Jerry Revich: Thank you, Rob.
Operator: Your next question comes from a line of Jonathan Ho from William Blair. Your line is open.
Jonathan Ho: Hi. Good morning. Just wanted to get a little bit more color on your thoughts around, I guess, the macroenvironment as it relates to your guidance and the potential impact to, I guess, the organic growth outlook as you start to look to next year?
Rob Painter: Hey, Jonathan. Good morning. It’s Rob. On the macro outlook, well, I’ll start with North America — geographically, North America is the strongest of the overall geographies. Europe is still a challenge, and I think will remain a challenge throughout 2024. So, those are the two major geos that impact the overall business, I would say. Asia Pacific feels a little bit more steady as she goes within that context. Within the vertical markets, in construction, it won’t surprise you that we overall see strength in subsegments such as infrastructure, renewables, data centers, reshoring, onshoring drive positive momentum for the bookings. Residential remains more challenged on a global level, and worse so in Europe. The freight markets which would impact our Transportation business, those remained quite challenged, I’d say — I’d really say globally on that.
I commented already on Agriculture, and we see those macros challenged a little bit more globally as well. The thing I would overlay on top of that, Jonathan, as we think about coming into 2024 is, just how structurally different our business is as compared to the Trimble of old. And so, I think it’s instructive to think about that $1.98 billion of ARR that we closed the year with. And by the way, that’s the way we do that calculation. It’s averaged across the fourth quarter. So, if you took really the contracted ARR, what we ended with, that would even be higher. So, we woke up on January 1st with that visibility and predictability into the business. We know from the bookings that we closed the fourth quarter with, how that helps accelerate that growth coming in.
So, I think it’s an important overlay when we look at the business model. And on one axis — a business models on one axis, and then the overlay of the geographic and end market segments on the other axis to come to a point of view on the macros that support our view on the guide for the year.
Jonathan Ho: Excellent. And just as a follow up, can you maybe help us understand where we are in terms of the distribution partnership realignment? And what does the opportunity look like just given the divestiture coming up and just the changing nature of your positioning within the space? Thank you.
Rob Painter: Jonathan, do you specifically mean Agriculture? Or do you mean distribution realignment across all of Trimble?
Jonathan Ho: The Agriculture segment of it.
Rob Painter: Okay. All right, from — okay. So, from the realignment on a distribution, there’s a few levers there that we work. One is with the C&H aftermarket dealers themselves, and we continue to be able to sign those up as what we refer to internally as retail outlets that work alongside our full-line vantage dealers. So, the sign-ups of the dealers, I’d say, that goes according to plan. And then, with the AGCO realignment coming in with that, I’d say in addition to that, that’s been part of the integration planning work that we’ve got with the team, and we’ve got a clear line of sight now to how we’re going to work with those new partners coming into the mix. So, in terms of the planning work, I would say it’s well underway and it’s what we need to do to get the business off to the start, we would like to see it get off to.
Jonathan Ho: Great. Thank you.
Operator: Your next question comes from the line of Tami Zakaria from JPMorgan. Your line is open.
Tami Zakaria: Hi. Good morning. Thank you so much. So, at the last Investor Day, I think you had a slide, you expected about 20% of revenues transacted through the connected digital platform by 2023, and that would go up to 70% by 2024 and 90% by 2025. I know, you’re hosting another Analyst Day probably this year. So, where are you in that journey now in terms of getting revenues through that platform?
David Barnes: Hey, Tami, it’s David Barnes. One thing I’ll say, just as context, is digital transformations and big process and system projects are really hard, and our experience is no different. We ended 2023 with about 15% of our revenue going through the new digital platform, that’s principally the North American AECO software businesses. We’ve been rethinking the scope and focus of our next phase of digital transformation. We’ll go from 15% to probably closer to 35% here in early 2024, and that involves bringing more of our businesses. So, including the e-Builder and Cityworks suites, and then expanding the AECO effort all over the globe. We’re right now in the process of rethinking how our digital platform interacts best with our hardware businesses and with transportation. So, I’ll be — I’ll hold-off in giving a forecast on how we go from 35% to more of the business. I think, we have a more informed and smarter approach now, and we’re rethinking our priorities.
Rob Painter: And those priorities, if I can add to that to build on David’s comment, is for sure to continue on the software businesses as the priority for the work.
David Barnes: Yeah, that’s right. Rob said in his commentary earlier that the AECO business is the tip of the spear. It’s where we see the highest, most direct early returns through the digital transformation and TC1 and selling bundles. So, that’s where our focus is at the moment.
Tami Zakaria: Got it. That’s very helpful. Thanks, David and Rob. The second question I have is, I just wanted to understand the operating margin guidance for this year better. I think, excluding the Ag JV, it seems like you expect about 80 basis points to 180 basis points of operating margin improvement this year. What is really — what are the building blocks of that? How do you really get there? And also, what is the impact of that 53rd week, if any at all, on that margin guide?
Rob Painter: Tami, I’ll start — this is Rob. I’ll start with giving you perspective, and then let’s have David build on that. I’ll start at the structural level of the company, ending the year at 64.7% gross margin compared to 58% from just five years ago. We look at the operating leverage, we’ve driven over that five-year timeframe, is at 44%. We talked about the bookings progression in Q4, that adds to the ARR, and that contracted ARR that we would have ended the year with coming into the year. So, at a structural level, the baseline of the business is poised to be able to increase the level of gross margin as we continue to grow the business. And you would see in the web tables the difference between the gross margins at the product level versus at the gross — product level versus the subscription and software businesses, and just how much higher the gross margin is in the software-centric businesses.
So, from a straight mix perspective alone, you drive gross margin up. And I’m talking about that structural gross margin because that is a primary driver of what can enable us to drive that operating margin expansion. We also talked about the costs management in the prepared remarks, which is another side of the equation. And David, do you want to build on that?
David Barnes: Yeah. So, as Rob said, structurally, our recurring revenue businesses are higher gross margin, you can see from disclosure, it’s about 80% gross margin on the recurring revenue streams versus about 50% on the product stream. So, a lot of the roughly 100 basis point to 200 basis point margin improvement become — flows directly from the ongoing mix shift of the business. With regard to the 53rd week, we quantified that that’ll have about an $85 million revenue benefit for the year, all in the last quarter. The one thing I’ll say though, is that’s not the only discreet factor that’s impacting our business. As I mentioned in my remarks, our business with big government customers, particularly the U.S. federal government, is lumpy from year-to-year.
We talked about that as being a good factor earlier in 2023. So, that’ll work against us. And then, we’re doing model conversions focused on the software that’s bundled with hardware. So, if you actually take the change in the federal business and the impact of the model conversions added to the 53rd week, they roughly offset each other. So, my way of looking at the underlying growth momentum of the business, I would say the 53rd week is a positive. Those other factors offset that positive and they’re relatively neutral.
Tami Zakaria: Got it. Thank you so much.
David Barnes: Sure.
Operator: Your next question comes from the line of Jason Celino from KeyBanc Capital Markets. Your line is open.
Unidentified Analyst: Great. Good morning, Rob. Good morning, David. This is actually [Devin] (ph) on for Jason today. Thanks for taking our questions. I want to start with the construction software business. Nice to hear bookings growth exiting at more than 30% over there. Really strong results. Maybe looking at 2024, seems like macro could be improving and TC1 really seeing strong traction there. How are you kind of thinking about bookings growth to trend for 2024 and any additional maybe puts and takes you can kind of give us on how the different sub-product group would kind of perform for the year?
