Rob Painter: Devin. Hey, good morning. This is Rob. Let me give you my perspective and thoughts on the bookings opportunity we have within the AECO software business. And this is a business now that comes into the year with, call it, in the range of $1 billion of ARR to start with, so of the company’s, call it, $2 billion of ARR. So, we’re talking some law of large numbers to continue to grow at that double-digit ARR clip, and we have to continue to be able to book at a healthy level. And all of 2023 was evidence of that, and accelerated even into the fourth quarter of 2023. So, we come in with some momentum and confidence around that. The color I’d like to put around that with Trimble Construction One is that it unlocks the cross-sell and up-sell by putting in place a framework that allows our customers to easily scale with us, that in turn unlocks our bundles and the offerings that meet the customers’ needs.
And so, that then creates an environment where inside the company, we’re working together to help scale a customer’s usage of our products with a lot less friction that they would have had in the past. And we’re seeing faster times to close deals. We’re seeing a greater share of wallet share captured when a new logo enters our ecosystem. And one of the things we said in the prepared remarks was that our TC1 agreements have now accelerated to make up 50% of the bookings that we had in the fourth quarter. And those agreements are the basis that powers that cross-sell penetration and that made up 25% of the fourth quarter bookings that we had. Coming into 2024, we’ll continue to expand TC1 by rolling it out to more regions, for example, Asia-Pacific, and we’ll roll it out into more of the portfolio.
For example, that’s the “O” and the AECO. So, we play those factors forward. We’ve got a belief set that we can continue to grow those bookings in the AECO space at a quite healthy double-digit level.
Unidentified Analyst: Got it. No, that’s very helpful color. And then, just a quick follow-up on TC1. It seems like things are really picking up over there. I want to ask, are you still mainly seeing adoptions among existing customers that are opting for TC1? Or are you seeing more new customers kind of adopting that product? And then, in terms of kind of the ASP opportunity, are you still kind of seeing the 2 to 3 times uplift that you kind of highlighted at your Analyst Day from TC1?
Rob Painter: Yeah. Good question, Devin. So, there is both, it’s existing customers and new customers. At the existing customers, for sure, and call it in the construction ERP space, those are uplifts that we’ve continued to drive, the conversions from on-prem to the cloud. And as you make that transition from on-prem to the cloud, doing more than just a lift and shift actually changing the nature of the offering. And it’s not just a pricing mechanism, it’s a value-based mechanism because then you can get access to the broader array of what we have to offer our customers. We do continue to see a healthy uplift when we make those conversions above a 2x rate. And then, on the new logos, well actually within — it’s sort of a blur between existing customers and new customers.
What we can see from the cross-sell data is that the customers who still predominantly are buying one or two solutions from us are picking up that third, fourth, fifth, depending on the nature of the exact bundle that they’re buying from us. And then on a straight new logo basis, we are certainly continuing to see wins from new customers. So really, it’s all of the above answer. When you have new customers, of course, there’s not an uplift in the equation. It’s all straight new revenue.
Unidentified Analyst: Great. Thanks for all the details.
Operator: Your next question comes from the line of Chad Dillard from Bernstein. Your line is open.
Chad Dillard: Hi. Good morning, guys. So, I wanted to go back to your question about the adjusted operating margins, and I was hoping you could bridge from ’23 to ’24. Just trying to understand like the moving parts of cost savings mix, operating leverage and more specifically, the impact of the AG divestiture.
David Barnes: Okay. Let me start with the last point. So, when we announced the Ag deal, we said that the impact on a ’23 pro forma basis of the divestiture of Ag was about 70 basis points negative to operating margins, so that’s where we started, and you can see the ’24 outlook in our as-adjusted table. The principal drivers from there, as I mentioned earlier, we’re planning on an as-adjusted basis, i.e., without the Ag business in the base, 100 basis points to 200 basis points of margin improvement. One way to think of that, Chad, is essentially all of it is in the gross margin improvement, which is a natural impact of mix. If you drill down a little more, we do have the benefit of cost reduction, but we are adding resources where it’s driving growth.
In fact, all or slightly more than all of our year-on-year OpEx is in our AECO business, where we had over 30% bookings growth, and we have about 20% ARR growth, we are really allocating our operating capital to pour the coal on that on that business. So, you can think of it as taking the cost reductions we’ve taken and reallocating it to the highest-return, highest-growth business.
Rob Painter: And if I can build on David’s comment, which is exactly right, in that capital allocation call. So, the capital allocation call within the P&L to continue to put that go-to-market OpEx into the AECO space. One of the things I should have said in the response to one of Devin’s questions was when we look at the net retention ratio, we’re near 110% in the AECO part of the business. It’s a terrific, terrific outcome that the team is driving. We look for — what’s an instructive measurement for us is looking at the customer lifetime value divided by the customer acquisition costs. And what that data is telling us is that we’re well above three on that is — that tells us that is a place to continue to put OpEx into. You don’t get an ROI on that OpEx in year one.
So there’s, call it, a trade-off there is that we’re playing the long-term game to continue to fuel that bookings growth, which will generate long-term sustainable ARR growth, and of course, overall revenue growth.
Chad Dillard: That’s helpful. And then, just on the segment reorg, can you talk about the impact on your distribution in go-to-market? Just trying to understand like the operational changes here. I guess like what you can do better now versus before under the old structure?
Rob Painter: Yeah, Chad, I’m glad you asked that, and that’s a good question. And let’s take the what we are calling field systems now. So think of that as the — in the old segmentation, the Geospatial businesses that we have, predominantly the one you’ll know the best is survey, and then we have the machine control business that distributes through our SITECH that traditionally have gone through the B&I segment. So those come together under Field Systems, Ron Bisio is looking after that. I’ll give you a demonstrable evidence of a change that we already made. We have one person responsible for sales now for all the Field Systems. One in APAC, one in the Americas, and one in Europe, Middle East and Africa. So, one person in each to call that three.
And that would have been six people, because we would have had that duplicated just a few months ago. What that does, beyond just driving some — just efficiencies that you could expect, it actually also allows us to rethink the allocation of how we use resources. That frees up some capability for us to put time and effort and money and people into ongoing dealer development. So, beyond the chase, the short to mid term numbers is actually having resources that can help our dealers think about a long term business. In some cases, Chad, we have dealers who cover multiple businesses for Trimble. Some do both civil and survey, some do ag and survey, some do ag and survey and civil. And with one set of eyes or one set of accountability overall of those is we can make more cogent decisions about how we make natural trade-offs that will happen between the portfolios.
If I look at the product — that’s the go-to-market. If I look at the product side, what it unlocks is, I’d say, more efficiency in how we think about measuring the hardware SKUs that we have. Over the last few years, we’ve reduced the SKUs by 10% in the company. That drives simplification and underlying systems. We have one view on our GNSS portfolio, for example, that goes across the business, one point of view now on the total stations and the scanners that can be used across multiple parts of the portfolio. So, I think it drives just a lot sharper portfolio thinking when we look at it at the product lens. So, we put that product lens together with a go-to-market lens, and I think that positions us well. I think, this is — I think, it was time to do it, and the announcement of the JV gave us a reason to really rethink how we did things and to move fast to put it in place.
And the teams, they did all the planning work in the fourth quarter and they’ve come out of the gate, I’d say, quite strong here as a team, as an aligned team with a defined set of OKRs, objectives and key results, that we’ve defined by each of these major businesses.
Chad Dillard: Great. Thank you.
Operator: Your next question comes from the line of Joshua Tilton from Wolfe Research. Your line is open.
Joshua Tilton: Hey, guys, thanks for taking my questions here. In the prepared remarks, you guys talked about being open to continuing to divest certain aspects of the business. When you look across your three new reporting segments, where do you see the most opportunity to maybe divest over the next 12 months and continue to simplify the portfolio?
Rob Painter: Well, good morning. Hey, thanks for the question. This is Rob, I’ll give you the lens I have on it. I think about two axes on this one. One axis is the financial profile of the business, call it, the — yes, there’s a short-term view on the profile and then there’s a long-term profile view on a business. And can it meet the expectation of returns that we have, whether it’s return on invested capital or accretion at an ARR growth or at an EBITDA level. On the other axis, we’ll look at the strategic attractiveness of that. That could involve the competitive position, but it also looks a lot at an individual businesses or product, let’s say, capability to make the whole stronger. And if something sits on its own and isn’t making the whole of the business stronger, so it doesn’t contribute to a stronger Transportation business or a stronger Construction business, then it’s not in the — let’s say, in the favorable side — it’s on a less favorable side of my 2×2 that I’m laying out, and the financial one speaks for itself on that 2×2.
