Roper Technologies, Inc. (NASDAQ:ROP) Q1 2024 Earnings Call Transcript

Roper Technologies, Inc. (NASDAQ:ROP) Q1 2024 Earnings Call Transcript April 26, 2024

Roper Technologies, Inc. beats earnings expectations. Reported EPS is $4.41, expectations were $4.34. ROP isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning. The Roper Technologies Conference Call will now begin. Today’s call is being recorded. All participants’ will be in the listen-only mode. [Operator Instructions] I would now like to turn the conference over to Zack Moxcey, Vice President, Investor Relations. Please go ahead, sir.

Zack Moxcey: Good morning, and thank you all for joining us as we discuss the first quarter 2024 financial results for Roper Technologies. Joining me on the call this morning are Neil Hunn, President and Chief Executive Officer; Jason Conley, Executive Vice President and Chief Financial Officer; Brandon Cross, Vice President and Principal Accounting Officer; and Shannon O’Callaghan, Vice President of Finance. Earlier this morning, we issued a press release announcing our financial results. The press release also includes replay information for today’s call. We have prepared slides to accompany today’s call, which are available through the webcast and are also available on our website. Now, if you please turn to page two. We begin with our Safe-Harbor statement.

During the course of today’s call, we will make forward-looking statements which are subject to risks and uncertainties as described on this page, in our press release and in our SEC filings. You should listen to today’s call in the context of that information. And now please turn to page three. Today, we will discuss our results primarily on an adjusted non-GAAP and continuing operations basis. For the first quarter, the difference between our GAAP results and adjusted results consists of the following items: Amortization of acquisition-related intangible assets, financial impacts associated with minority investments. And lastly, transaction-related expenses associated with the completed acquisitions. Reconciliations can be found in our press release and in the appendix of this presentation on our website.

And now if you please turn to page four, I’ll hand the call over to Neil. After our prepared remarks, we will take questions from our telephone participants. Neil?

Neil Hunn: Thank you, Zach, and thanks to everyone for joining our call. We’re looking forward to sharing our first quarter results and our increased outlook for the year. As we turn to page four, you can see the topics we’ll cover today. I’ll start by highlighting our strong performance in Q1. Jason will then go through our financial results in more detail, review our balance sheet, including our M&A capacity, and finally, our notable cash flow performance. Then, I’ll walk through our segment highlights and discuss our increased guidance for the full-year and initiate our Q2 guidance. After our closing remarks, we’ll open the floor for your questions. So let’s go ahead and get started. Next slide please. As we turn to page five, three key takeaways for today’s call.

First, we delivered another strong quarter results. Second, we’re increasing our employer outlook; and third, we continue to be very well positioned relative to capital deployment. To double-click a bit, we grew total revenue by 14%, organic revenue by 8%, and EBITDA by 16%, with EBITDA margin expanding by 60 basis points to 40.2%. We grew depths by 13% to $4.41, beating our guidance range. We grew free cash flow 15% year-over-year with free cash flow margins of 31%. We also completed the acquisition of Procare Solutions, a leading provider of software and integrated payments for the early childhood education market for $1.75 billion. Procare is a great addition to Roper. We remain very excited about the business and are especially pleased with the initial results and progress we made during the onboarding process.

We’re also increasing our full-year 2024 guidance for total revenue, organic revenue, and depths, reflecting our strong momentum and continued confidence in our outlook. And we continue to be very active in the M&A market, an environment that continues to improve, and one where we have a very large pipeline of high quality and attractive opportunities. Net-net, we’re quite bullish about our ability to be active on the M&A front this year. As you can see, we had a great start to 2024 and were well positioned to deliver yet another strong year of performance and growth. Now let me turn to call over to Jason. Jason?

Jason Conley: Thanks, Neil. Let’s dive right in on slide six. Q1 was an excellent first installment to 2024. Revenue was 14% over prior year to $1.68 billion. Organic growth of 8% was led by double-digit growth at our TEP segment and solid mid-single-digit growth across our application software and network software segments. Of note, organic recurring revenue grew 7%, despite known headwinds at our freight match and foundry businesses. Acquisitions contributed 6 points of growth led by Syntellis, which is a large bolt-on for our Strata platform that closed in Q3 of last year, and Procare which closed at the end of February. Regarding Procare, integration is going really well, and we’re excited to work with Joe and Kinzel and her team to drive continued growth and innovation in the attractive early childhood education market.

EBITDA was $676 million, which was 16% over prior year. EBITDA incremental margin of 44% translated into EBITDA margin of 40.2% and represented 60 basis points of expansion. This was fueled by gross margin expansion of 100 basis points to 70.3%. Our market leading businesses compete on customer NMC and deliver demonstrable value to their customers, which we consistently realize in our high gross margin profile. Depths of $4.41 was above our guidance of $4.30 to $4.34. Importantly, free cash flow was strong at $513 million, up 15% over prior year, and our trailing 12-month free cash flow surpassed $2 billion for the first time in Roper’s history. Looking over a four-year horizon, revenue and EBITDA CAGRs are 13% on a quarterly basis. For free cash flow, we take a broader lens and review on a trailing 12-month basis, which generated an 11% CAGR over this period.

Adjusting for cash tax payments related to Section 174, which went into effect and impacted the current periods free cash flow by $80 million. The normalized CAGR is 13% over this period. For 2024, we still expect free cash flow margins of 30% or more. With that, we can turn to slide seven to talk about our balance sheet. Following our Procare acquisition, our net debt to EBITDA ratio came in at 2.9 times at quarter end. Our revolver, which provides us with $3.5 billion of immediate liquidity, was utilized to fund the Procare acquisition, bringing the drawn balance to $1.75 billion. With strong, consistent cash generation and a well-positioned balance sheet, we have the capacity to deploy $4 billion or more towards high-quality acquisitions.

And I’ll reiterate our commitment to remain a solid investment-grade issuer, as access to investment-grade capital markets is fundamental to our strategy. In terms of what we’re seeing in deal markets, our pipeline of acquisition opportunities is growing and quite attractive. As always, we will remain patient and disciplined in allocating capital to opportunities with highest risk-adjusted returns for our shareholders. With that, I’ll turn it back over to Neil to talk through our segment detail and updated guidance.

Neil Hunn: Thanks, Jason. As we turn to page nine, let’s review our application software segment results. Revenues here grew by 18% in total, and organics revenue grew by 6%. EBITDA margins were 43.3%. We experienced strong performance across this portfolio of businesses. We’ll start with Deltek, our enterprise software business serving the government contracting, architecture, engineering, and construction contractor markets. Deltek continue to grow at SaaS solutions, especially within their private sector markets. Importantly in the quarter Deltek launched a new Gen AI powered digital assistant, dev op, which will be integrated across Deltek’s core software applications. We also welcome Bob Hughes as the new CEO of Deltek.

Bob brings a wealth of software and leadership experience to the role, having most recently served as the Chief Customer and Strategy Officer at UKG. Bob, we’re thrilled to be working with you. We also welcome Mike Corkery into his new role as a full-time Group Executive within Roper. For those who do not know, Mike was Deltek CEO for nearly 12-years, more than spanning our entire ownership period. Mike, thank you for building a tremendous market-leading company. Not only has Deltek grown multi-fold during your leadership tenure, the underlying quality has massively improved, and the culture has never been better. Thank you for everything you’ve accomplished, and we’re very much looking forward to working with you in your new leadership capacity at Roper.

Aderant continues to perform incredibly well in the market and had another great quarter with continued SaaS momentum and Gen AI focused innovation. Vertafore also performed well with solid growth in their ARR base. Turning to Power Plan, our financial planning and tax software business serving the heavy fixed asset industries, Power Plan was impressive in the quarter and grew its ARR with strong customer retention and adoption of its new SaaS solution. Great job here. Our Healthcare IT businesses, led by Strata & Data Innovations, were also strong in the quarter. We’re especially pleased to see the solid data market execution at both businesses. Finally, as I mentioned a few minutes ago, we completed the acquisition of Procare Solutions, which is also a good start and complements this segment with a higher organic growth profile.

For the remaining three quarters of the year, we expect to see mid-single-digit organic revenue growth for this segment. Please turn with us to page 10. Revenues in our network software segment grew 5% in total and 4% on organic basis, despite the fact we continue to experience pressure with our freight matching businesses and the impact on foundry related to the recent actor strike and rider strike. EBITDA margins continue to be strong at 55.9% and grew about 10% year-over-year. As we dig into the details of it, we’ll start with our freight matching businesses, DAT & Loadlink, which declined slightly as expected due to the challenging freight market conditions that affected each of these businesses. As is typical for Roper, we invest for long-term, sustainable, and improving levels of organic growth.

In DAT case, we’re leading the industry with Gen AI-enabled fraud detection and prevention tools. As many know, fraud across the transport ecosystem remains a cause of great concern and economic loss. Turning to Foundry, which continues to innovate at an impressive clip, both in terms of major product enhancements and customer productivity-based AI ML innovations. That said, Foundry declined a bit in the quarter as expected given the recent industry strikes. Notwithstanding the headwinds of DAT, Loadlink, and Foundry, we grew 4% organically in this segment based on the strength across the balance of this portfolio. Specifically, iPipeline, our life insurance and annuities network software business had strong renewals, customer expansions, and market activity, especially in the annuities market.

ConstructConnect continued its solid march to improve finance results and enhance its network value with Gen AI powered solutions. And MHA had a strong quarter benefiting from increased operational focus and rigor, revenue timing related to one of MHA’s data partnerships, and improvement in senior care occupancy rates. For the balance of the year, although we did a touch better-than-expected in the first quarter, we continue to expect to see low-single-digit organic revenue growth for this segment based on the continued difficult freight market conditions and our view that Foundry’s recovery will be extended through this year. Now please turn to page 11 and let’s review our TEP segments results. Revenues here grew 17% on an organic basis and EBITDA margins remained strong at 34.3%.

Neptune continued to see notable customer demand, in particular, for their ultrasonic meters and meter data management software. In short, Neptune delivered another great quarter of growth. Verathon had very strong growth across all three of its product families and executed at an exceptional level in the quarter. Of note, Verathon had a record number of large account wins, further demonstrating their market momentum. Great job by Team Verathon. We also had strong execution and growth led by healthcare and markets from CIVCO, Inovonics, IPA, and rf IDEAS. As we turn to the outlook for the balance of the year, let us remind you that we expected to have a stronger first quarter, which we delivered. That said, for the balance of the year, we expect to see organic revenue for this segment to be in the high-single-digits area.

Now please turn with us to page 13. Now let’s review our increased full-year 2024 guidance and discuss our Q2 outlook. Based on our strong Q1 results, enterprise momentum, and our confidence in our outlook, we are raising our guidance for 2024. For the full-year, we now expect total revenue to grow in the 12% area, up from our initial guide of 11% to 12%. Organic revenue to grow about 6%, up from 5% to 6% originally, and adjusted depths being the range of $18.05 and $18.25, up from $17.85 to $18.15 previously. Our guidance continues to assume a full-year effective tax rate in the 21% to 22% range. For Q2 we expect adjusted debts to be in the range of $4.42 and $4.46. Now please turn with us to page 14 and we’ll open it up for your questions.

As per custom, we’ll conclude with the same key takeaways with which we started. First, we delivered another strong quarter results. Second, we’re increasing our outlook for the full-year; and third, we’re very well positioned relative capital deployment. For the quarter, we delivered double-digit growth in revenue, EBITDA, adjusted depths, and free cash flow with margin expansion and very strong cash flow conversion. Also in the quarter, we completed the acquisition of Procare Solutions, which is a great addition to our enterprise and our application software segment. And we’re increasing our full-year 2024 guidance for total revenue, organic revenue, and depths, reflecting our confidence in our outlook and continued momentum. Finally, we continue to maintain a strong financial position with $4 billion plus of capacity for capital employment.

The M&A markets are very active. We have a very robust pipeline of attractive acquisition opportunities that we’re excited to pursue with our unbiased and disciplined approach. We’re quite bullish about our ability to execute this part of our strategy over the course of 2024. Now, as we turn to your questions, and if you could flip to the final slide, our strategic flywheel, we’d like to remind everyone that what we do at Roper is simple. With compound cash flow over a long arc of time by operating a portfolio of market leading, application specific, and vertically oriented businesses. Once a company is part of Roper, we operate a decentralized environment, so our businesses can compete and win based on customer intimacy. We coach our businesses on how to structurally improve their organic growth rates and underlying business quality.

Finally, we run a centralized process-driven capital deployment strategy that focuses on finding the next great business to add to our cash flow compounding flywheel. Taken together, we compound our cash flow over a long arc of time in the mid-teens area. With that, we’d like to thank you for your continued interest and support and open the floor to your questions.

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Q&A Session

Operator: We will now go to our question-and-answer portion of the call. [Operator Instructions] Your first question comes from Julian Mitchell from Barclays. Please go ahead.

Julian Mitchell: Hi, good morning.

Neil Hunn: Good morning.

Julian Mitchell: Good morning. Maybe just the first question on the network software division. So the freight markets, I think there was a fairly sort of down-be outlook from some of the U.S. trucking companies in the past couple of weeks. Sounds like that business for you on freight matching is playing out as expected. Are we expecting sort of down low-single-digit for the balance of the year in the freight match business? Is that what you’re kind of dialing in? And any comments on where we are on the sort of carrier consolidation?

Neil Hunn: Why don’t you take, Jason the first one, I’ll take the second one.

Jason Conley: Yes, so Julian, it’s — like you said, it’s about playing out as we expected down low-singles for the year. Not much change from our perspective last quarter. So yes, that’s kind of the current guiding assumptions.

Neil Hunn: And for us on the carrier side, it’s actually been pretty stable for the last several months. It hasn’t improved, it’s just been stable. And when you take that stability and you put it against the priority of your comp, that’s what drives to the outlook for the year.

Julian Mitchell: That’s helpful, thank you. And then just dialing in on the second quarter EPS guide. I think normally you’d have maybe a 3%, 4% type sequential increase in earnings in the second quarter. It looks like it’s basically flat at the guide midpoint for this Q2. Is there anything going on sort of sequentially with any of the segment sales or margins that’s abnormal or something below the line that’s weighing on that?

Jason Conley: No, not really. I mean, we feel good about our guidance being raised for the full-year. And if you look, we look back a quarter ago, our Q2 guy is consistent with what we thought 90 days ago. So I think if you go back to like ‘21 and ‘22, we were actually flat Q1 to Q2 on a segment EBITDA basis. And that’s usually the normal motion for us. Then last year we did move up sequentially, but that was driven by some, a surge at TEP. There was some strong deliveries led by Verathon. And then this year, Verathon’s coming out strong out of the gates, so we don’t have that dynamic this year. And then usually AS steps down a little bit in earnings due to some Vertafore timing, but we didn’t have that dynamic last year.

So, you know, I think we feel good about sort of the progression from Q1 to Q2 on an operating basis. And in terms of the second-half, we’ll start to see the accretion of Procare with this, it’s got sequential growth throughout the year and then we’ll have, of course, reduced interest expenses we paid on the revolver. So feel pretty good about the progression going throughout 2024.

Julian Mitchell: Great. Thank you.

Operator: Your next question comes from Deane Dray with RBC Capital Markets. Your line is now open.

Deane Dray: Thank you, good morning everyone, happy Friday.

Neil Hunn: Happy Friday. Good morning, Deane.

Deane Dray: Great, hey since it’s the newest addition to the team on Procare, just some data points. So what was the contribution in the quarter? And remind us about any kind of seasonality on the cash flow, because it is tied to education. So we know that it tends to be seasonal. And any sort of like first 100 day plans for the business?

Jason Conley: Yes. So if I can hit that, Deane. So there was about where we expected. We had a couple more days in, but it was a little over $20 million of revenue came in sort of about as we expected in terms of EBITDA margin in the mid-30s or so. And then I think what we — from a cash flow perspective, it’s more of a monthly sort of payment stream. So we don’t get — it’s not like a frontline where they’ve got big renewals and the schools are paying them. This is childhood education centers that are just sort of paying on a monthly basis, of course, there’s a payment stream there, too, that we get that comes on a monthly basis. So it’s more consistent throughout the year. And I think we’re just off to a really good start in terms of the integration work.

Of course, the teams are quickly up and running from a financial standpoint. We’re working through all the normal integration points around insurance and cyber and things like that. And then beyond that, we’ve been engaged in weekly conversations on progress against some defined value creation levers that we had around growth, and those are going really well. And super collaborative teams digging in and we’re really on track for the milestones we agreed upon right after close. So just feeling really good about the momentum there.

Deane Dray: And the normal cadence for the monthly is revenue cadence is approximately what?

Jason Conley: It’s consistent, right? So it’s just — if you think about software is obviously consistent month-to-month. And then the payments they might get a little bit more at the beginning of the year, but it’s modest. It’s pretty consistent throughout the year. Of course, they’re growing, right? So it’s going to — it will go — ramp up sequentially throughout the year. But just overall, in terms of a business model, it’s pretty consistent throughout the year, not a lot of seasonality.

Neil Hunn: If you’re comparing this to front line, where most of the cash flow comes in Q3, this is not that. This is much more linear throughout the course of the year.

Deane Dray: That’s great. And then just a follow-up on the fastest growth platform right now with surprisingly on the tech-enabled products, Neptune is just how — what’s expectations for this growth rate? How much of this — because we see it similar numbers at like Badger meter. So it looks in line, how much of this is market growth versus any sort of share gains that you might be realizing?