Jim Todd - Director-Investor Relations Steven W. Berglund - President & Chief Executive Officer, Executive Committee Member Francois Delepine - Chief Financial Officer & Executive Committee Member.
Jonathan F. Ho - William Blair & Co. LLC Jerry D. Revich - Goldman Sachs & Co. Richard C. Eastman - Robert W. Baird & Co., Inc. (Broker) Richard F. Valera - Needham & Co. LLC Brett W. S. Wong - Piper Jaffray & Co (Broker) Ian L. Ing - MKM Partners LLC.
Good afternoon. My name is Patsy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Trimble Second Quarter Earnings 2015 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.
I would now like to turn the call over to Jim Todd. Mr. Todd you may begin your conference..
Thank you. Good afternoon. I'm here today with Steve Berglund, our CEO; and Francois Delepine, our CFO. Before we begin, I'd like to remind you that the forward-looking statements made in today's call and the subsequent Q&A period are subject to risks and uncertainties.
Trimble's actual results may differ materially from those currently anticipated due to a number of factors detailed in the company's Form 10-Ks and 10-Qs or other documents filed with the Securities and Exchange Commission.
During this call, we will refer to a press release, which is available along with additional financial information on our website at www.trimble.com. The non-GAAP measures discussed in the call are reconciled to GAAP measures in the tables to our press release. Now let me turn the call over to Steve..
Good afternoon. Second quarter results were in line with expectations. We continue to face the challenges that have been with us for the last several quarters, led by agriculture, which continues to be our most intractable problem and where we saw quarterly year-to-year revenue decline for the second year in a row.
The stronger dollar and the effects of the oil price decline also impacted the growth profile for the quarter. These three effects impacted the revenue growth rate by an estimated 10% in the first half of the year, against the 6% reported revenue decline.
We continue to expect these effects to diminish as significant factors in the year-to-year comparisons in the fourth quarter and first quarter. And allow us to credibly reintroduce growth into the Trimble story.
We were pushed down into the middle of our second quarter revenue range by Brazil and China, which showed a sharp decline in performance, reflecting the uncertainties in both countries. In the first quarter, these two countries together produced revenue growth for us of over 10%, in the second quarter, they were down over 25%.
Although, we were expecting headwinds from Brazil, in particular, we were not expecting something quite so precipitous. Although, European core revenue, excluding exchange rate and non-recurring effects, increased year-to-year in the quarter, Europe continues to be volatile and seems to be providing mixed messages.
The brightest performance continues to be in transportation & logistics within the Mobile Solutions segment and building and construction within E&C. Although, year-to-year Mobile Solutions' growth was modest at the segment level, the transportation and logistics element demonstrated double-digit growth.
Performance we will – we expect will continue through the remainder of 2015 and into 2016. The primary drag at the Mobile Solutions segment level continues to be in Field Services business, which is expected to deliver performance improvements leading into 2016. Building and construction revenue was also up double-digits year-to-year.
E&C segment performance was held back primarily by the year-to-year decline in the Geospatial business, which has been hit hardest by the oil price shock. The demand for survey equipment was impacted directly by the disappearance of exploration work, which has been historically dependent on high-end GNSS solutions.
The secondary effect, which is larger than anticipated, has been the decline in activity in oil producing regions. In effect, previously planned Walmarts are probably not being built in places like North Dakota.
Our Heavy Civil Construction business is also being affected by these same conditions in oil producing regions, but is also facing headwinds in the Asia-Pacific region. The Australian market continues to be difficult and China became more challenging in the quarter.
Our agriculture revenue was pressured in the quarter, particularly because of continued performance issues among the OEMs.
Although, this OEM performance shortfall caused us to add more conservatism to the third quarter estimate, we continue to model more stability late in the year and continue to see flat to potentially up slightly year-to-year revenues, starting in the fourth quarter.
The volatility in the Ag market remains unprecedented and this outlook represents our best effort view of it. Given that we are getting little help from the markets, our emphasis revolves around a few priorities. Secure the model, revive growth and tell the story. Securing the model is focused on a return to 20% non-GAAP operating margin in 2016.
In the trailing 12-months through June, our non-GAAP operating margin was 17.1%, down from the 20% levels we produced in 2013 and 2014. The margin fall reflects the revenues in agriculture and Geospatial dropping faster than we could cut cost, the discrete impact of the Manhattan Software acquisition, as well as a few other portfolio effects.
To recover to 20% operating margin, we need an additional three points off that baseline. The path to these incremental margin points under conservative revenue assumptions includes a number of elements.
First, an improvement in building construction margins, some of it from a continuation of current revenue growth into 2016 and some of it, a significant bump from the ability to recognize deferred revenue in Manhattan Software.
Second is a continued expansion of the transportation and logistics business, fueled by new products and the PACCAR business. Third is pruning the portfolio of strategically insignificant businesses and product lines that are generating losses. Fourth is additional cost control. Last quarter, we described actions to reduce costs by $15 million.
After evaluating the environment, we will target another increment of $15 million of cost for an annualized total of approximately $30 million. The reductions are being focused on those businesses that are struggling with revenue and margins. Those businesses that are growing and delivering improved margins will be allowed to grow their cost base.
We believe these actions will move us back into the neighborhood of a 20% operating margin in 2016 without relying on revenue growth outside of the transportation and logistics and building and construction. If we deliver a more optimistic revenue scenario, there would be the potential for upside.
The second priority is to revive growth in 2016 after a difficult year in 2015. The issues that affected us in 2015 have created a long list with few positive offsets, agriculture, exchange rates, oil prices, European ambiguity, Australia, Russia, and now China and Brazil.
If these elements stabilize at the current lower level and become the new normal, we believe we can grow in 2016. From a business portfolio perspective, agriculture and Geospatial have been the biggest drags in 2015.
We believe the first half represented the low point of our Geospatial market performance, and that a level of recovery has already started. We exceeded our expectation in the second quarter, which is creating some restored confidence.
The short-term role for Geospatial in the portfolio will be a recovery during the second half of 2015 with a return to meaningful growth early in 2016. Agriculture remains a hard forecasting problem. While the three-year secular growth outlook remains as strong as ever, the short-term remains volatile.
On a relative basis, we appear to be outperforming other participants in the market. Our minimal expectation for Ag for 2016 is flat year-over-year revenue, which should allow us to begin to demonstrate the impact of the new emerging product categories and to avoid being a drag on the rest of Trimble.
Our third priority is telling our story more effectively to both our customers and to the financial community. Current market issues are masking positive trends that signal the continuing evolution of Trimble. One of the most significant trends is the increasing role of software and services in the mix of revenue.
A snapshot of second quarter revenue reflects that trend. In-spite of overall revenue being down, software and services revenues continue to grow strongly and reflect a three-year annual compound growth rate of approximately 20% since 2012.
These dynamics are driving a structural shift of revenue towards software and services, and ultimately towards a more SaaS centric model. In-spite of the growing software and services role, hardware and sensors remain strong Trimble differentiators and are an important part of the value bundle for us.
However, as a matter of strategy, hardware and sensors are becoming more of an enabler as opposed to the key value driver. Last quarter, we provided three examples of the lift that hardware enabled software provides.
This unique combination of sensors and software creates significant upside possibilities for Trimble and we need to step up in our articulation of that story. Another perspective on telling the story is the development of the distribution channel to get this Trimble message to the marketplace.
In prior quarters, we have discussed the challenges and the unique Trimble advantages in our go-to-market strategy. We have implemented a unique dealer channel strategy in the heavy civil market with the SITECH dealer channel and are building a new dealer channel for building and construction and building point.
We're also developing an agricultural dealer channel based on our current dealers, called Vantage that will have the first wave of implementations completed by December. These dealers will have the capabilities to bring the information based Connected Farm to growers and their advisors.
In both construction and agriculture, the dealer channel needs augmentation to secure major enterprise accounts or large projects such as the New Beijing Airport we discussed last quarter.
Our new organizational format has created an intensified focus on securing large wins and we have doubled on the way to tripling the number of individuals who have both deep domain knowledge and large account experience to spearhead the effort. Most of these individuals have been re-tasked and do not represent an incremental cost.
We expect this hybrid effort, combining the elements of both direct selling to establish and frame the relationship and dealers to provide local hands-on capability will turn out to be the right mix.
We've continue to expect to produce an improving trend in the second of 2015, although at a slower pace than we originally expected as a result of the continued issues with the agriculture OEMs, Brazil and China. Our view on the growth possibilities of 2016 remain largely unchanged from last quarter.
Regardless of what the revenue picture for 2016 ends up being, we are committed to engineering and return to the traditional Trimble financial model. Let me turn the call over to Francois..
Thank you, Steve. Good afternoon, everyone. Before getting to the numbers, please note that unless otherwise indicated, the operating results I will discuss will be on a non-GAAP basis. The reconciliation from GAAP to non-GAAP numbers is in our earnings press release, along with the financial data of these segments.
Unless otherwise indicated, growth rates are meant to be year-over-year growth rates. So, now, let's first cover the second quarter results. Q2 total revenue was $586 million, down 9% year-over-year at the midpoint of our guidance.
Currency translation added approximate 4% year-over-year unfavorable effect, offset by acquisition growth of approximately 3%. The combination of divestitures and the completion of our contractual arrangements also reduced revenue by approximately 2% year-over-year.
Additionally, Q2 2014 benefited from a positive revenue recognition event, creating a negative year-over-year growth impact of approximately 2%. Netting out those factors, revenue was down mid single-digits.
As expected, growth was challenged due to continued headwinds associated with the agriculture market and the Field Solutions, continued weakness related to oil and gas in Engineering and Construction, and the down quarter in our Advanced Devices segments. Now, looking at our revenue by segments.
Engineering and Construction segment revenue was down 8%. Q2 2015 E&C revenue was a complicated story. Currency translation had an approximately 5% unfavorable revenue effect year-over-year, roughly offset by growth from acquisitions.
Divestitures of several distributors combined with the completion of a contractual arrangement related to the initial phase of VSS JV, reduced E&C revenue by approximately 3%.
In addition, Q2 2014 benefited from a positive revenue recognition events, regarding a distributor, creating an unfavorable year-over-year impact to E&C revenue of approximately 4%. Excluding these impacts, E&C was down low single digits. Within E&C, the revenue performance was mixed.
Building and constructions grew double-digits with a mix of organic and acquisition growth. Geospatial was down double-digits, impacted primarily by FX, continued weakness in certain regions with significant oil and gas exposure, and the prior year recognition events.
Heavy Civil was down high single-digits, impacted primarily by FX, the prior revenue recognition events and a JV contractual completion. Outside of these items, Heavy Civil revenue was up single-digits.
Field Solutions segment revenue was down 24% due to weakness in the agriculture and the GIS businesses, and the negative impact of currency translation, which was approximately 4%. Acquisition added 2% positive impact. The weakness in our agriculture business was slightly worse than expected, and was most pronounced in OEM factory install.
Mobile Solutions segment revenue was up 4%. Within that segment, the transportation and logistics business was up double-digits with continued strength in both the mobile and enterprise businesses.
The rest of the segment was negatively impacted by Field Services, which was down double-digits, and to a lesser extent, the Q4 2014 divestitures of a non-strategic business. Advanced Devices was down in the mid-teens. As we've discussed previously, Advanced Devices revenue can be lumpy due to the timing of OEM sales.
Now, looking at our revenue by geography. 57% was from North America, 23% from Europe, 13% from Asia-Pacific, and 7% from rest of the world. North America was down 3%. The largest impact to North America was agriculture and Geospatial weakness. Europe was a positive story in the quarter.
Although, revenue was down 13% on an as-reported basis, Europe revenue was flat excluding currency, and we have been up 9% excluding the distributor revenue recognition event from Q2 2014. Russia continued to be down. Asia-Pacific was down 18% year-over-year, a significant shift from what we saw in Q1 2015 where Asia was flat year-over-year.
Currency only had a small negative effect. In the shift from Q1, China was down approximately 25% year-over-year. Australia continued to be weak. India and other countries in Asia continued with strong growth, up by relatively low numbers. Rest of the world was down 16% year-over-year.
In another shift from last quarter, South America was impacted by year-over-year decline in Brazil for both E&C and agriculture. The Middle East and Africa were relatively flat. The impact of currency on rest of the world was minor. We're continuing to see a gradual evolution in our revenue mix.
For the first half of 2015, recurring revenue represents roughly 25% of total company revenue. Recurring revenue as we define it includes subscription, SaaS, maintenance and support revenue. Now, moving to the rest of the P&L. Our gross margin, operating income, tax rate and EPS also came in generally in line with our expectations.
Non-GAAP gross margins decreased to 56.1% compared to 58.5% in second quarter 2014. Gross margins were impacted primarily by a combination of lower sales of high margin products in our Geospatial division.
The completion of the VSS JV contractual arrangement within E&C and a one-time product cost benefit from a favorable telecommunications tax ruling in Q2 2014 within Mobile Solutions. In addition, both FX and acquisitions had a negative impact on company gross margins.
Q2 non-GAAP operating income was $97.1 million, or 16.6% of revenue, as compared to 23.2% of revenue in the prior year. Total company operating income percentage was negatively impacted by lower revenue and lower gross margin as I just mentioned.
The restructuring actions we talked about at the end of Q1 have taken place, but I have not yet add their full effect on operating expense across the company. Acquisitions also continue to be diluted to company margins within the quarter.
The impact of currency translation and company operating margins were small, given our globally distributed cost base. The non-GAAP tax rate was 24%, which we currently expect to see for the remainder of the year. Q2 2015 net income of $74 million was down 39% as compared to Q2 2014.
Diluted earnings per share were $0.28, down 38% as compared to Q2 2014. Q2 2015 operating cash flow was $97 million, down 26% year-over-year. Operating cash flow for the first two quarters of 2015 was $204 million, down 5% as compared to the first two quarters of 2014.
Operating cash flows have continued to improve relative to non-GAAP net income due to combination of deferred revenue increases and working capital performance.
Turning to the balance sheet, we finished the first quarter of 2015 with $129 million in cash, accounts receivable was $356 million with days sales outstanding of 55 days, and ending inventory was $281 million. Deferred revenue increased to $287 million, up 22% year-over-year.
The significant increase in deferred revenue, primarily reflects changes in revenue mix and includes the impact of acquisitions. Debt increased – debt decreased by $24 million, ending at $640 million. Our leverage ratio, which is a gross debt to trailing 12-months EBITDA, remained at the comfortable level at 1.5 times.
During the second quarter, we repurchased approximately 2.5 million shares of Trimble common stock for a total of $60 million. We have repurchased approximately 6.2 million shares for $171 million over the trailing 12-months.
From a capital allocation standpoint, our first priorities remain to fund the business both internally and through acquisitions. Given solid operating cash flows and a modest acquisition pipeline, we expect to be active with share repurchases in Q3. Our stock repurchase program has remaining authorization of $177 million.
I will now turn to our guidance for Q3 2015. We expect third quarter revenue to be between $535 million and $560 million, and non-GAAP earnings per share of $0.19 to $0.26.
Non-GAAP guidance excludes the amortization of intangibles of $41 million, related to previous acquisitions, estimated acquisition cost of $3 million, the anticipated impact of stock-based compensation of $13 million and approximately $4 million in anticipated restructuring charges.
Third quarter, non-GAAP earnings per share guidance assumes approximately 261 million shares outstanding, and a 24% non-GAAP tax rate. This non-GAAP tax rate still assumes that the R&D tax credit will be reenacted for 2015. Our Q3 revenue guidance assumes continued weakness in agriculture and oil and gas impacted markets.
It also reflects the weakened environment in China and continued weakness in Brazil, Russia and Australia. Guidance also assumes an unfavorable currency translation impact of approximately 4%. As Steve discussed, we continue to take cost action to shore up our operating margins as we exit this year and into 2016.
With that, we will now take your questions..
Our first question comes from Jonathan Ho with William Blair..
Good afternoon, guys. I just wanted to start out with maybe little bit more color in terms of the guidance that you gave, particularly getting back to the corporate margins for 2016. I know you've sort of outlaid some of the assumptions that you had around that.
But can you maybe give us a little bit more in terms of what your executions are in terms of the macro environment and perhaps, maybe the FX exchange environment as well and your thoughts on what that needs to be, in order to achieve either a return back to growth or a return back to the corporate margins?.
Yeah. So, I think we're kind of looking at the two issues a little bit independently.
I think the return to 20% we're basically aside from some kind of continued growth in the building construction space or at least elements of it, which looks pretty good at this point in time, as well as the transportation and logistics, which again is looking pretty good.
We're basically, modeling kind of a return to 20% operating with no real help elsewhere from revenue. And so, as far as exchange rate environment, we're maybe naively with the Fed potentially raising rates, but we're assuming kind of current exchange rates continue through into 2016.
So, we're not assuming the wisdom of actually being able to call future exchange rate move. So, basically a flat line. And in a simple sense is, again through June trailing 12-month, operating margin, non-GAAP operating margin was 17.1%.
So, in shorthand form, we see the three points coming from, one, Manhattan Software, which has been holding up a lot of revenue in deferred revenue. So, that – turning that situation around and being able to get the deferred revenue out of that, which should be possible into 2016. That's more or less a point of margin itself.
The cost reductions we've taken adds another point, so that's two out of the three points of margin uptick. And the third point is a combination of some portfolio trimming which turns around some losses on individual product categories, as well as some lift from the building construction kind of organic realm and transportation and logistics.
So we see getting back to 20%, somewhat independently of let's call it a larger revenue story.
Now, okay, the revenue – in terms of revenue growth, again starting in the fourth quarter and into the first quarter, we start to lap some of these effects, whether it'd be oil prices, exchange rates and the like – and okay, so essentially those no longer get to be the drag.
So I think we inherently have growth built-in, it then becomes a question as to how large the growth rate we can actually achieve in 2016. But if everything more or less holds at the current level kind of reduced level, at current level we do see the ability to create a level of growth in 2016.
We're becoming a little less explicit in terms of how much growth that could be given kind of these new headwinds from China and Brazil, but I think the construction of the scenario is relatively straight forward.
The big element here is agriculture, which we are – which we're modeling and which we believe will be kind of flat line to maybe slightly up in 2016 and that begins in the fourth quarter of 2015, that's our view of it at this point in time.
So, I think the 20% we have a path that doesn't assume a whole lot of lift on the revenue front, and then I think the revenue story is on top of that..
Got it. That's fantastic detail.
Could you just maybe delve into the Manhattan Software acquisition a little bit more and perhaps maybe walk us through magnitude of the deferred that you think is going to come back and sort of approximate timing for those chunks of revenue, the re-signed maintenance to come back?.
Yeah. So maybe let me give the kind of the business context and then give it to Francois to kind of talk to the numbers.
But the business contracts, which we still stand behind, obviously we were surprised by and that the state of deferred revenue and the fact that we've been unable to recognize the level of revenue that we expected originally out of Manhattan.
But again Manhattan Software was an acquisition toward in the second half of last year, really to extend our view of the connected construction site into the operation of the building, turning the constructible model over at the end of the project to actually become the basis of an operational model.
And the fundamentals of Manhattan in terms of orders, bookings, actually cash flow has been consistent with our expectations, it's been a positive story, it's been the accounting that has been the challenge for us. So, from a business perspective, I think it's still valid, still fundamentally a positive to-date story on Manhattan.
But let me give it to Francois to talk to the kind of the number side of it..
Yeah. So just to add a little bit of color maybe without giving the exact specifics, that we increased – out of the 20% growth in deferred revenue from – on a year-over-year basis.
16% of that, 22% was from acquisitions in that include kind of the acquisition operating balance and most of that would be from Manhattan, and if you look at the Q2 increase, so sequential increase, again, we had an increase also in Manhattan from the acquisition, we had an increase of mid single-digits and most of that again was Manhattan.
So, and if you think of what's currently on the Manhattan deferred revenue balance, it's approximately $20 million.
That continues to grow as we speak and has the delivery capabilities improved and we can turn the bookings into recognized revenue faster and also deliver some of the backlog of bookings that is currently in deferred as we deliver the product and implement the product that balance should stabilize or no longer grow quarter-over-quarter.
So, that would start benefiting our P&L..
Great. Thank you..
Our next question will be from Jerry Revich with Goldman Sachs.
Jerry?.
Good afternoon..
Good afternoon..
I'm wondering if you could just flash out a little bit more color what you spoke about in your opening remarks to even terms of how the path to the build out of the buildings channel and how we should think about SG&A negative sales as you continue down that path looks like for the company as a whole-ish, your negative sales was up a few hundred basis points year-to-date.
I am assuming big part of that is around supporting that channel.
But I'm wondering if you just flush that out that and how we should think about that evolving?.
Yeah. So I think that starting to kind of looking back and moving to the front here maybe a little bit, but the – we're not looking to the changes we're making in channel to – we're not looking for any fundamental structural changes in our cost structure out of this.
Now Trimble has become a little bit more complicated or maybe significantly more complicated over the last few years and kind of ratios like sales and marketing cost to revenue because very roughly 50% of our overall go-to-market approach has been – it has become direct, five years ago it's much more indirect.
And that in terms of the way the accounting is done for revenue and where the costs are that will mess with the ratios a bit. So – but fundamentally, what we're doing now in terms of initiatives across the board, we're not actually looking to kind of move the needle at all relative to kind of the, the traditional ratio.
So we would expect those to kind of self-correct over time. But specifically, on the building construction, kind of go-to-market approach on the channel, really two elements of that. One, we are kind of analogous to what we did with SITECH and the Heavy Civil.
We are building out a main channel called BuildingPoint, which is a worldwide dealer network, commonly branded with the name BuildingPoint, with a set of guidelines and with a set of branding characteristics of that. Our attempt there is to make that channel synonymous with technology and vertical construction.
The construction of buildings, software centric, but able to handle both – handle the bundle of hardware and software, and that effort has been going on now for, I believe over a year, is proceeding and okay, we expect within the next year to more or less have the channel substantially build out.
Now, in parallel to that, there is the issue of large projects and large accounts, maybe the most significant account that we have been able to press release in this arena has been AECOM, which was last year, but in account like that isn't necessarily going to rely on a dealer – a set of multiple dealer relationships, there does need to be a kind of a central point of them because those are coming from Trimble.
So, in parallel to the dealer channel, we're building out a direct selling capability in combination with professional services. So, Gehry Technology brought with it, a professional services capabilities.
So, we are able to go in as a Trimble and do a corporate level sale to someone like AECOM or maybe more to the point be able to go in and in a project level make a sale at the project. Although, what's been announced so far with the Beijing airport has been heavy on the Heavy Civil. We would expect the same thing to occur on the building.
So, what we end up having is two collaborative channels, one that looks like a direct capability and one that's a dealer channel, but the direct would lead the way in and then coordinate dealer activity at the local level.
So, call it something of a hybrid model, but it's something we're comfortable with and actually where we believe that we are – we have a pretty strong competency and it's really consistent with the way Trimble has worked for a number of years.
But again, I think in terms of the cost structure, we would not expect these efforts to really kind of move traditional relationships in terms of comps..
Okay. Thank you for the color. And then, in Mobile Solutions, can you just talk about whether the transportation and logistics business growth, you said it was double-digit. So, I think we're seeing deliveries in your end markets up 15% to 20%.
I'm wondering if you had similar growth in T&L, and can you just update us on how the Field Services transition came along over the course of the quarter?.
Yeah.
So, I would say that in a rough sense is – T&L is consistent with those sorts of growth numbers and we actually believe that we're – as the year – as we move deeper into the second half of the year and as we get into 2016, we believe that the trend will accelerate both because of the PACCAR deal that we talked about last quarter, but also we were feeling pretty good about new product introductions that are coming and the impact that they will have.
Field Services is still fundamentally a turnaround situation. It is going through a comparatively painful transition, kind of moving away from heavy reliance, historical reliance of small and medium accounts to more enterprise level, more complicated, more work flow oriented solutions and pipeline activity is good.
That pipeline will probably not be kind of fully realized until we get into 2016. So, what we're expecting there in terms of profile is for it to continue to be a negative factor from a profitability standpoint on the segment for a couple of quarters more declining over that time period.
And during the second half of the year, we're expecting or we're forecasting at this point in time that it ceases to be a significant drag anyway on revenue that – revenue first flat lines and then starts to grow as we get into 2016..
Okay. Thank you..
Thank you..
Our next question is Richard Eastman with Robert W. Baird..
Yes. Good afternoon. Could you just cycle back to the Field Solutions business and against that strong double-digit decline in revenue.
Could you just kind of speak to how ag did perform and how GIS did perform? And then, maybe the second half of 2015, I guess the expectation is that ag flattens out against at least the fourth quarter comp, is that the expectation there?.
Yeah. So, the expect – pretty explicitly is that particularly with performance we saw in Brazil and performance we're seeing out of the OEMs, which is I think that we had – we're expecting the third quarter to maybe kind of moderate out. I think we're just watching the third quarter at this point of time.
But, right now, another drop is in the estimate for the third quarter. Whereas in fourth quarter, which was – which where we saw the really precipitous drop last year. I think that – and a lot of that was inventory effect in the OEM channel.
We don't expect – we certainly don't expect the inventory effect to recur in agriculture, and relative to everything else, the – it's getting we're kind of coming to the limits of how much worse the OEM element could get sort of thing. So, right now, we're modeling and with some reasonable expectation of it actually turning out to be true.
We're modeling the fourth quarter to be flat in agriculture, and I think, right now, we've got and what I think is a sober and conservative estimate for the third quarter and last year late in the quarter kind of a September effect, we saw a kind of a cliff that we went over in the last two weeks, three weeks of the quarter.
So, there may be some moderation that occurs in the third quarter, but that's not kind of implicit in the estimate at this point in time. We're kind of calling it down kind of in a fairly conservative fashion. So, we'll see how the quarter unfolds, but that's the way we're looking at it at this point in time.
As far as GIS, GIS was down year-to-year in the second quarter that was consistent. The story for GIS is very similar to kind of the story that was more survey focused in the script.
But GIS is relatively heavily dependent on kind of the oil factors or oil regions as well, and so, that kind of pull GIS along with it, but – so, GIS was also down in the quarter, and we're expecting it to reflect kind of more or less same profile as the survey equipment they tend to operate in tandem to some extent..
Sure. And then, can we just ask the – when I – I think you had suggested and really repeated that you expect second half 2015 revenue to be up over the first half, maybe not at the same pace you did a week ago or prior to this quarter, but again with the third quarter revenue guidance at the midpoint at $545 million.
It does suggest the fourth quarter is got to be solidly north of $600 million?.
Well, I'm not sure that we've ever said, called out a relationship between second half and first half. I think, we've always talked in terms of second half 2015 versus second half 2014.
And, okay, last quarter, we were a bit more bullish, I would say about the third quarter and kind of the Brazil, the China and the kind of the Ag OEM has made us a bit more careful about third quarter. I think our view on the fourth quarter, which is flat to potentially up relative to last year. I think that's still our outlook at this point in time..
Well, it would have to be again, second half of this year over second half last year.
The fourth quarter would have to be north of $600 million, and what I'm kind of getting at is, the third quarter to fourth quarter sequential step-up in revenue comes from, which of these core-end markets?.
Well. Okay. Let's make sure, we're consistent on the construct. So, I don't think anything we said today actually talks about the full second half.
So, third quarter is what we said it was going to be and I think fourth quarter discretely I'm suggesting that revenue level compared to the fourth quarter of last year is flat to up, which would – I believe the fourth quarter last year was roughly $600 million, which would indicate that yeah, it would be or no, it was $564 million or so.
And so, I think that we're saying something north of $564 million is probably the outlook for the fourth quarter is just I think we'll get to the fourth quarter – we'll talk more specifically about the fourth quarter in three months.
But in general, I think the fourth quarter becomes something of an inflection point leading into 2016, which is flat to up..
Yeah. Just to kind of follow-up on that, if you're trying to reconcile with things that we said a quarter ago, our general expectations for the second half as it stands today are lower, now than they were three months ago. So, that's what Steve just told you respectfully (46:17)..
Okay, but the step-up, the implied step-up from Q3 revenue to Q4 revenue is probably only $20 million and that could easily be seasonal so. Okay. And then, just one last question, sorry, one last question on the Mobile business.
And Steve, the adjusted EBITDA at 14.7%, is the decline there from the first quarter to the second quarter in adjusted EBIT, is that all largely a function of the Field Services business – first quarter was 16%?.
Yeah. So it's largely as a result of that. I think, to a lesser extent, we had also a product transition during the – in the T&L, or Transportation and Logistics group that also impacted, a little bit that sequential drop, but by and large, for the most part it was the Field Services, so you're correct..
Okay. All right. Thank you..
Thank you..
Our next question will be from Rich Valera with Needham & Company.
Rich?.
Thank you. And so, Steve, if I look at the implied operating margin in your third quarter guidance and then make some assumptions about the fourth quarter, it would appear that the calendar 2015 op margin could be significantly lower than the 17% trailing four quarters.
And I'm not sure why that wouldn't be a more relevant baseline as we look to next year and trying to get to 20%. I mean it seems like you could be closer to maybe 15.5% or call it maybe 16% for calendar 2016.
So, you have another point to point-and-a-half to bridge to get to that 20% and I'm just wondering why that is the more relevant comparison?.
Well, I'd say – first of all it hasn't happened yet and therefore rather than kind of building a set of actions around a forecast, I think that we understand fully and completely the trailing 12 months, we're building it off of that as a result.
But I think that – I think looking to – we haven't said anything about the fourth quarter and what that might be. So, the third quarter is standing kind of in isolation at this point in time.
But again, I think that if you – we could also go back to the third quarter last year which had a 20% plus operating margin and build it off of that in terms of what has happened since then to bring it down from 20%. So, we can search for different baselines.
So, I think that one of the exercises I've done is basically gone back to the third quarter last year where we had 20 plus percent operating margins built – in terms of what has impacted that, using that as the baseline and how do we recover that.
So, I think, it's a matter of what base you choose for triangulation and I didn't choose the third quarter last year, I didn't choose the third quarter this year. But I think that the trailing 12 months I think provides a sober estimate and okay, we're triangulating off that. But I think the logic of getting to the 20% is still sound.
And so, it's obviously a lot more complicated than that, but today was an attempt just to basically say, okay we have a commitment to get to the 20% and okay we do have a path to it, that's a little bit more complicated shall we say than the one we laid out.
So, a fair point, but at the same time, I think that it's a matter of okay, what you base what off of and I'm prepared to do it for the third quarter off of the trailing 12 months in three quarters, but I'd like to do it of actuals not a forecast..
Fair enough.
Just one more, I don't think you've mentioned your new irrigation product/initiative in agriculture, which you know I thought you were pretty optimistic about heading into the back half of this year with a – I think a rebooted product and distribution around that? I mean, what's the status of that? Is the market still just too challenging for that to gain any traction or how do we think about that, second half of this year and maybe into next year or maybe being something incremental on ag to give you a little above market boost?.
Yeah. So, certainly in the context of 2016, we're looking it to be – for it to be incremental. What we have done is we have built a direct sales force capability. So, we are outtalking to large growers who do a lot of the irrigation.
It has maybe not surprisingly turned out to be a relatively conservative market from the standpoint is we have – and typically a farmer who has needs 10 irrigation systems or 15 irrigation systems, will say put it on one, let's try it out, and so, what we've got at this point in time is a number – large number of trials going on. Okay.
So, the revenue to-date hasn't been as high as we maybe would have forecasted six months or nine months ago simply because of the adoption process is taking longer. So, like most of the Trimble businesses it is a fairly conservative uptake process in the works. I think we're now in the third quarter and fourth quarter, starting to move out of season.
So, I think it really is, so, it hasn't generated revenue sufficient to really being worth talking about in the larger context to that, but we've done a whole lot of learning this year really in the first year of implementation. We have engaged the marketplace.
We have talked to a lot of farmers and I think that the probabilities for it to be a meaningful revenue item in 2016 is quite high. So, I think we're, I suppose in a sense, disappointed that the uptake wasn't instantaneous.
We were probably naïve in terms of believing that – again the farmer with 15 – who needed 15 systems would order all 15 without seeing a demonstration taking place over some period of months. So I think that is more, it has become more of a 2016 issue than a 2015 issue.
Now at the same time from a market standpoint, from a competitor standpoint, we're very pleased with where we stand, we believe we have a unique hit product capability, we have or actually – we have a unique solutions capability because we've taken the base product.
We have integrated with other capabilities, and there is – it's evolved into more of a water management system. So from that standpoint, we're quite happy with where we stand. But again, I think it has turned into more of a 2016 potential than a 2015 in terms of moving the needle for agriculture..
Okay. Thanks for that color, Steve..
Our next question is from Brett Wong with Piper Jaffray..
Hey, guys, thank you for taking my questions. I was just wondering if you could talk a little bit more, provide some more detail around the lower oil impact and kind of expectations of when you think that will improve. I mean you previously mentioned Steve, that you expected second quarter to kind of be the bottom.
I mean what are you expecting now for when that impact is going to stabilize and when we potentially start to see improvement?.
Yeah. So, I think that probably when we look back I wouldn't – I would guess I wouldn't doubt anyway that probably the second quarter does kind of – first quarter and second quarter particularly together represent the low point. Now, I think that probably the oil producing regions themselves are going to languish for a period of time.
But I think, two effects, one, when we get into the – when we get to the – into the fourth quarter and to the first quarter, at least the year-to-year comparison that's to be easier. So, we've got that, but I think as a – from a company standpoint is because of our relative market share in the GNSS, GPS.
We have been a kind of overrepresented in the oil exploration area and we have actually I think had a stronger presence in the oil producing regions than maybe more – some of the competition.
I think what we need to do as a company and that's what we're doing at this point in time is, okay, a reallocating mine share, reallocating resources, reallocating marketing programs kind of a way from a focus on oil at least until it's starts to come back until we see the oil prices going up.
And redirect our points of emphasis to other areas, that's taking place at this point in time. So, I think that yeah aside from kind of the year-to-year comparison relief we see later in the – at the end of the year, I think we're seeing, let's call early signs of the benefits of this redirection of activity.
So, I think we don't have to be a victim to the oil price effects. I think we can take proactive efforts, we're doing that. So, I would say is that right now I maybe speaking too early without a whole lot of – without enough data really to support in a big way.
I would expect 2015 to actually be for our Geospatial business a reasonably robust growth year, but we need to get from now until then, but that's what's going on and I think that it will be a situation that corrects itself..
Okay. Thanks, Steven.
And just looking at China quickly with the increased weakness, uncertainty there, do you have concerns about the Beijing airport contract that's been awarded, that you received and that's getting further postponed or any of kind of future opportunities that you are thinking of?.
No, actually I think, probably, okay – again I'm China no expert, but I think what we're – we saw in China in the second quarter was probably more headline effects than anything else. I think, the fundamentals of China are still strong.
I wouldn't see at all that the Beijing airport deal or kind of the other infrastructure deals are in any real jeopardy. I think what we saw was again the headline factor, where people that were potentially going to invest in the second quarter with the relative volatility of the stock market just decided to postpone differ and reconsider.
So, I think, there is a fair chance that what we saw in China in the second quarter and kind of self corrects in quite a hurry and that it doesn't actually reflect anything fundamental. We'll see, but I think it's highly probable that the second – our second quarter results didn't necessarily reflect anything terribly fundamental about China..
Okay, great. Thanks again for taking my questions..
Thank you..
Our last and final question in the queue will be from Ian Ing with MKM Partners..
Yes, thanks for fitting me in. Steve, you talked about improving the distribution channel in ag and replicating some of your SITECH success in E&C, but as you probably know, farmers are skeptical bunch, I mean, even when faced with a good ROI value proposition.
So, how do you expect to really win over this market with channel and customer education?.
Well, okay, so, I think it's – yeah, so, without a doubt I would expect agriculture and I think we've been consistent the same as over a period of time. Is agriculture – we see a transformation in both construction and agriculture. We would see the transformation occurring in construction much more rapidly than agriculture.
So, the value proposition in construction is that, by using technology you can reduce project cost by 25% or 30%. Okay, that the competitive forces in construction are strong enough, is that – okay – I think the – those contractors who don't adapt will be out of business in fairly short orders. So, construction I think will occur rapidly.
I think agriculture is a more conservative, a more patience sort of market. It will take longer. I think the end result will be very much the same of agriculture being transformed through the use of the information.
So, I think that there is going to be – I think that against kind of what – the speculation of last few years in terms of time phased projections. I think it will turn out to be a slower developing market than people have been saying.
At the same time, it will happen, it will be a big change and I think that fundamental to that change will be an edge, a channel that can deliver value to the customer that is – that becomes a trusted advisor to the farmer, and I think that becomes the fundamental consideration, which is to really reflect the level of neutrality and level of trust with the farmer turning over data to if you will, a third-party is an act of trust.
So, I think that's fundamental. So, I think we're putting the basis in play to make that happen. I think we're being – let's call it appropriately sober, saying on time expectations, but I think it's the first step of many.
So, I think that starting from a low level, I think we should see good growth coming from it, but we're not projecting a rocket ship here..
Great. And then from my follow-up Francois, I mean how long will it take for currency translation impacts to play out? I mean the dollar didn't get any strong in Q2, but obviously there is some sort of lag in the pricelists adjusting. And once the pricelists do fully adjust, there is some demand consequences at that point. Thanks..
Yeah. So each division kind of adjust to the situation the kind of best they can with regards to pricing. We see the impact in Q3 to be – I mean the current rate to be a little bit lower than it was in Q2, but we quantify that is about 4%.
In Q3, it will also be a little bit lower than we would expect to see it in – in Q4, rather we expect to see it bit a lower than in Q3.
So, we're thinking about $20 million – $25 million in Q3, about $20 million in Q4, and then starts reducing after that still more – still a little bit in the Q1 and then after that in Q2 assuming current rates obviously will start lapping that and thoughts on demand issues once the price is fully addressed..
Yeah. So, you kind of expect things to neutralize themselves, so we may see some a good results. Now if you look at the results in Europe actually if you exclude the impact of FX and the distributor revenue recognition event that we had last year. So, which kind of impacted the year-over-year comparison. Europe was actually up 9%.
So it kind of indicates that there is strong demand locally..
Okay. Thank you..
Thank you. And this concludes today's conference call. You may now disconnect..