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 David Revich - Goldman Sachs & Co. Andrew C. Spinola - Wells Fargo Securities LLC Ian L. Ing - MKM Partners LLC Richard C. Eastman - Robert W. Baird & Co., Inc. (Broker) Brett W. S. Wong - Piper Jaffray & Co (Broker) Eli Lustgarten - Longbow Research LLC.

Good afternoon. My name is Christine, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Trimble Third Quarter 2015 Earnings 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. Thank you.

James Todd, Director of Investor Relations, you may begin your conference..

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 Form 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..

first, that relatively more value is being created from software and system integration and comparatively less from hardware. And second, that some historical elements of hardware are becoming more commodity-like.

We are re-sharpening our focus and ensuring that our hardware development is creating unique value, and in some cases, we are outsourcing hardware elements to better focus on the solution, reduce development costs and improved time-to-market.

The brightest performance continues to be in Transportation and Logistics within the Mobile Solutions segment and building Construction within E&C. T&L demonstrated double-digit growth in the quarter and we expect this will continue through the remainder of 2015 and into 2016.

The primary drag at the Mobile Solutions segment level continues to be in the Field Services business, where the outlook is improving, but where positive effects take time to play out because the business is SaaS (0:09:56) centered. We expect a relatively strong growth year in 2016 in the Mobile Solutions segment.

Building construction quarterly revenue was also up double-digits year-to-year. Total E&C segment performance was held back primarily by the year-to-year decline in the Geospatial business, which is largely a function of the oil price shock.

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, primarily Australia and China.

For E&C, in 2016, we expect building construction to remain in double-digit growth territory, but the baseline expectations for both Heavy Civil and Geospatial in single-digit growth.

Our agriculture revenue was pressured in the quarter because of general market conditions, though with a particular pain point being the performance of the OEMs, which continued to be volatile and difficult to forecast. We are carrying a level of conservatism into the fourth quarter guidance.

We continue to see an ability to differentiate our performance from that of the OEMs as we move into 2016.

Our base assumption is that OEM revenue will fall another 15% in 2016, but that other compensating factors such as new products in the guidance business, new service revenue and continued guidance penetration of regional markets outside North America bring us somewhere in the vicinity of flat for the total year.

Finally, let me update you on senior management appointments. Late last quarter, Darryl Matthews joined Trimble to head a sector which includes agriculture. He joins us from Nufarm where he was President and General Manager of the NAFTA Region.

He brings a combination of significant agriculture domain knowledge and a background of implementing strategies in large and complex markets. In addition, earlier this week, we announced the appointment of Sach Sankpal as a Sector Head with a focus on pulling together our efforts in intelligent transportation and asset sharing.

We define both intelligent transportation and asset sharing not so much as new market categories, but more as significant enablers in our existing vertical markets. Sach joins us from Honeywell International, where he was President of Global Safety Products.

Sach was actually with Trimble from 2001 to 2003 and was actively involved in the early formulation of our construction strategy. We believe the addition of Darryl and Sach are important augmentations of the management group.

Our traditional and generally successful managerial emphasis has been on the combination of market domain knowledge and innovation. In a larger and more complex environment, we are placing increased discrete emphasis on a strategic execution.

Both Darryl and Sach have a track record of execution and will extend the diversity of thought within the Trimble executive group to better enable us to manage to tangible outcomes. Let me turn the call over to Francois..

56% was from North America, 24% from Europe, 13% from Asia Pacific and 7% from rest of the world. North America was down 3%. Within that, revenue in the U.S. was flat, with double-digit decline in Canada. The largest negative impact on North America continued to come from our U.S. agriculture business, as well as oil and gas-related weakness in the U.S.

and Canada. Offsetting these, the United States saw pockets of strengths in E&C as well as Mobile Solutions. Europe remains generally uncertain, although it was a positive story for the quarter, showing flat revenue year-over-year as reported and up approximately 12% on a constant currency basis.

Europe saw strength, particularly in agriculture and within our Transportation and Logistics business. The primary pockets of strengths were in the UK, Netherlands and Nordic regions. Germany was modestly improved from recent trends. Russia is still depressed.

Asia Pacific revenue was down 5% year-over-year as reported and down approximately 2% on a constant currency basis. The Australia, New Zealand area is still depressed; China was down. China is both uncertain and reflecting that uncertainty through lower demand. Our China revenue was down mid-teens year-over-year in Q3.

While the Chinese uncertainty is likely to be a negative factor of revenue for the next six months, looking beyond that, we'll still see significant opportunities and still regard China as a source of growth. Finally, we experienced growth in a number of other countries, including India, Korea and Japan.

Rest of the world was down 16% year-over-year and down approximately 11% on a constant currency basis. Brazil continued to be the primary driver of this weakness, and this market is likely to remain very challenging for some time. Middle East was down in the quarter, but has shown growth on a year-to-date basis.

From a revenue mix standpoint, and as Steve mentioned, we're continuing to see an evolution towards more software, services and recurring revenues across multiple segments. We believe this will, over time, lead to better productivity and improved margins. Now moving to the rest of the P&L.

Our gross margin, operating income and EPS came in ahead of our expectations. Q3 non-GAAP gross margins, slightly decreased to 57.4%, compared to 57.8% in the third quarter of 2014. Gross margins were relatively steady in all of our segments.

While there were negative gross margin impacts due to reduced volumes and the hardware mix in some businesses, we also saw positive benefits from software subscription mix that largely offset those. Q3 non-GAAP operating income was $104.9 million or 18.7% of revenue, as compared to 20.2% of revenue in the prior year.

Total company operating income percentage was negatively impacted by lower revenue, as well as by acquisitions and foreign exchange. Offsetting this, operating expenses were down slightly on a year-over-year basis, even after the impact of increased expenses from acquisitions in the past year.

The impact of currency translation benefited operating expenses year-over-year, as well as results from the restructuring and cost containment actions we've taken over the past two quarters, which are progressing as expected. The non-GAAP tax rate was 24%, which we currently expect for the remainder of the year.

Q3 2015 non-GAAP net income of $77.8 million was down 11% as compared to Q3 2014. Diluted non-GAAP earnings per share were $0.30, down 9% as compared to Q3 2014. Q3 2015 operating cash flow was $72.4 million, down 25% year-over-year.

Operating cash flow for the first three quarters of 2015 was $276 million, down 11% as compared to the first three quarters of 2014. Operating cash flow for the year-to-date period remained strong relative to non-GAAP net income, due primarily to changing revenue mix and working capital performance. And we expect this general trend to continue.

Turning to the balance sheet, we finished the third quarter of 2015 with $124 million in cash, accounts receivable was $345 million, with days sales outstanding of 56 days, and ending inventory was $271 million. Deferred revenue increased to $275 million, up 19% year-over-year.

The significant increase in deferred revenue primarily reflects changes in revenue mix and includes the impact of acquisitions. Debt decreased by $120 million, ending at $759 million. Our leverage ratio, gross debt to trailing 12 months EBITDA, ended at 1.8, within our targeted range.

During the third quarter, we repurchased approximately 8.2 million shares of Trimble common stock for a total of $155 million. We received 3.7 million of those shares through the accelerated share repurchase program announced in September and additional shares will be delivered in Q4 upon completion of the program.

During 2015 so far, we have repurchased a total of $228 million of Trimble common stock. Our capital allocation priorities remain unchanged. Our first priorities remain to fund the business both organically and through acquisition.

Given solid operating cash flows and the current acquisition pipeline, we expect to continue to be opportunistic relative to the stock buyback. Our current stock repurchase program, after the completion of the ASR in Q4, will have a remaining authorization of approximately $250 million. I will now turn to our guidance for Q4 2015.

We expect fourth quarter revenue to be between $520 million and $550 million and non-GAAP earnings per share of $0.19 to $0.26.

Non-GAAP guidance excludes the amortization of intangibles of $40 million related to prior acquisitions, estimated acquisition cost of about $3 million, the anticipated impact of stock-based compensation of $14 million and approximately $3 million in anticipated restructuring charges.

Fourth quarter non-GAAP earnings per share guidance assumes approximately 253 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, which is widely believed. Q4 revenue, excluding M&A impacts, has historically been in line with Q3 revenue levels.

Our Q4 guidance indicates a decline, although better than expected Q3 results. Guidance assumes that organic growth for the company, outside of agriculture and Geospatial, remains consistent with normal seasonable patterns.

It also reflects the persisting macro uncertainties in agriculture and oil and gas-impacted areas as well as continued caution relative to markets outside of the U.S. Revenue guidance also assumed an unfavorable currency translation impact of approximately 3%.

We expect operating expense to be down year-over-year, reflecting primarily the impact of our restructuring actions. With that, we will now take your questions..

Your first question comes from Jonathan Ho from William Blair. Your line is open..

Hi, this is Jonathan Ho. Just wanted to start out. You guys talked about 70% of the business, I guess everything excluding agriculture and Geospatial growing by about 4% organically this year despite, as we know, a very challenging environment.

I just wanted to understand what some of the drivers were that allowed the business to grow and what your expectations are in a more normalized environment for what these non-Geospatial and agriculture segments should be growing on an annual basis?.

Yeah. So, I think that – I think what, in those business excluding Geospatial and agriculture and then compensating for exchange rates, I think I would generally say what we've seen in the first nine months of this year is kind of our baseline for projecting into 2016 in terms of regionally and otherwise.

So, I would say is it – kind of that 4% number provides our foundation for starting to consider net changes into 2016. So, I think, again the relatively strong points in that were building construction and transportation and logistics, okay.

Within E&C, we've got some headwinds on Heavy Civil, but by and large, I think that that – looking into 2016, we're not anticipating kind of any net change other than we expect kind of at the regional level and in terms of new products and such, probably more contribution from Heavy Civil during 2016, more contribution or less of a drag, more contribution from Field Services.

And so, I think that that's why we're relatively comfortable talking about growth into 2016 and then just kind of doing the net change thing, looking to Geospatial to grow single-digits, but looking for Geospatial to grow at a reasonable rate in 2016, and again kind of flattish – flattish agriculture.

So kind of that's the formulation looking into 2016, but taking the first nine months, not assuming a whole lot of change in circumstances, certainly no improvements in the economies outside of the U.S., and using that as the basis for projecting into 2016..

Got it. And then as a follow-up, just wanted to understand in terms of the fourth quarter guidance, I mean this seems to be a pretty big step-down sequentially. But if I recall correctly, last year's fourth quarter agriculture already – seems fairly conservative expectations on a year-over-year basis.

So where is the step-down going to take place in terms of the segments, and can you maybe help us with each of the growth rates that we could think about in terms of that fourth quarter expectation?.

Yeah, so just kind of following up on what Steve said for the fourth quarter, really the weakness that we have assumed is still reflected in agriculture and you're right. It was a weak quarter in Q4 last year. We expect a further drop in agriculture in Q4, and hopefully, that will do better than what we expect.

But at this point, we're quite cautious in agriculture as well as oil and gas as well. And there is a fair amount of caution as well built into the Q4 guidance with regards to the non-U.S. markets and some of the uncertainty there.

So in terms of the last, just kind of go back to what – what Steve was saying in terms of the rest of the business, assuming kind of continuation of the pattern for the first three quarters of the year..

But talking to, particularly in light of recent – some recent announcements from some of the OEMs, maybe it was today. Okay. So, certainly projecting nothing, but weakness at least in the short term from the OEMs.

So, I think that our estimate for agriculture, buried in the estimate is – I think what we've got in there is, shall we say, a highly bankable view of the world, which assumes relatively – I guess, the word of the day is bleak, bleak things from the OEM segment.

So, I would say our range estimate for agriculture is kind of the low-end is built into the estimate. There are scenarios that lead to better. But right now, we have kind of, let's call it, a very conservative view of agriculture built into the fourth quarter and hoping to do better from it. But I think what's in – is an awfully conservative estimate..

Great. Thank you..

Your next question comes from the line of Jerry Revich from Goldman Sachs. Your line is open..

Good afternoon..

Good afternoon..

Hi, Jerry..

I'm wondering if you could talk about the timing of the leaning out of the organization structure, Steve, that you laid out. Some of it sounds like it will be sooner benefit than other pieces.

Can you just calibrate us and the ultimate opportunity once you're through those efforts?.

Yeah. Well, I think we talked about, let's call it, the more tactical cost adjustments in – after both the first quarter and second quarter. I would say substantially most of the work in those has been done. Some will occur in fourth quarter, just some natural legs built in.

I think in terms of this use of the word leaning out, I think that some of this is to portray that over time that the process will continue. So, in terms of organizational realignments, some of those will take more than a year to implement. And so, I think that – there is no endpoint per se in terms of what we're doing.

The $30 million that we talked about in the first quarter and second quarter, I think will – is substantially done, will be fully complete by year-end. But then in parallel, I think there are these more strategic elements that will continue through time. I don't want to get overly precise about how much of the magnitude they will be.

But certainly would like to use the language of operating margin more so than anything else. So, I think we've – last quarter, we laid out a fairly precise path back to 20% during 2016. If you go back more than a year, you've heard about our – you would read about our aspirations to be more than 20%, implying numbers more like 23%.

So, I think that in the longer term, we believe this company is capable of kind of producing margins, operating margins at that level. And so, I think this leaning out process is actually more strategic and kind of leading to an end objective more like that..

Okay. And then Francois, the Engineering and Construction margins were really strong this quarter in a tough end market environment.

Can you just bridge for us the year-over-year drivers of percent margin improvement, while top-line was down and then just touch on it? It does appear like your fourth quarter guidance assumes that margins step back down.

Is that right and any additional color on the drivers there?.

Yeah, so, let me talk about E&C in particular. I mean, yeah we saw a mixture of factors in that E&C, but the building and construction segment, which is mostly software, was particularly strong. So I would attribute a lot of the E&C progress in Q3 to that.

We're starting to see – modestly, we were starting to see positive impacts from Manhattan, which we've talked about and that's going to be more positive next year, but it's getting a little bit better on a year-over-year basis, so that's also helpful.

In terms of the drop in Q4 compared to Q3, so now let's just kind of put Q3 into context that E&C and overall, we have pretty strong margins. If you look at historically, we do see operating margins decline sequentially from Q3 to Q4. It varies from year-to-year; there's some acquisition effects that you've got to factor out, et cetera.

But overall, there's definitely a pattern of reduction. We tend to have low operating expense in Q3 as a result of the summer season, a lot of activities that pick up in Q4. So we've looked at that. We've looked at the gross margins, and essentially – we looked at the gross margins over the last four quarters and took that into consideration.

We do expect a small sequential increase in OpEx from Q3 to Q4, but relative to seasonality factors, again, less of an increase primarily because we have the impact of our restructuring action. So, there's lots of different factors that went into that.

We're very focused on delivering to the guidance or better, but that's kind of how we've built the guidance..

Okay. Thank you very much..

Your next question comes from the line of Andrew Spinola from Wells Fargo. Your line is open..

Thank you. I wanted to ask a question about the business construction sub-segment. That sub-segment has sort of evolved over the last couple of years as you've made some acquisitions.

And I was wondering if we could just step back and maybe talk about that sub-segment and maybe give us a sense of how – what's in there other than Tekla at this point? What are the growth drivers there? Is it low penetration? Is it sort of a cyclical bounce in commercial construction right now? And maybe just from a higher level, what part of that business is software as a percentage and what's the – how much of E&C is business and construction these days? Thank you..

Sure. Probably not going to be terribly helpful in terms of exact percentages at the segment level, but let me try to give you a sense. What we call building construction is actually an attempt to capture kind of a whole work process, from design through build through operate.

So, at the front end of that would be SketchUp, which was acquired from Google a number of years ago, to capture the design or pre-design, for that matter, but more the architect, and taking that information that is developed during the design process into the build with the user being the contractor, whether it be the general contractor or the individual trade.

So within that category, for example, you see we have a mechanical electrical plumbing-focused business. We have a business focus – business element focused on general contractors.

In there, we have more – in between is Tekla, which is really focused on steel and concrete BIM design and then ultimately to enable us to take the data that has been built up during the construction process and deliver it into the operating model.

We acquired Manhattan Software to be the repository for the operators of these buildings that have been constructed. So, I would say that the foundation view of how we view this market is really around information and software, and integrating kind of all these elements through a software platform.

Now, I would say what makes Trimble unique in this category though is the combination of hardware and software and information.

So for example, think of a plumbing contractor installing plumbing fixtures in a building, on a handheld or on a portable tool, drill or some other tool, actually referencing the BIM database, wireless length to the BIM database, and actually doing real-time positioning – where to position the drill bit ultimately, sort of thing.

And that's where you see the relative uniqueness of Trimble is that we've got hardware element, we've got the software element, we can combine those into a common solution for the contractor.

So I think again, probably don't want to quote specific percentage of software, but I would say in the building construction element within E&C, it is significantly software-oriented. That will continue to develop mostly along software, but there are hardware elements of value in there as well.

And as far as E&C, let's say I would, in general, say – well, let's talk in terms of software intensity, so the Mobile Solutions is the most software-intensive part of Trimble, it's just kind of virtually all software. E&C would be next.

Agriculture and the Field Solutions would be – will develop over the next few years and become much more information-centric. But I would say, E&C would be in the intermediate position, kind of among the three large segments at this point in time. But I don't think we want to get in the business kind of quoting specific percentages at this point..

Fair enough. And just one other for me, switching gears a little to ag. With all the commentary around ag, I think you'd made the comment previously that you – you thought 30% for the – that segment was going to be the base for the margin profile.

And I'm just wondering is, I know this is weaker this quarter obviously on lower revenue, but can you help us understand what's driving that, at least in that quarter? Is there any issues around pricing and is 30% still a good baseline for the ag segment? Thanks..

Yeah. So I think that – yeah, certainly margin has been under pressure just because of the scale effect. I would say the core of that segment is agriculture. I think we remain comfortable with 30% operating margins for agriculture, GIS and the other components in that – in that segment are maybe putting some pressure on the segment level.

But I think overall for agriculture, kind of the core of the segment, we still kind of see 30% – our commitment is to 30%. But as far as pricing pressures, no real – no real pricing pressures, no new pricing pressures. Pricing really isn't the dynamic in that market at this point in time. So, pricing is pretty stable.

So, I think it's mostly – margin management here is mostly kind of on the cost side, not necessarily on the pricing side, other than foreign exchange, of course..

Got it. Thank you..

Your next question comes from the line of Ian Ing from MKM Partners. Your line is open..

Yes, thanks, Steve. My first question is on this organizational realignment that you detailed today. You do have this history of tuck-in acquisitions, quite a few. The argument is, these targets have access to more scale and more resources that Trimble has to offer.

But given the challenging environment, do any of these acquisitions stand out, either more on the – a more disappointing side or more surprisingly positive side?.

I think it certainly is a range value of – on a continuum, I would say that we've been pretty public about talking about the challenges of Manhattan Software, which is a relatively sizeable acquisition on our scale, roughly a year ago, and kind of converting deferred revenue into recognized revenue has been the central challenge at Manhattan Software.

So, I would say if I were to kind of construct a continuum here, Manhattan Software, I would not describe it as a disappointment. I would describe it as a challenge. And so, I think it's a strategically sound investment that will pay off, again, in terms of its design, build, operate spectrum.

In terms of – at the other end of the continuum, just to create a range value here, I would point back a few years, I think PeopleNet and TMW have turned out to be a significant combination, acquired separately, but we're integrating the two.

And I would point back to the PACCAR win that we talked about last quarter, as probably not having been possible without that particular combination. So, I think that would be a strong plus.

Tekla has been a strong plus both in terms – from a financial standpoint and in terms of kind of strategic significance about positioning us in a central position in this kind of BIM-oriented world.

SketchUp, acquired from Google has, I would say, not necessarily starting from the big number, but SketchUp has, I think, been a great success arguably with the potential of becoming a phenomenal success in terms of, again, giving us some platforms that we do not otherwise have, such as the three dimensional warehouse, content is working into the mix, in potentially across the company, SketchUp brings that in.

SketchUp brought in kind of a strong three-dimensional platform that augmented Tekla's. And then I think that in terms of access, SketchUp has given us access to potentially every architect in the world, which I think we can leverage. So, I think this is playing out over time.

And I think that one question that would have been very fair of us a year ago would have been, can you really pull these together into one user solution, one coherent user solution? And I think we answered that question relatively strongly earlier this year with the introduction of Trimble Connect, which does tie it all together, which unifies kind of all these product offerings into something that begins to be a comprehensive pool (0:44:55).

And from a market standpoint, that has – is turning out to be very strong reaction there. So, I think again a range value, but I would describe Manhattan Software as a challenge at this point in time, but a number of these have really been strategically transformative..

Thanks for that. And then for my follow-up, what are the different scenarios in the near term for this federal highway bill to progress? It looks like the House completed the markup of their version.

It looks like all political parties want to get some version passed, but there's a lot of uncertainty on how to fund it, how do you see the different scenarios play out and what it means to Trimble?.

Well, I guess, I – for the moment, will more or less defer to the pundits on the issue. I think probably, the actions this morning in Washington were net-net positive to the probability of something happening. But I think that I – here is the case where I – as far as I can detect, everyone in Congress wants to pass a highway bill.

And they are getting hung up primarily over how to fund it and that is looking reasonably etiological at the moment. And so, I'm not in a position to make – make the call in terms of what the probabilities are.

But I would say – I would be more hopeful today than I was two days ago relative to the prospects, but I don't know how to put a weighting on it.

And again, I think that if Congress did pass multi-year funding for the highway bill, it would have a relatively instant impact on Trimble because it would – it would change the investment climate for those contractors who are engaged in highway work.

Right now, they are limping from quarter-to-quarter basically, not seeing a kind of a strong funding path. If they saw in a multi-year funding, there would be something to compete for. The way that they would compete would be through technology.

I think our phones would start ringing within 24 hours or 48 hours of Congress passed the bill and the President signed it..

Thank you..

Your next question comes from the line of Richard Eastman from Robert W. Baird. Your line is open..

Yes, good afternoon.

Steve, could you just kind of talk for a minute or two about the oil and gas exposure and your ability to track that exposure through your Geospatial business, and I guess to a lesser extent the Heavy Civil? But do you – first of all, is there – there's not really a direct number that you can track to the downturn in oil and gas, in terms of where those products go.

But do you feel like you've got a good – your arms around, the secondary impact? And the fact that you commented about calendar 2016 being up kind of low single-digits in Geospatial and Heavy Civil, I mean, do you sense that secondary impact is bottoming here at year-end?.

Yeah, if you heard low-single-digit, I think I said single-digit. So, if you heard low, either I misspoke or you misheard. But I think single-digit and I'm not necessarily characterizing as low-single-digit at the moment, by the way. But, yeah, so there are two – I think, there are two numbers associated with oil price.

And okay, we're seeing it in Geospatial primarily. One is a number we can identify with some relative certainty. And so, in the fourth quarter call last year, you heard us, I think, talking about 1% of revenue or $25 million, maybe $30 million. That is fairly directly tied with the oil industry, which is the use of our stuff in oil exploration.

And so, during the fourth quarter last year, we saw that kind of evaporate in a remarkably short period of time. So, that was a primary effect. We had that one relatively well in hand going into the year, which was kind of $25 million, $30 million. That's gone for the time being.

So, that will be a sustaining effect, that won't – it will recover maybe, but not particularly quickly. The effect that we had less of a handle on, which surprised us a bit was the secondary effect, which was the effect on regional economies, heavily centered in North America. So, places like North Dakota, Parts of Canada, Western Pennsylvania, Texas.

It was the effects on the local economy and just kind of the chilling effect on regional investment in those areas. So, construction activity kind of ceased, the planning for projects ceased simply because the economic basis of those areas dissipated with the kind of the evaporation of the oil revenue.

So, I would argue that we have a relatively good handle on that, it is very much regional. And so, we have – we have done a couple of things. We've redeployed resources, deemphasized in certain regions and putting emphasis on other regions. We have also, within those regions, with our – with our distribution partners, kind of refocused the business.

They had maybe gotten a little complacent and a little too focused on oil as being their mainstay, they are refocusing. So, I think that – when we talk about or not – the lapping effect being effective here. I think we will see that really in the second quarter, partially in the first quarter, but in the second quarter pretty completely.

And so, I think we reestablished a new baseline without kind of the oil effect. So, I think that it's not profound confidence, but we're pretty sure we can grow this business during 2016..

Okay. And then just as a – and as a follow up, as you laid out at the beginning of your comments, you laid out these four cost actions, and I know there's others, but you laid the four out. We also had the $30 million of cost take out that you talked about in the first quarter and second quarter.

And then as we get into 2016, Manhattan will start to contribute more. But I'm curious, all of that said with the same general mid-single-digit core growth expectation.

Are you kind of signaling a more intense focus on driving leverage, on a cost take out? Are we creating some cushion here to where we were just at the end of the second quarter from a cost perspective or am I reading too much into your comment?.

I would never use the word cushion, out loud anyway. But I think directionally, you're not far off here. So, I think last quarter, on kind of a no net revenue increase basis, talked in terms of how we get three margin points. So, that point is the 12 months rolling average on margin, operating margin, non-GAAP operating margin was, I think, 17.1%.

And so, the focus on last quarter's call was, okay, how do we bridge three margin points back to 20% and do it in a fairly responsible, conservative fashion? Certainly, the 18.7% in the third quarter was encouraging in terms of, okay, it seems you're talking about a 1.3 point margin gap and it is three, but back to the three, the source of the three was called a point with some rounding, I mean just the portfolio effect, so there are some things going on in Trimble that we're in the process of cleaning up, but just shutting down non-strategically relevant businesses or selling them or, in some fashion, dispositioning them.

But we figure there is a point there, rounding at least a point there. There is a point – from the $30 million we've quoted, $30 million is roughly a point of margin on revenue. And the other point, some of which should hopefully be relative no-brainer, is the Manhattan effect.

As we structure ourselves to be able to recognize that deferred revenue within Manhattan, that turns into revenue, that will bring a contribution, where there is now just a loss for the Manhattan. So – and plus, I think there was an assumption that, okay, T&L, or the transportation and logistics business will continue.

So, I think those three are kind of the key elements of getting back to 20%. Now if we – in terms of these other elements, I think we will continue to drive on cost and achieving leverage kind of in the categories, a low gross margin, R&D, marketing, selling and G&A.

I think we've got a multi-year history of talking about getting additional leverage out of those categories. So, I think we will keep focused on getting additional leverage out of those. So, I think the – beyond kind of the path to 20%, again, we're looking for savings and opportunities and leverage beyond that as well.

And hopefully, we will produce more evidence of that during 2016. Whether that represents a cushion or not, I guess we're just going to have to see..

Okay. And then just a real quick one for Francois. When you were walking through the E&C operating numbers, you had mentioned acquisitions added about 100 basis points to growth. But I just – kind of estimating the activity you've had over the last 12 months, I would have thought the contribution there was more like $25 million.

So, is there a subtraction there or is this a deferred revenue issue or...?.

It's actually a net number because we also had some divestitures of – and we also have the net impact of the arrangement with Caterpillar which reduced a little bit on a year-over-year basis as well. So, that's kind of a net number that you saw there..

Okay. Okay, thank you..

Thank you..

Your next question comes from the line of Brett Wong from Piper Jaffray. Your line is open..

Hi, guys, thanks for taking my questions here at the end. Just wondering, Steve, I know you've talked a bit about this already on the call.

But as you look at the kind of mid-single-digit expectation for growth next year within the Heavy Civil and Geospatial, can you just talk to your conviction or why you expect that kind of growth given some of the other people in the industry, including your partner in that industry, are expecting kind of a flat to down year next year?.

Okay, well, not sure which partner, but I'll pick two partners, Caterpillar and C&H. And one – so it starts from the premises that we're not an OEM. We sell – we sell ROI, we sell productivity, we sell yield incrementally. So, in effect just saying, okay, what the OEMs are doing is indicative, but not necessarily the total definition of what we do.

And in particular, the two areas we're pointing at most strongly for sources of growth, T&L and building construction are basically OEM-independent, by and large. The PACCAR deal is nice, but we're largely OEM dependent in those two areas where we're expecting to grow.

I think just kind of dissecting numbers, I think Cat has a major exposure to mining, and we don't. So, I think in terms of comparing Caterpillar to us, there needs to be – you need to do some conversions to get apples-to-apples. And I'd say the mining element is one major reconciling item.

I'm not sure what they're saying about their engines business, but that would be another reconciling item. So, I think that the aggregate numbers may not necessarily be particularly comparable. But again, we're talking about single-digit growth in Heavy Civil; we're not talking about anything too aggressive.

And that's, I think, a fairly conservative, fairly well thought out number that does not assume improvement in core markets like Australia or China. So, I think we've thought it through and I would argue the premises that the OEMs are necessarily substitutes for Trimble. Now on C&H, where we – which is our largest OEM presence.

I think they're again, I think are talking about significant drops in demand. And again, we acknowledge that in our agriculture number for 2016, we are assuming a 15% drop in OEM-related sales. What we're saying is that okay, what we've got are new products that are pretty robust. We've got geographic expansion.

So, the situation in North America or Brazil is not being – is not representative of what we're seeing in other places like Europe where we're actually seeing growth in agriculture. And then, I think there is the – we are adding new product categories in ag.

So, the combination of those – we start with a minus 15% for OEM, and I think we have discrete ways to kind of build back towards, let's call it, a flattish number, whether it's plus 2% or minus 2% or some number like that.

I think our point of view is that it's not minus 15%, it's not minus 20%, it's probably not even minus 10%, and that it all works together in there.

And I think the other point is – this is a bad-news/good-news thing, is agriculture is now – you do the weighting – agriculture as a percentage of total Trimble doesn't have quite the same capability of moving the Trimble number around in terms of growth rates that it did a few years ago. So, I think we've thought this through.

I think that we're not enthusiastic, we're not optimistic about the market.

This is not classic Trimble growth that we're talking about next year, but I think we've thought it through, and I think we're putting out what we think is – this economic environment, this market environment that we're looking at, this is what I think we can produce next year..

Okay, great. And I know we're kind of up here against the time, so we can always follow up after if you guys want. Thanks..

Thank you..

Your next question comes from the line of Eli Lustgarten from Longbow. Your line is open..

Good afternoon, everyone..

Hi, Eli..

Actually, Caterpillar is very complimentary of you guys in talking about growth opportunities and getting business as opposed to (1:00:49) as a partner?.

We noticed that..

Yeah. And that – can we talk – I mean, you've gone through a lot of material, market conditions, restructuring and stuff, can you talk about new products development spending and what's going on? In particular, you think about, with a lot of problem to the ag business, the competitive landscape has changed (1:01:15) and you are in the other one.

And you have a lot of new products, you talk about a bunch of new products. Same thing is happening in Mobile – in Mobile Solutions, I guess you had deals with PACCAR. So, obviously, the whole host of suites in the E&C business.

If you can talk about, with all the cutback that's going on, what's your new product spending is doing, development as we look at this year and next year? And are we really – is there a chance that we're looking at maybe some heavier investments next year as market begins to hopefully stabilize or further growth?.

Yeah. So I think the starting from Trimble at the 30,000 foot level is, I think the Trimble model with the composition business as we have in this company at this point in time, I think our general model is that, R&D spending is 13% to 14% of revenue is appropriate now. Okay.

We've got to produce growth rates that are consistent with that number, obviously. But that would be our view at the moment, it's 13% to 14%. And so, I think we're taking the long view. We're taking the long pull on the ore and not kind of – we have thinned out R&D, but mostly with the idea of improving the relative leverage out of R&D.

But the cost cutting we're talking about is not centered on R&D. And again, our view of the world is that Trimble value creation is innovation, plus our domain knowledge equals value to the user. So, we're not going to comprise on the innovation side. So, I think our product flow, the next 12 months, in the next three years, is healthy.

I think the – as I talked about in the script is, I think the nature of it is changing, more software emphasis, more emphasis on system integration, less what's going on base hardware functionality, which is available from the outside. And – but I think that the – if you look at kind of new product introduction, I think we're doing fine.

I would say is that you point out agriculture and I would say that in terms of the combination of hardware, relevant hardware to kind of the information problem on the front, as well as software development, I would argue that we're sitting in a pretty good place there and arguably the same for the mobile and E&C segments.

So, I would – without getting terribly specific to say I think our – we're taking the long view, we're not compromising R&D spending and continual product innovation and an outflow of new products is really part of our basic culture..

Just a quick follow-up. I think during the presentation, you started talking about software subscription and the percent of the business and, I don't know whether I heard 45% or not.

With software subscription, what percent of the sales and business is now and, if you looked out three years, what do you expect that to be for the company?.

Yeah, fair question and, but I don't have a, let's call it, an overly precise answer. I think it will tend to go up, but we're not targeting a number. I think we're really talking about what's necessary to kind of meet the needs of the user as the first priority. And so, I don't think we're targeting a number.

Could I see that number being 20 points higher in a few years? Yeah, I could see that. But I don't think – we're not targeting a number, so I really don't have a number to share with you..

Where is it now, what percentage?.

Well, what we said was the combination of software services and recurring is over 45%..

Okay. Thank you very much guys..

You bet..

We will now turn the call back to the presenters..

Okay. Thanks for attending, talk to you next quarter. Thanks..

This concludes today's conference call. You may now disconnect..