Trimble Beats, Outlook Cautious – Analyst Blog

Trimble Navigation’s (TRMB) first quarter earnings exceeded consensus estimates by 3 cents. While GAAP earnings also exceeded management’s expectations, non-GAAP earnings were at the high end of management’s guided range.

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 of $319.0 million was up 14.9% sequentially and 10.4% year over year, exceeding the high end of the guided range of $308-313 million (up 11-13% sequentially). Trimble’s recovery remains slow and uneven, with E&C, the largest segment continuing to be impacted by the recession and technology spending in other areas also remaining limited.

E&C unit revenue of $157.6 million was up 2.1% sequentially and 23.5% year over year. E&C usually witnesses strength in the first two quarters of the year and declines in the next two. The weaker-than-seasonal sequential improvement is attributable to the still-weak economy as related to the markets served by the company. The most important markets within E&C are heavy and highway, large-scale commercial, smaller-scale commercial and housing in that order. Trimble did see some recovery in its heavy and highway business, although the weakness in survey instruments was disappointing. Commercial is expected to remain weak for the rest of the year, as spending in this area is improving very gradually. However, there could be some improvement in the residential market, given early signs of recovery. The recession continued to impact European markets, while other international markets performed better. China remained a source of strength in the last quarter.

TFS revenue of $95.9 million was up 67.8% sequentially and down 3.3% from the first quarter of 2009. 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, the sequential increase in segment revenue was mostly in line with normal seasonality and the decline from the year-ago quarter was due to the recession, which resulted in a lower level of sales over the past few quarters. Geographic information systems (GIS) revenue, on the other hand was soft, impacted by lower government spending. North America, Brazil and Europe were sluggish for the company, with the performance in Australia somewhat stronger.

TMS revenue of $38.0 million was flat sequentially and down 0.9% from the comparable quarter of the prior year. The relative softness in this segment is largely on account of the impact of the recession, which prompted some fleet owners to cut the size of their fleets. Some decided to stop deploying Trimble products, which resulted in high churn rates for the company. Trimble lost a significant customer, which chose to deploy a product developed internally. Although small and medium customers have started showing interest, it is unlikely that there will be any major improvement in the near term.

The AD segment generated 9% of revenue, down 2.1% sequentially and up 15.4% from a year ago. Although the segment has been on a decline in the recent past due to weaker sales of embedded products, growing international exposure and new deal wins are finally contributing to growth. The opportunity pipeline is encouraging, so we could see some encouraging growth off a relatively small base.

North America remains the largest segment for Trimble, with a 55% revenue share. The market was up 26.4% sequentially and 4.7% from the year-ago quarter. Growth may be attributable to pockets of strength in the E&C business, as well as seasonal improvement in the agricultural sector. Stimulus-driven spending did not take place, according to management.

Europe was particularly sluggish, with a 21% revenue share, up 5.0% sequentially and 0.8% year over year. The company has increased its footprint in the region and an economic recovery should boost sales.

Asia/Pacific was 18% revenue, increasing 8.9% sequentially and 41.9% year over year, driven by product and geographic expansion, as well as new programs in China and India.

The rest of the world contributed 6% of revenue, down 13.8% sequentially, but up 32.5% year over year.

The pro forma gross margin for the quarter was 51.7%, up 215 basis points (bps) sequentially and down 34 bps year over year. The sequential increase was due to the continued investment in technology by larger customers, which could help them increase efficiencies. The decline from the year-ago period was partly due to pricing pressures and partly due to the weaker mix of survey business, which typically carries higher gross margins.

Operating expenses of $113.5 million were up 4.1% sequentially. The operating margin was 16.1%, up 587 bps sequentially and 169 bps year over year. Management’s restructuring actions have significantly lowered the cost base, which helped the positive compare with both the previous and year-ago quarters. Specifically, COGS as a percentage of sales was down 215 bps sequentially, S&M down 196 bps, R&D down 149 bps and G&A down 27 bps.

The GAAP operating margins by unit were E&C 11.9% (up 190 bps sequentially), TFS 41.0% (up 1,324 bps), TMS 5.0% (down 600 bps) and the AD segment 20.4% (up 764 bps). On a year-over-year basis, the E&C margin was up 997 bps and AD up 235 bps, while both TFS and TMS were down. The improvement in the E&C margin was the combined effect of higher revenue and lower expenses. Volumes and mix were the main reason for changes in the TFS margin. Mobile solutions margin was impacted by product mix and weakness in public safety sales. The AD segment margins benefited from both a stronger mix and a lower cost structure.

 Net Income

The pro forma net income was $40.1 million, or a 12.6% net income margin compared to $20.9 million, or 7.5% in the previous quarter and $30.4 million, or 10.5% net income margin in the prior-year quarter. The pro forma calculations in the last quarter exclude restructuring charges, acquisition-related costs and amortization of intangibles 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 $27.9 million ($0.23 per share) compared to $9.5 million ($0.08 per share) in the previous quarter and a net profit of $17.2 million ($0.14 per share) in the prior-year quarter.

Inventories were up 4.6% to $150.7 million, while annualized inventory turns were up slightly from around 3.9X to around 4.1X. Days sales outstanding (DSOs) went up slightly from around 67 to 68.

Cash generated from operations was $55.0 million, similar to the previous quarter. The company ended with a cash and investments balance of $307.1 million, yielding net cash position of $122.8 million. This compares to a net cash position of $122.8 million in the previous quarter. The company spent $21.6 million on acquisitions, $5.3 million on capex and raised $9.2 million through the issue of common shares. There were no share buybacks.

Management expects first quarter revenue of $320-325 million (up 0.3-1.9% sequentially). The midpoint of the guidance range is expected to bring GAAP earnings of $0.22-$0.24 per share and non GAAP earnings of $0.34-$0.36 per share. The one-time charges excluded for the calculation of non-GAAP EPS are amortization of intangibles (approximately $13.9 million) and the impact of stock based compensation ($5.6 million). Both the GAAP and non GAAP EPS use a tax rate of 28-30% and a share count of 124 million.

The outlook remains cloudy to a large extent and although management has taken necessary measures to cement relationships, enhance product value and lower the cost structure, the company continues to face issues related to its specific businesses. A silver lining is the fact that government stimulus spending is yet to impact results, so there should be some improvement once that kicks in.

We reiterate our Neutral rating on Trimble shares.