Trimble Inc.
Q3 2016 Earnings Call Transcript

Published: 2 Nov 2016

[Operator:]

Good afternoon. My name is Tasha, and I'm your conference operator today. At this time, I would like to welcome everyone to the Trimble Third Quarter 2016 Earnings 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. Thank you. Michael Lesyna, Director of Investor Relations (sic) [Vice President, Strategy and Corporate Development] (00

[Michael W. Lesyna:]

Thanks, Tasha. Good afternoon, everyone, and thanks for joining us on the call. I'm here today with Steve Berglund, our CEO; and Rob Painter, our CFO. I would like to point out that our earnings release and a slide presentation supplementing today's call are available on our website at www.trimble.com, as well as within the webcast and we will be referring to that presentation today. Turning to slide two of that presentation, I would like to remind you that the forward-looking statements made in today's call and the subsequent question-and-answer period are subject to risks and uncertainties. Trimble's actual results may differ materially from those currently anticipated due to a number of factors detailed in the company's Form 10-Ks and 10-Qs or other documents filed with the Securities and Exchange Commission. The non-GAAP measures that we discuss in today's call are fully reconciled to GAAP measures in the tables to our press release. With that, please turn to slide three for an agenda of the call today. First, Steve will start with an overview of the quarter. After that, Rob will take us through the remainder of the slides, including an in-depth review of the quarter and our guidance, and then we will go to Q&A. With that, please turn to slide four and I will turn the call over to Steve.

[Steven W. Berglund:]

Good afternoon. Our third quarter results were mixed. While we showed progress against last year and continued the trend of revenue growth and margin expansion, revenue was below the expectations we held at the beginning of the quarter with the largest shortfall against expectation being in geospatial, which continues to struggle with adverse market conditions. The worldwide market remains uncertain and comparatively volatile, with some regions providing balance (02

[Robert G. Painter:]

Thanks, Steve. Turning to slide five. Revenue for the third quarter was $584 million, in line with continued year-over-year progression throughout 2016. Top line growth was 4%, with currency translation having minimal impact at the aggregate level; and acquisitions, net of divestitures, contributing less than 1%. Organic growth has demonstrated progression throughout the year, and the third quarter continued that trend. Nevertheless, $584 million was $3 million under our guidance range. In looking at our results by reporting segment, Field Solutions, Mobile Solutions and Advanced Devices, all met or exceeded our top line expectations. Engineering & Construction fell short driven by the North American geospatial market and to a lesser extent building construction in Europe, with an offset of strong performance in our civil engineering and construction business. Our third quarter gross margin was 56.9%, down 50 basis points on a year-over-year basis and up 100 basis points on a sequential basis. Third quarter operating margin was 19%, up 30 basis points on a year-over-year basis and up 280 basis points on a sequential basis. Many businesses experienced operating margin expansion, as our business leaders executed very strongly on cost reduction initiatives. Our net income was up 8% on a year-over-year basis and up 13% on a sequential basis, with earnings per share up 10% year-over-year and 14% sequentially despite the challenging market conditions. Cash flow continues to strengthen in relation to net income, in large part due to the mix shifts we're seeing in our business; and year-to-date cash flow from operations was $282 million. Turning now to slide six and reporting segment commentary, we'll start with Engineering & Construction. Revenue was $332 million, up approximately 2%, with foreign currency translation having a neutral impact and acquisitions having an impact of less than 1%. From an operating margin perspective, we expanded over 300 basis points sequentially, largely driven by cost reduction and expense management. On a year-over-year basis, operating margins were down 30 basis points, reflecting the relative weakness in geospatial. In our Engineering & Construction segment, we talk about the business as the sum of three franchises

[Operator:]

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

[Jerry Revich:]

Hi. Good afternoon.

[Steven W. Berglund:]

Hi.

[Robert G. Painter:]

Hi, Jerry.

[Jerry Revich:]

Rob, you mentioned your deliveries in Field Solutions were ahead of the end market indicators by looks like an 8% to 10% range. I'm wondering if you could just frame for us the drivers of the outperformance? How much of it was new OEM partners and how much of it was new product introductions? Can you give us a sense, even if you're not willing to share the hard numbers, just to calibrate us? And how sustainable that is, the outperformance is heading into the fourth quarter?

[Robert G. Painter:]

Sure, Jerry. So really I would break into two buckets. The first is on geography and market penetration, and the second is the OEM relationships. From a geography and market penetration perspective, like give you an example of South America or Europe, Russia, where we've been seeing a positive year-over-year movement throughout the course of the year. And that continued and in fact accelerated here in the third quarter. So as markets, I'll use Brazil as an example, are adopting technology at an increasing rate, that is a favorable for us. And on the OEM side, we have a couple new OEM relationships which are continuing to grow and provided positive benefit to us in the quarter. So those are really the two main drivers of the outperformance.

[Jerry Revich:]

Okay. Thank you. And then, in Mobile Solutions, we have upcoming electronic logging standards regulations by year end 2017, and I'm wondering if you folks can talk about do you have the overhead, the SG&A investment in place to support a significant aftermarket ramp. And can you talk about the extent to which your backlog is building on the aftermarket side. Is that starting to play out yet?

[Robert G. Painter:]

Yeah. So that is playing out. Throughout the course of the year, we've have a record amount of backlog specifically in our PeopleNet business, which would be the, let's say, the largest beneficiary from the ELD mandate that's coming. So, yes, that is a favorable macro for us and for the business. And then, we are seeing that play out in our backlog. And as it relates to the SG&A investments in the business, or I guess I'd expand that to say R&D investment as well in the business in order to capitalize on the opportunity, yeah, we feel quite strongly that we've made the incremental investments really over the last 12 months to 18 months to get us to the point now to be able to capitalize on this important market opportunities.

[Jerry Revich:]

Okay. Thank you.

[Operator:]

Your next question comes from the line of Jonathan Ho from William Blair. Your line is open.

[Jonathan F. Ho:]

Hey, guys. I just wanted to start with some of your SaaS commentary and I just wanted to understand or maybe quantify this a little bit better. Can you maybe give us a sense of how much of an impact came from, I guess, SaaS selections being higher than you anticipated on the license revenue? And where do you see that recurring revenue headed to over the long run?

[Robert G. Painter:]

So that's a good question. So let me isolate this from what may or may not happen on the hardware side of the business. But it's to say if agriculture – when agriculture comes back and, let's say, comes back strong, that would naturally impact the hardware revenue growth in the business and have an impact in a relatively way to, let's call it, recurring versus hardware in our portfolio. So if we call – we'll just put that aside for a moment and focus on SaaS. I think of it in three buckets. We have current businesses that are converting to SaaS offerings. We have greenfield development; and then we have our ongoing, I'll call it, organic growth from our existing SaaS businesses. So the organic growth from our existing SaaS businesses, think of that as a PeopleNet. It's been a SaaS model. We'll continue to be a SaaS model when that business continues to grow. Greenfield development, that looks like Trimble Connect that Steve talked about and TripInsight that I mentioned in my script. So new products right out of the gate will come from the SaaS. And then, current businesses that are converting to SaaS, a couple of examples to share with you. One would be in our building construction business. Our Tekla Structures product has a subscription offering in addition to a perpetual license offering. So we offer both to customers. And what we're seeing is that a higher percentage of customers are starting to elect the subscription offering. If we look at our TMW business, some of the core products are moving to SaaS, or ALK, where mapping and routing engine is also undergoing a conversion to SaaS. So if you add that up, I would say we're not quite ready to start putting numbers externally out there for the sum of those pieces. What I would guide you to is that they will be increasing overtime. And, again, leaving hardware out of the picture, I think the kind of growth I talked about on a year-over-year growth what's recurring is consistent with the kind of growth we would expect to see going forward.

[Jonathan F. Ho:]

Got it. And then, can you talk a little bit about how quickly some of the initiatives that you're investing in, the opportunities that you define, like autonomy, when will those sort of turn into revenue opportunities? And do you need to make additional investments to accelerate on some these newer growth initiatives?

[Steven W. Berglund:]

Well, some of this is going to play out overtime. So, for example, there are existing revenue streams already in general realm of autonomy. We're currently building modules, component level, subsystem level modules, that are going into, let's call it, early-stage autonomous systems. And so, there are already revenue streams. Now, it's very early days and these are kind of at beta levels. And beyond that, I can't say much more because a lot of these are covered by very tough MDAs. So some of the revenue is already in existence, so the question there is how quickly and how big can it get. Others are, let's just say, we made references in Mobile to drive our user communities and to 3PLs, again, kind of the same stage, which is kind of beta level existence. And so, I think that what we would expect over the next three months to six months is increased market validation with the idea that in the latter stages of 2017, maybe as soon as the second quarter, that some of these start to be worthy of discussion in terms of actual revenue contribution. So I think that really we would expect – there are currently already revenue streams associated with this. So it's not entirely on speculation. But I would say, during 2017 we start to see evidence of more revenue, which starts to actually become more part of the story. And then, I think that the big news on most of these would tend to be more in 2018, but with some validation during 2017. Rob, anything to add?

[Robert G. Painter:]

No. I think that's a good way to characterize it.

[Jonathan F. Ho:]

Great. Thank you.

[Operator:]

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

[Richard Eastman:]

Yes. Good afternoon, Rob and Steve.

[Robert G. Painter:]

Hi, Richard.

[Richard Eastman:]

Very quickly, could you just kind of walk through the margins in Mobile and E&C. And maybe my point is that in Mobile we had 240 basis points of sequential improvement in the op margins, but still maybe I'm not quite where you would like to see them by year end and I think the dynamic on the Mobile side there around hardware versus software sales. I guess the question is, sequentially does the op margin there continue to improve? And then maybe the same question on E&C, just sequential tone because, again, you're not getting the mix benefit in E&C and yet you alluded to more cost take-out. And I thought the 20.8% margin in the quarter was actually quite good without a beneficial mix. So just kind of trends here and how in those two segments of the business we should think about those sequentially?

[Robert G. Painter:]

Sure. So let me start with Mobile Solutions. So, yeah, we would expect to see margin progression as we move forward into the fourth quarter. And, yeah, the dynamics that take us towards that progression really are the same ones we've been talking about through the year is that cumulative subscriber base, customer base growth; and that's the software portion of the revenue stream. That starts to, let's say, outweigh the hardware installs that we've been working our way through throughout the year. Of course, we'll continue new hardware installations on an ongoing basis, but the size of the pie we see it playing out in a favorable way that continues to expand margin as we move into the fourth quarter in Mobile Solutions. And we also do have a couple of large customer contracts that, let's say, will be implemented and fulfilled or were planned to be implemented and fulfilled in the fourth quarter which have very high margins associated with them. So when we put those factors together, that gives us the continued conviction in Mobile to be able to expand our operating margin. If I got to E&C and the expansion of operating margin, there actually is a bit of a mix impact in E&C in the fourth quarter. And that is if you take the three primary franchises, geospatial, civil engineering and construction and building construction, building construction typically has one of its stronger quarters in the fourth quarter, particularly in a couple of the larger divisions within that business. And as that is a highly software-centric business, it does come with associated higher margins. And so, that for us would be a part of – actually really the primary driver of margin progression that we would expect to see in the fourth quarter.

[Richard Eastman:]

I see, okay. And then just one last question, a follow-up question. Steve, some of the infrastructure companies out there, Martin Marietta or Vulcan, some of these guys are expressing some solid optimism for 2017. Part of it could be election-related, part of it is just fast money. But I'm curious if you by any chance – do you share any optimism for 2017 when you look at the geospatial business or even to some degree the North American heavy civil business, the backlog, order tone, anything there?

[Steven W. Berglund:]

Well, we remain largely a book and burn business. So any optimism we may have would not be in the form of kind of backlog.

[Richard Eastman:]

Okay.

[Steven W. Berglund:]

Possible exception maybe being Mobile Solutions. So they may be in a better position to judge 2017 simply because they may have more metrics to look at. I would say is that, if you look at tone, the tone of this call is somewhat more cautious than the tone of the last call simply because I think we're seeing just more uncertainty in the U.S. And I chalk it up to, at least for the moment, as being kind of election uncertainty in terms of it's not clear kind of what policies will be in effect in a few months, or necessarily kind of what the likelihood for infrastructure spend is going to be. Now, if you look at what's being said is everybody is bullish on infrastructure spend. And the question is going to be whether there is a political ability to actually transform that into real spending. So I think on the one hand, given the semantics of the moment, I guess I would be optimistic is that the one thing where there seems to be bipartisan agreement is to spend more money on the infrastructure, which of course will benefit us. And so, I would say on that level, yeah, I would be optimistic. But, again, I think given the signs that we're seeing in the market, which is on a relative uncertainty compared to three months ago, I think our posture is to wait and see and get some real facts and probably talk more about what we see in three months. But for the moment, particularly in geospatial and I think that the other participants in our industry are kind of reflecting the same tone, it's just there is an awful lot of uncertainty at this point in time and I think we need to wait for that to dissipate before we have something concrete to say.

[Richard Eastman:]

Got you. Okay. Thank you very much.

[Operator:]

Your next question comes from the line of James Faucette from Morgan Stanley. Your line is open.

[James E. Faucette:]

Thank you very much. I wanted to ask a question on how you think about what the right investment levels are for the hardware pieces you are retaining in it? And, I guess, really at the root of the question is, are you running OpEx levels that are sufficient for more possible product cycles?

[Robert G. Painter:]

You are breaking up a little bit, are you asking about the level of hardware investment we're making?

[James E. Faucette:]

Yeah. That's right. Sorry, if I was breaking up. Yeah. Just I'm trying to get a sense if you feel like the investment levels in hardware appropriate right now. And if you can continue to make those investments that you need at the OpEx levels you're targeting?

[Robert G. Painter:]

Yeah. So the short answer is, yes, we feel the investments we're making in, I would say really R&D in aggregate for the company are in line and sync with the opportunity that we see in the near-term and near, mid, and long-term. And if you breakdown the investment we make in our more hardware-centric businesses versus our software-centric businesses, you could see metrics play out such as a percent of revenue that you put in the software company versus our more hardware-oriented businesses. So it plays out like you would expect. In other words, it's higher in the software businesses. But to turn back to your question, I think, it's important to note a couple of things that I'll highlight. The first is in our geospatial business, which is primarily a hardware business. And so, having product innovation is imperative to rejuvenating the portfolio and getting the business back into growth mode. And so, those product launches that I talked about are a reflection of the investment we've been making in R&D. The second example I'd give you from civil engineering and construction business, which is also predominantly a hardware business. I would look at the performance or the investment we make in our joint venture – actually plural, joint ventures – with Caterpillar, which are quite significant and I think by a good order of magnitude the largest in the industry with respect to investing in machine control technologies.

[James E. Faucette:]

Great. And then, I guess kind of a bit of follow-up to that is like how are you measuring I guess perhaps the lack of impact from the FAST Act versus maybe they're just a lengthening of replacement cycles for hardware generally? I mean, any specifics or metrics that you can point to how you've measured the impact to those kinds of programs in the past? Thanks a lot.

[Robert G. Painter:]

Yeah. So it's a good question and I guess I would say I wish I could provide you some magic insight into the impact of the FAST Act and what it means for our business. As we've said earlier in the year, we viewed that as instilling some confidence in the system that there was going to be investment there, but some of that optimism does seem to have dried up to an extent over the last few months. And I would probably sort of harken back to what Steve said a few minutes ago about let's let this election dust settle and then see where we come out.

[Operator:]

Your next question comes from the line of Colin Rusch from Oppenheimer. Your line is open.

[Kristen Owen:]

Hi. Thanks for taking my question. This is Kristen on for Colin. I just wanted to talk a little bit about you're seeing in your various channels here, the ISM numbers out today suggest we are seeing a little bit of a buildup in inventories. So can you just speak to what you're seeing across the various channels?

[Steven W. Berglund:]

And do you mean specifically our distribution channels or...?

[Kristen Owen:]

Yes, yes.

[Robert G. Painter:]

Okay. I got you. Well, from an inventory, let's say, load perspective in our dealer channels, I would say we don't see our dealers being long on inventory at the moment. So if we were talking about some of the – let's say, OEMs might talk about their production versus retail demand, and that's really not a dynamic that plays out for us in our business. So in an aggregate sense, we feel good about where the dealers are positioned with their level of inventory now and don't see them as being overly long on inventory.

[Kristen Owen:]

Okay. And then just switching gears a little bit, I wanted to talk about capital allocation. Obviously, M&A has been a little bit lighter than we've traditional seem to-date. We've seen you back in the market with buybacks, you've got a pretty low leverage ratio. Can you just talk about how you're setting those priorities for capital allocation if we are bracing for this continued macro sluggishness?

[Robert G. Painter:]

So our capital allocation approach really remains the same. As we talked about, our cash flow does continue to be strong. And our first priority really is in continuing to invest in our business, whether that's organic, let's say, primarily organic investment in the business; and in addition, M&A activity. So as you noted and as you've seen, the acquisition activity has been light this year, but I would say we expect to see some more activity there in the not too distant future. So we balance that investment, whether that's organic or inorganic, along with the opportunity to do opportunistic share repurchases. And really if I look at our CapEx level in Trimble, it's generally quite light. So that's usually not a huge factor for us in the capital allocation equation. And to your last point about if we were to see, let's say, the economy, let's say, I guess take a turn for the worse and I think given, like you said, our leverage ratio, we think we're in quite a nice position to weather a storm if there was one to come.

[Kristen Owen:]

Great. Thank you very much.

[Operator:]

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

[Brett W. S. Wong:]

Hi. Good afternoon. Thanks for taking my questions. First, I was wondering if we could talk about the margin a little bit. Just wondering if you can quantify how much margin expansion you continue to see from the internal initiatives such as ongoing cost reduction, portfolio rationalization, as we look into 2017? And, Rob, you spoke about the 20% adjusted operating margin still as a target. Any idea on timing in that. Obviously, you look to 2017, but is that mid 2017, end 2017, just any idea there is helpful?

[Robert G. Painter:]

So on the op margin and 20% as we move into 2017, I think it's best to anchor with Steve's commentary that we'll hold off for the election dust to settle before, let's say, painting a view forward into 2017 relative to our view on timing of that margin. And I would really say, if not we'll backup from that and look at a couple of the factors. We'd be looking at our revenue growth assumptions, as well as our level of investment and our operating expenses and therefore the ability to generate operating leverage on that revenue growth. And so, really, I think at a high level think about revenue growth in kind of three different – call it, three different scenarios. If our level of revenue growth consistent with what we've seen this year, year-to-date, maybe a slight step-up from that, call that a mid assumption. Then you would have a level of revenue growth that would be below that and a level above that. In all scenarios, achieving operating leverage is really foundational to the strategy of the company. The level of operating leverage which you can achieve does correlate highly or at least reasonably highly to which tranche of that revenue growth is going to be available for us in the market. So it's kind of our, let's say, mental framework at a high level for how we'll think about planning the business as we go into 2017. And I hope here in the next, well, I guess really weeks that we'll start to have a little bit more insight into the market that will give us, let's say, a more definitive view that we can talk about with respect to 2017. Brett, did that answer your question or did you have something else?

[Brett W. S. Wong:]

Year. No, no. That's helpful. Just one more question, wondering on the ag side, you spoke about regional growth and strength. But can you talk about in a little more detail in terms of adoption or the ramp-up of new offerings specifically looking at here in North America? And if you've seen strength from some farmers adopting some of those new technologies or new offerings, I should say?

[Robert G. Painter:]

Sure. So, yeah, I mostly talked about geographic – I am going to talk about geographic growth and growth with OEMs in the business. Really, a third one that I should have talked about earlier would be in the area of those new product offerings; and what I'm getting at there is the software portion of the ag business. So if you think about maybe in a simpler ag level sense, we create the digital prescription for the farm and we do that on our AGRI-DATA platform, so with our software. And then that goes to the physical – out in the field, right, to the tractor to be implemented. That's the strategy laid out is to create that prescription, and then get it to the equipment in the field and then you'll be able to create a feedback, which then enables ongoing analytics. The software business is continuing to, let's say, perform to our expectations. Those expectations will only get bigger overtime. And we're encouraged with what we're seeing in that business so far. And as Steve mentioned, bringing all our software entities in agriculture into one team under one leader, we think, creates the organizational context in order to execute upon the strategy.

[Brett W. S. Wong:]

Great. Thanks so much.

[Operator:]

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

[Eli Lustgarten:]

Thank you. Good afternoon, everyone.

[Robert G. Painter:]

Hi, Eli.

[Eli Lustgarten:]

A little bit of clarification question, so I understand it. You mentioned in your prepared remarks and it came up in a question about a bunch of big contracts, I guess, in Mobile that are going to be booked and shipped, it sounds like, in this quarter. And I wonder if you can quantify that, because I'm really talking about thinking of 2017. And 2017 has a big hardware electronic device ramp-up also, and just wondering if we look at whether in that business – I understand the forecast – (01

[Robert G. Painter:]

Sure. So in terms of order of magnitude and what I was referring to in guidance with discrete number of contracts, thinking in terms of low millions, low single-digit millions of dollar. And so, that's kind of the order of magnitude we're talking about. And then, to put further I guess color on that, our offerings in Mobile Solutions cover fleets, enterprises, mobility applications, and the deals I'm referring to are in our enterprise side. So in other words it's really quite centric to our TMW business doing the – think of it as the ERP for the transportation company. And those can be larger deals with larger implementation cycles, and those implementations would come due here in the quarter so that we could be able to recognize that revenue. You need the customer sign off in order to do that, and getting that is a part of the guidance that we've provided. So that answers the first part of your question. The second part related to we move into next year and what ELD will mean to the business and what it could mean to the hardware margins. It's a good question. From a modeling perspective, yes, of course there is a dynamic of the amount of hardware demand that we see and what that will do to the margins in the business. And one of the things that we've – there's, well call it, a put and a take of the ELD mandate. The very favorable thing, the advantage here is that it's providing tailwinds to our business. In reality, yes, is also providing tailwind to newer entrants and to the market. So that hardware space of the business is a competitive space and would naturally then provide some, let's say, at least challenge to the hardware margins or at least throttles your ability to, let's say, price on the hardware. So we are conscious of how that will play out during the year and I think ultimately see what the demand is for which level of product we have, because we have solutions that are actually quite simple, that would be on the simple side, which would be cheaper. And then, we have really the higher end, let's call it, the fully capable, most capable solution steps that are in the higher end of the spectrum. So there is a mix within the offering that we have that will guide where the margins go. So we don't know exactly, of course, how that's going to play out yet, but we know the dynamics and the levers available.

[Eli Lustgarten:]

Sure. But it wouldn't be unreasonable to think of maybe more top line and margins don't expand as much because it's hardware mix. Is that a fair scenario for next year in that?

[Robert G. Painter:]

Yes. That is a possible scenario.

[Eli Lustgarten:]

And then a further question. As part of your ag offering, you now have a partnership with Deere. So can you talk a little bit about what you're doing with Deere, is there a materiality to that stuff? Are you just providing software because there is a lot of aftermarket on the product. How does that work, I mean, Caterpillar is a fabulous deal that you, but I'm just trying to understand what you with Deere who is your competitor at the same time?

[Robert G. Painter:]

So, fundamentally, it's about interoperability of data. We talked about creating the prescription for the farmer with our ag software and the ability to get that out to the field and to the equipment. That could be equipment that's operating Trimble technology on it, or it could be equipment that has John Deere equipment on it. And whether it's a farmer or a construction company, mix fleets are a reality in the marketplace. So having that we think is an important relationship to have them.

[Eli Lustgarten:]

Is it a hardware supplier or a software supplier or both? I am just trying to understand what...

[Robert G. Painter:]

No. It's really software, it's APIs.

[Steven W. Berglund:]

And, Eli, probably the other point of distinction here is, there are really two different sorts of relationships available here. One on the agriculture, which is obviously pretty limited just because the stance there is mostly competitive. On the construction side, there is a much wider opportunity for collaboration there.

[Eli Lustgarten:]

Okay. And one final question, I mean, the Caterpillar dealers love your product or something. I mean, are we looking at ramping up or an expansion requirements in that part of the business as the Caterpillar deal is continuing to fall in love with your JV and your controllers?

[Steven W. Berglund:]

Given that we have two joint ventures with Caterpillar, I would prefer to say absolutely nothing and they would probably – it's a joint message to put out there.

[Eli Lustgarten:]

Not a problem. Thank you.

[Operator:]

Your next question comes from the line of Jon Fisher from Dougherty & Company. Your line is open.

[Jon Fisher:]

I have two questions. The first one, given your cautious tone and concerns on the North American, particularly U.S. market, I mean, given how well Europe, ex-UK, Latin America and Asia performed in Q3. What's your confidence in the sustainability of the non-North American geography performance and should we be concerned about those markets rolling over, whether it's Q4 or early part of 2017? And then the second question is, the Manhattan Software acquisition, why is that – continue to still be an issue? And if I remember correctly that was a UK-centric acquisition I believe. How much of the issues in the UK are actually directly related to Manhattan Software? Thank you.

[Steven W. Berglund:]

Well, let me maybe tackle the first and let Rob handle the second, which is again there's the scenario for every – yeah, there are any number of scenarios we could create for kind of what's going to happen with the world. Does Brexit somehow freeze up Europe, and all of this? And does Brazil in particular carried through with kind of a reform minded regimen and all of that. So there is lot of uncertainty out there. I would basically say that if you look at Russia, if you look at Australia, if you look at Brazil, if you look at a lot of these economies that we're pointing to as recovering, and I guess I would throw Spain, Iceland, Ireland into that category as well, basically these are bouncing off of a very rough foundation. Some of this goes back to kind of 2009. So, I would say, we've been through the kind of I guess, I could characterize it as a cyclical downturn. We hit bottom, we hit bottom pretty hard particularly in places like, well, any of those in fact. And so, I think these recoveries are not exactly rocket shifts at this point in time, I think they're comparatively modest recoveries that are founded in fundamentals and not necessarily speculative bubbles or anything else. So I would say is, yeah, with the conditionality that there are lot of moving parts out there at this point in time and a lot of things could happen to the downside, I would say is, I would look at these pretty favorably as being potentially lasting for years and pretty sustainable. So I would say is, the central questions at this point in time are U.S. simply because we've seen this uncertainty kind of come into the markets that really wasn't there three months or six months ago, and kind of the UK, specifically around Brexit. And frankly, the UK early part of the year was very strong. And then it was really the second quarters and third quarters where we saw kind of a screeching halt. So that's leaves us to believe that was very much Brexit directly or indirectly centered. I'll let Rob take a try in the Manhattan question.

[Robert G. Painter:]

Yeah, let me answer the Manhattan question or address the Manhattan question. I'll try and do a fast version as we're kind of – I think we're over time. So to put our areas of emphasis in Manhattan in the context, I think one has to understand the underlying business model and there is a few product lines in Manhattan Software, the biggest two of which are Integrated Workplace Management Solutions, as well as space management. And when we sell that Integrated Workplace Management Solutions, it's called IWMS, and we're selling a solution that's got a seven-figure price tag typically and it has a long implementation cycle. That's typically weighted towards implementation by around professional services, resources. And so, when we put that context into a public company GAAP accounting, we and myself included underestimated the impact of that and that has us accordingly focused on three topics. The first of which is operational improvements. So move clients to a world-class hosting facility and we are increasing the utilization of our professional services, resources. And one of the way we'll increase the utilization of these resources is by increasing the product configurability versus the customization of the solution. So the more it's configurable, then the faster you can recognize revenue and the easier it is to engage within that work of implementation partners. The balancing act though is that we have some of the biggest logos in the world as customers and they've got demanding requirements. The second is completing a couple of discrete large implementations. But, again, those provide us with great logos and they've also been long-standing engagements to complete. So the faster we can get through this implementations, then that's the quarter we can get to our existing backlog. And then the third area is that of managing the business model. We've got to continue to build the backlog. We are continuing to the build backlog. And the business of backlog we think is healthy in the business, so that we can continue to have a business that grows overtime. The second is in the area of cost reduction, and we have made cost reductions in that business so that we can operate within the framework of what our short-term reality is in. And then we also looked at complementary metrics for the business. So whether that's cash flow, billings, deferred revenues, so that we take a full scope view of the business. And to your question about how much of that is UK impacted. There either would be a minor impact, but I wouldn't call it a fundamental impact as that business is a global business.

[Jon Fisher:]

Thank you very much.

[Operator:]

That is the last question. I would now like to turn the conference back over to Michael Lesyna.

[Michael W. Lesyna:]

Thank you, Tasha, and thank you everyone for attending today's call. And we look forward to speaking with you again next quarter.

[Operator:]

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