say a bit more -- I know I mentioned in the opening comments, taking a fresh look at the portfolio along with the strategy, structure and systems in the business.

To break that down just a little bit more at a strategy level, this vision of -- the mission of transformation and the vision of delivering products and service at the intersection of physical and digital worlds, we will continue doing that. That's -- those building blocks have been in place for the better part of 20 years. And what I see us doing is building a data strategy to further connect the industry life cycles we have, and I think we will continue to develop more subscription business models.

When I look at the people in Trimble, I think we employ extraordinary people, and the objective would be to develop and engage our people even more. If I think about the aspect or dimension of that execution, we have a unique -- I think somewhat unique organizational model to decentralized structure. We'll continue to execute in a decentralized structure, keeping that intimacy with the markets and the accountability of the P&L that we have at the business units.

And I think we can create more alignment and efficiencies around that model. And at some level, change of CEO or not change of CEO, these are activities we would have been moving towards. I would -- really say we've been moving towards anyway. So that -- maybe that gives you a little bit of a flavor. And certainly, as we come into next year, there will be another level of specificity to put on top of that.

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Jerry David Revich, Goldman Sachs Group Inc., Research Division - VP [20]

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Okay. And then in terms of e-Builder and Viewpoint, can you just talk about how the lead indicators for those businesses are performing, what do the pipelines look like, what were bookings like in the quarter, just to help us understand how these businesses are performing given the mixed macro environment?

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Robert G. Painter, Trimble Inc. - CFO & Senior VP [21]

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Sure. And I understand, yes, you wouldn't naturally see that level of detail. The best indicator to use would be the ARR. And at an ARR level, we're about 19% ARR growth in the combined Viewpoint and e-Builder business. That's obviously a healthy number. We see no reason that, that doesn’t -- we can't continue that kind of performance.

As evidence, the e-Builder team, I mentioned the user conferences. And just to give you a sense of momentum and energy in those businesses, the e-Builder business user conference had, I think, over 600 attendees. The Viewpoint user conference had over 2,100 customer attendees. It's quite inspiring actually to be with both of these management teams and to see how the customers engage with the teams.

You put that together and it really has us feeling quite optimistic about where we are with those businesses. And then take it in combination with the rest of the Trimble portfolio and connecting to what Ann was asking about a couple minutes ago, and it sets out for us what we think is the right strategy with a lot of headroom over time.

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Jerry David Revich, Goldman Sachs Group Inc., Research Division - VP [22]

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Okay. And lastly, you really had phenomenal gross margin performance in services, both year-over-year and sequentially. Can you just talk about what moved in the right direction? And is that level of margins sustainable on a go-forward basis?

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Robert G. Painter, Trimble Inc. - CFO & Senior VP [23]

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Sure. So what you're referencing are the web tables, I presume, Jerry, on the services component?

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Jerry David Revich, Goldman Sachs Group Inc., Research Division - VP [24]

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That's right.

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Robert G. Painter, Trimble Inc. - CFO & Senior VP [25]

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Yes. So I probably should step back for just a moment. So we are -- we have supplementary web tables that we put out with the release. One of the things that we introduced last quarter was a revenue breakdown by type, and type is hardware, software, recurring and professional services. I mean it's an effort to really, for investors, better align how we talk about the business, with you having an ability to actually deconstruct it yourself.

So we provide that revenue breakdown now for the company. And the goal would be if things go according to plan next year, to align the face of the financials, that is the queue to the same kind of categories. The incremental addition we made this quarter was adding gross margin supplemental information that aligns with those revenue categories. And so in the web table that Jerry's referring to, you can now see the gross margins by the revenue types, again, hardware, software, recurring and professional services.

Okay. So Jerry, the specific question you had on pro services, if you look over the time period we've provided over the last 3 years, the pro serve category is the one that jumps around the most category-to-category. And that's really reflective of revenue recognition policies and the nature of how -- how to explain this, the nature of how the recognition can work on a -- and if you have a percent to complete versus time and materials type contracts and how they may push from one quarter to another quarter.

We had a nice benefit in the construction software business in Q3, where we were able to move to a percent complete recognition. And so we were able to catch up some revenue and some that had 100% margin associated with it in the third quarter. So I would call that a discrete change that gave us that bump in the third quarter. I wouldn't call that something I would expect to continue on and on, on an ongoing basis.

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Operator [26]

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Our next question comes from the line of Richard Eastman from Baird.

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Richard Charles Eastman, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [27]

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Rob, could you just maybe discuss the ag business and just where you see that business kind of tracking into year-end? And any positives that you could -- that you have a good feel for around 2020, just kind of outlook there? I mean we have, obviously, the tariff impact on the U.S. business, but rest of world as well. How do you see that business tracking into 2020?

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Robert G. Painter, Trimble Inc. - CFO & Senior VP [28]

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Well, I would say, yes, at the moment, as we all know, the conditions are somewhat challenging in the market. If you do the walk around the world, I'd say there's been more challenging spots than opportunistic spots.

What we've -- just to give you a few examples, Argentina has become a very difficult market with the political, I'll say, instability or situation in Argentina and, I mean, how that's working out with farmers in Argentina.

In Q3 in Brazil, you've seen a number of companies, including us, are mentioning the lack of financing that was in place -- that wasn't in place enough in the third quarter to be a catalyst for sales in the quarter. That is now in place, so that would be a positive thing to -- as we move forward, Brazil should look incrementally better if the financing stays in place.

Obviously, China lost about 40% with the swine flu. So 40% of the swine population. That had some ripple effects around the world. You've seen some protests in Germany, farmers with some government policy. So there's set of challenges, for sure, around the world.

Where we saw bright spots, I would say, Australia in the third quarter was a good market for us. Where I would also say the bright spot for us is new product introduction. And so at AGRITECHNICA, I think we'll have the bigger splash launch. But we have launched the WeedSeeker 2 product, and that's the kind of nature of the things that we need to do in the ag business to create our control of our own destiny.

The displays that we've launched about a year ago, we call them GFX, initial had its rollout and success outside of North America. Now we're starting to be able to bring them into the Americas as we continue to add firmware, which further enables the displays to be relevant for this market.

So continued product innovation is a big deal, continuing to work the go-to-market channels. There's always an element of not just looking at what's happening in the world, but okay, what can we control and what can we do better on. And so we think about our go-to-market channel, which is a competitive advantage for us, and continuing to work that.

In addition, the last thing, I guess, I'd mention is we have continued to add a number of OEM relationships. And while OEMs are challenged at the moment, to the extent that we see the OEMs find any green shoots next year, that would be good for that aspect of the business. And I think probably, like, you have heard some, at least, some commentary from that part of the universe that's been slightly positive for next year. So we pay attention to that as well.

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Richard Charles Eastman, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [29]

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Okay. And then just as a follow-up, a somewhat similar question around Geospatial, I mean, we've had this China-related issue now for a bit. Would you look at the revenue in the quarter for all of Geospatial, including the surveying business, where you referenced some government order slowdown? But are we kind of basing here kind of a $155 million quarters?

I mean it doesn't sound like this OEM business in China is going to come back. And obviously, we had a slowdown in the surveying side more domestically, but your thought around that level of revenue. I mean would you look at that and think it's maybe stabilizing down here?

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Robert G. Painter, Trimble Inc. - CFO & Senior VP [30]

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Well, of the 4 reporting segments we have, Geospatial is the one that we've called as the lower, I'd say, lower growth segment naturally compared to, let's say, B&I, where we think that's got the most organic growth potential in it.

So at some level, I'd say it remains the more mature of the markets that we have. And when I say that, it's a market -- a set of businesses or market or reporting segment where we have high ambitions, and we think we're taking tactical and strategic moves to enable growth to happen in Geospatial.

There, I would -- like I talked about ag, I would look at new product categories. Two years ago, we talked about the SX10 for the better part of a year, the combination of a scanner and a total station. The X7, I talked about on the call, wouldn't be indicative of really entering the mainstream 3D laser scanning market. And I would say it's a category where we were somewhat absent from, and we think there's a lot of opportunity in there to grow that aspect of the business.

So the China OEMs or just the OEM business in general, yes, some parts of that, we think, will be hard to recover, no doubt. At the same time, some of the technologies that are, for us, involved in the autonomy world are in the Geospatial segment. And we think that we've got some avenues of growth to be able to achieve out of autonomy and the number of technologies that spawned out of Geospatial.

So I definitely think that there's opportunities, Rick, for good things to happen in the business and for growth to happen in the business.

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Operator [31]

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Our next question comes from the line of Rob Wertheimer from Melius Research.

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Robert Cameron Wertheimer, Melius Research LLC - Founding Partner, Director of Research & Research Analyst of Global Machinery and Cannabis [32]

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I guess it's pretty obvious across the industrial world that the OEM business would have been soft, and we saw that. Could you talk -- and you touched on this earlier with Jerry, but can you just talk a little bit about what you're seeing on Buildings and Infrastructure on the software side?

Is it just as resilient as you would've thought as you look into the more granular details than we can see? Is the growth rate just as good? Or is there any creeping uncertainty on purchasing decisions coming into the -- I mean, obviously the growth is great, right, but coming into the software side of the business?

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Robert G. Painter, Trimble Inc. - CFO & Senior VP [33]

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Sure, Rob. I think that there is a little creeping uncertainty. Ours clearly wasn't enough to, I'd say, move the needle markedly on the B&I segment, but we are seeing some of that uncertainty into the buying behavior.

Now what aspect is uncertainty and these pauses and waiting to see which way the wind's going to blow on some -- whether it's trade or construction backlogs, I think that part is a little hard to read, or is it really a turn in fundamentals. Obviously, there's tons of different indicators out there. You could look at the architecture index and say, okay, it inflected to the negative. But if I'm in North -- I'll stay in North America.

In the civil business, contractors have a healthy backlog of business. They may not be growing that backlog like they were the last couple of years, but there's a healthy backlog of business. And we saw double-digit growth, for example, in North America in the civil construction business and our field sales for what we do in machine control and guidance.

If we go back to software, continued to see -- we did continue to see growth. I do think it was incrementally off. So we certainly watch that. And I would close by reiterating that ARR growth, the 19% in the combined e-Builder and Viewpoint, which is a subset of that. That leads us to feel good about the prospects for those businesses coming into 2020.

We take the architecture and design business or the SketchUp product, it's also one of the software businesses in B&I. The SketchUp units, the revenue is down year-over-year because we have converted to a SaaS model. That would be -- if you call that the bad news.

The good news is, is that the units are up 50% year-over-year. It's the third quarter in a row where we've had 50% up on units. It's, I'd say, safe to say wildly exceeded the expectations we had for it. The team's done a heck of a job with the conversion. It's clearly expanded the addressable market even further than we thought it would expand, and that's clearly a really good thing for us in the long term. So nothing definitive, right? I can see some puts and takes within that.

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Robert Cameron Wertheimer, Melius Research LLC - Founding Partner, Director of Research & Research Analyst of Global Machinery and Cannabis [34]

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But so far, you're obviously growing very strongly through it as the structural factors overwhelm, I guess. Okay.

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Operator [35]

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Our next question comes from the line of James Faucette from Morgan Stanley.

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James Eugene Faucette, Morgan Stanley, Research Division - Executive Director [36]

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I wanted to ask a couple of questions. First, I'd say my congratulations to both Steve and Rob. I'm wondering, with the change in responsibilities and some of the things that you talked about in terms of improving the engagement of the Board around strategic thinking, et cetera.

Historically, Steve, you have been a very good acquirer of other companies and bringing them under the Trimble umbrella. How are you thinking about that as a strategy -- ongoing strategy going forward, particularly as we're going through this transition to more of a subscription business and trying to expand the software capabilities overall?

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Steven W. Berglund, Trimble Inc. - President, CEO & Director [37]

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Rob's pointing at me, so I guess it's mine to answer. He's being deferential here. So I think that Rob, in his remarks, talked about being, what, offensive -- or taking the offense, and I think that it's still our mentality.

I think that if you look at the 3 major realms of construction, agriculture and transportation, I would point in particular about transportation and construction is still going through, what I would call, a pretty rapid change and with the belief that in the next couple of years, the endgame, relative to the competitive state, ultimate steady-state competitive mixture as things start to reflect. So this is not a 5-year sort of deal. I think it's more like a 2-year, given the rate of consolidation and such.

So I think that our intention, certainly, and, again, emphasizing transportation and construction, is to be on the offense because I think we have a unique set of capabilities at this point in time and we have a unique position in the marketplace and in some sense, ours to win or lose and we certainly intend to win.

So now speaking more from a Board perspective, I think Rob's got a great deal of support and degrees of freedom to define what winning -- what that winning formula is. But I think that, that is the relative mindset we're bringing.

Now that does not automatically mean acquisition after acquisition, but I think that does play a role in this in terms of the kind of the competitive winner is going to be the one with the best array of assets that solves the total problem, certainly in both transportation and construction. So I think maybe more of an attitude than a set of specifics here, but I think maybe that gives you some color.

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Robert G. Painter, Trimble Inc. - CFO & Senior VP [38]

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And then just to overlay a financial lens to the strategic landscape, if I look at the perspective of liquidity and leverage, the net debt to EBITDA of 2.13x positions us well to be able to make moves should they be available. Or we look at the free cash flow in the business, that we're generating well over the, call it, the $500 million range, the business produces the cash flow to enable us to play offense.

And when we look at, for instance, the -- we have a $1.25 billion revolver that's untapped and available, we have stack maturities on the debt. So -- and we put the, I'll say, component pieces together underneath this that can enable us to assert ourselves on the strategic front, and I think we're well enabled in order to do so.

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James Eugene Faucette, Morgan Stanley, Research Division - Executive Director [39]

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That's really helpful. Yes, definitely seems like you have the ability to go do things if and as opportunities present themselves. Rob, just a couple of quick follow-up questions more related to near term. First, can you give us any sense of how much subscription transition may be curtailing revenue right now and if that's concentrated in any specific groups?

And then last quarter, your comments around Europe on macro environment tended to center around Germany, et cetera. Wondering if we can get any type of update on further developments in that market or more broadly in the European theater?

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Robert G. Painter, Trimble Inc. - CFO & Senior VP [40]

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Well, so earlier in the year, at the company level, we talked about the incremental conversions to subscription being a headwind of 1 percentage point on revenue and 1 point on operating income or EBITDA. I would say that's played through, through the year.

So we do see a headwind as a result of that. And I mean, it's a good point to ask the question because it masks what is, in reality, a really good thing that's happening in the business. Now you see that not entirely, but you see that mostly through the ARR growth that we have in the business. So yes, that would be the answer on that one.

You asked about Europe and what we're seeing in Europe overall, if I got the question right. In the -- whether I take a quarter -- I'll take the quarter view on that. We were up in Europe, and it was primarily in the Buildings and Infrastructure segment we were -- where we were up. There's, I'd say, big swings in what we're seeing in different parts of Europe in the quarter.

Maybe not surprisingly, U.K, the U.K. proved to be quite difficult in the quarter. I'd say Central Europe was largely still in a growth pattern for us. Southern Europe was still mostly in a growth pattern. France and Spain actually did quite well for us in the quarter. Germany, being the heartbeat of the European economy, it was up just a bit in the low single digit. Does that help?

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James Eugene Faucette, Morgan Stanley, Research Division - Executive Director [41]

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That's really helpful.

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Operator [42]

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And our last question comes from the line of Andrew DeGasperi from Berenberg.

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Andrew Lodovico DeGasperi, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [43]

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First, I guess on the competitive environment generally, how's -- has anything changed sequentially in any of your markets?

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Robert G. Painter, Trimble Inc. - CFO & Senior VP [44]

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From a competitive landscape, we think we're in a better position competitively. We put 13% to 14% of our revenue back into R&D and that innovation engine. It's something we continue to intend to have as central to the strategy of the company.

And if you look at the relative market share of many of the Trimble franchise businesses, our ability to put more money back into innovation at our size and to build out and best competition, we think, will continue to be a good thing for the, I'll say, the long term, sustainable competitive advantage of the businesses that we have.

So from that perspective, we'd say we feel like we're in a good spot and getting better if it's -- even if maybe it's incrementally better, which -- those are the kind of things that can get masked, obviously, in an environment like this is trying to reconcile absolute and relative results. But I'd say pretty much across the board, we feel like we're in a good and getting better competitive position.

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Andrew Lodovico DeGasperi, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [45]

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Got it. And then just as a follow up on M&A, just curious if you considered or are you considering expanding to new verticals? Or are you really just focusing on expanding the portfolio that you have right now?

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Robert G. Painter, Trimble Inc. - CFO & Senior VP [46]

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I would say at the moment, I'd say emphatically, the portfolio that we have, so we don't have an expressed intention to add a vertical that we're not currently serving today and to go after that. We think there's a lot of room within the markets we serve. We clearly serve a number of markets already today. So the intention is to stay within the markets that we're in.

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Operator [47]

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I'm showing no further questions at this time. I would now like to turn the call back to Michael Leyba.

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Michael Leyba, Trimble Inc. - Director of IR [48]

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Thank you for joining us on the call. We'll speak to you again next quarter.

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Operator [49]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.