Trimble Navigation’s (TRMB) first quarter earnings exceeded the Zacks Consensus Estimate by 2 cents, or 4.5%. Both GAAP and non-GAAP earnings were at the low end of management expectations.
Seasonality typically causes huge sequential fluctuations in both revenue and margins. As a result, management generally compares results on a year-over-year basis. We have included sequential comparisons, where required.
Revenue
Trimble’s first quarter revenue of $384.3 million was up 18.8% sequentially and 20.5% year over year, exceeding the high end of the guided range of $370-375 million (up 14-16% sequentially, up 16-18% year over year).
While the weakness in U.S. commercial and residential construction continues to impact Trimble’s business, other areas have started to pick up. Trimble has also made a number of acquisitions in recent months, which are helping to build the product portfolio and position the company in markets with better growth prospects.
Revenue by Segment
E&C unitrevenue of $190.0 million was up 3.6% sequentially and 20.6% year over year. E&C usually witnesses strength in the first two quarters of the year and declines in the next two. The most important markets within E&C are heavy and highway, large-scale commercial, smaller-scale commercial and housing in that order.
Of these, only the heavy and highway construction business showed strength in the last quarter and survey work was robust. SITECH channel development made progress in the last quarter and Trimble stated that the company was on track to complete implementation by early next year. Commercial is improving very gradually and residential is likely to remain lumpy in the near term.
There appears to be a growing awareness regarding the state of domestic infrastructure, which given the productivity enhancements offered by Trimble products could result in strong revenue growth in the future. At the same time, infrastructure build-outs in emerging economies are likely to be a further boost to results.
TFS revenue of $123.1 million was up 64.4% sequentially and 28.3% from last year. The segment, which is largely driven by the agricultural market, is particularly weak in the second and third quarters, with revenue stabilizing in December and jumping up in March.
Therefore, results in the last quarter were in-line with normal seasonality. Trimble stated that the revenues in the last quarter were helped by both the agricultural and geographic information systems (“GIS”) sides of the business.
The growth in the agricultural business was helped by new products and a global strengthening of the agricultural economy. New products helped drive GIS sales, which did however see hurdles in the form of budgetary constraints at both state and local levels.
TMS revenue of $44.4 million was up 9.9% sequentially and 17.0% from the comparable quarter of 2010. The segment remains a drag on Trimble’s results, despite the fact that the company is beginning to see some success in terms of revenue.
Trimble is increasing its focus on international markets, where there is a growing demand for its products. It is also seeing increasing demand at U.S. companies. Some of the recent demand comes with initial high costs that Trimble expects will leverage results in the second half.
The AD segment generated 7% of revenue, up 8.4% sequentially and down 2.7% from a year ago. The segment has not been performing too well in the recent past due to weaker sales of embedded products. Growing international exposure and new deal wins are positives however.
Revenue by Geography
North America remains the largest segment for Trimble, with a 50% revenue share. Revenue from the region was up 21.3% sequentially and 9.5% from the year-ago quarter, reflecting a recovery in the market.
Europe was stronger, with a 26% revenue share. Sequential and year-over-year revenue increases in the region were 34.3% and 49.1%, respectively. Other than the fact that the European economy is also on the road to recovery, Trimble’s business is supported by a number of acquisitions here.
The Asia/Pacific accounted for 15% of Trimble’s revenue in the last quarter, declining 1.0% sequentially, although staying flat (up 0.4%) year over year, due to the success of targeted programs in China and India, as well as geographic expansion over the last few months.
The rest of the world contributed 9% of revenue, up 7.0% sequentially 80.7% year over year.
Margins
Trimble’s pro forma gross margin for the quarter was 51.8%, up 128 basis points (bps) sequentially and 11 bps year over year. Gross profit dollars grew 21.9% sequentially and 20.7% from last year. Management stated that the primary drag on the gross margin was the Mobile Solutions business, where Trimble had won a few agreements requiring the sale of low-margin hardware in the initial stages.
Management said that this gross margin phenomenon was a short-term affair and the subscribers that were being signed up would generate high-margin subcription revenue in the back half of the year.
Trimble reported operating expenses of $135.7 million that were flattish sequentially and up 19.6% from the year-ago quarter. The operating margin was 16.5%, up 778 bps sequentially and 36 bps year over year. All expenses declined as a percentage of sales although S&M (down 313 bps) and G&A (down 203 bps) were the biggest drivers.
Trimble stated that forex and acquisitions accounted for 1.4 percentage points of margin in the last quarter. However, S&M expenses increased 33 bps from last year, while all other expenses declined.
The GAAP operating margins by unit were E&C 12.0% (up 18 bps sequentially), TFS 42.7% (up 652 bps), TMS -3.0%(down 234 bps) and the AD segment 14.4% (up 47 bps). TFS was the only segment with significant expansion from the year ago quarter. Segment operating margin went up 168 bps, E&C followed with an expansion of 5 bps. TMS and AD were down 801 bps and 600 bps, respectively.
The improvement in the TFS margin was attributed to higher volumes. The negligible movement in the E&C operating margin was on account of the increased operating leverage in the segment being offset by higher investments related to the Virtual Site Solutions JV with Caterpillar Inc. (CAT), higher marketing expenses related to trade shows, foreign exchange impacts and acquisitions. The Mobile solutions margin was impacted by weaker gross margins as discussed above.
Net Income
The pro forma net income was $57.6 million, or a 15.0% net income margin compared to $44.7 million, or 13.8% in the previous quarter and $40.1 million, or 12.6% net income margin in the prior-year quarter. The pro forma calculations in the last quarter exclude restructuring charges, amortization of intangibles and acquisition-related costs on a tax-adjusted basis. Our pro forma estimate may not match management’s presentation due to the inclusion/exclusion of some items that were not considered by management.
On a fully diluted GAAP basis, the company recorded a net profit (for Trimble shareholders) of $39.7 million ($0.32 per share) compared to $36.6 million ($0.29 per share) in the previous quarter and a net profit of $27.9 million ($0.23 per share) in the prior-year quarter.
Balance Sheet
Inventories were up 5.3% to $203.0 million, with annualized inventory turns going up from around 3.3X to around 3.7X. Days sales outstanding (DSOs) were flattoish at around 63.
Trimble generated $27.9 million of cash from operations and spent $39.0 million on acquisitions, $4.0 million on capex and did not repurchase any shares in the last quarter. The cash position at quarter-end increased $23.6 million during the quarter to $244.3 million. The net cash position at quarter-end was $91.0 million, up $23.4 million in the quarter.
Guidance
Management expects first quarter revenue of $391-396 million (up 2-3% sequentially, up 17-19% year over year). Earnings on a GAAP basis are expected to be 35-37 cents per share and on a non GAAP basis, 50-52 cents per share.
The one-time charges excluded for the calculation of non-GAAP EPS are amortization of intangibles (approximately $16.0 million) and stock based compensation ($6.8 million). Both the GAAP and non GAAP EPS use a tax rate of 15-17% and a share count of 126.8 million.
In Summary
Trimble is seeing much stronger end markets and a few of its businesses have started seeing normal seasonality. Additionally, management initiatives, such as the lowering of the cost structure, strategic acquisitions, product enhancements and international expansion appear to be paying off.
The softness in certain areas of the business is related to macro concerns and nature of new business acquired and we are optimistic about improvements in the back half of 2011.
The Zacks Rank on Trimble shares is #3, implying a short-term Hold recommendation.
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