Roper Technologies, Inc. (NASDAQ:ROP) Q4 2023 Earnings Call Transcript

Roper Technologies, Inc. (NASDAQ:ROP) Q4 2023 Earnings Call Transcript January 31, 2024

Roper Technologies, Inc. beats earnings expectations. Reported EPS is $4.37, expectations were $4.33. Roper Technologies, Inc. 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. [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 fourth quarter and full-year 2023 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 2.

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 3. Today, we will discuss our results primarily on an adjusted non-GAAP and continuing operations basis. For the fourth quarter, the difference between our GAAP results and adjusted results consists of the following items: Amortization of acquisition-related intangible assets, the financial impacts associated with our minority investments in Indicor and Certinia. And lastly, transaction-related expenses associated with our 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 4, 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, Zack, and thanks to everyone for joining our call. We’re looking forward to sharing our quite good 2023 fourth quarter and full-year results with you this morning. As we turn to Page 5, let’s look at today’s agenda. This morning, I’ll start by walking through our full-year highlights and then we’ll turn to commenting on our most recent acquisition, Procare Solutions. Jason will then go through our quarterly results, both in aggregate and at the segment level, share our annual results and review our strong balance sheet position, then I’ll pick up and discuss our segment level annual results, our 2024 outlook, wrap up, and turn to your questions. Let’s go ahead and get started. Next slide, please. As we turn to Page 5, the two key takeaways for today’s call are; first, we delivered a very strong 2023; and second, we remain well-positioned and are carrying positive momentum into 2024.

As we look back on the full-year, we’re proud of what the organization accomplished. From a financial perspective, we delivered 15% revenue growth, 16% EBITDA growth and 32% free cash flow growth, with free cash flow margins at 32%. Our total revenue growth of 15% was underpinned with 8% organic revenue growth. Jason will cover this in a few minutes, but Q4 was strong as well with 13% total revenue growth and 8% organic revenue growth. Also during the year, we deployed $2.1 billion in the high-quality vertical software acquisitions, highlighted by our bolt-on acquisitions of Syntellis and Replicon. As we all know, last year was a challenged year relative to available acquisition opportunities, given that I’m super-proud of our team’s ability to grind through the market conditions and successfully convert two outstanding value-creation M&A opportunities.

Given all this, we entered this year with positive momentum. We continue to see strong demand for our mission-critical solutions. As a reminder, each of our businesses is a leader in their respective market and delivers system of record, network critical or vital and-or lifesaving technologies. As a result, we continue to see strong demand for our solutions. Also as we head into 2024, we have meaningful contributions from our recent acquisitions, Syntellis, Replicon, and Procare. It is important to highlight these additions to our portfolio of businesses also improved the underlying quality of our enterprise in terms of reoccurring revenue mix and organic growth profile. Finally, we continue to be very active in the M&A market, in environment that we expect to be notably improved in 2024 with a strong balance sheet and a large pipeline of attractive opportunities.

So, a strong ’23 and solid momentum both organic and inorganic behind us as we enter 2024. Now please turn to the next page, Page 6, where I will discuss our most recent acquisition, Procare Solutions. Procare Solutions is a fantastic addition to the Roper portfolio. Let’s start with the fundamentals. We’re paying $1.75 billion net of $110 million tax benefit for the business. We expect Procare to contribute about $260 million of revenue and $95 million of EBITDA for the 12 months ended Q1 ’25. Procare will be accretive to our free cash flow in ’24 and to our adjusted DEPS in ’25. We will fund the acquisition with a portion of our $3.5 billion revolver, and we’ll report Procare in our Application Software segment and expect the deal to close this quarter.

Procare meets all our longstanding acquisition criteria, leader in a smaller market, delivers mission-critical verticalized software solutions, competes based on customer intimacy, operates in asset-light business model, and is led by a skilled passionate leadership team. What’ incrementally different for us is the maturing leader nature of this company. As we outlined during our Investor Day last year, our corporate strategy leans on implementing two modest improvements. First, continue to improve our long-term sustainable organic growth rate. And second, capture more value from our capital appointment capacity. Relative to additional capital deployment value capture, we are focusing on doing a higher proportion of bolt-on activity as evidenced by last year’s capital deployment records and adding higher-growth or maturing leader business profiles to our enterprise.

Procare is a prototypical maturing leader archetype, meeting all our longstanding criteria that I mentioned above, but as structurally faster growth business that possesses the opportunity to improve margins as the top-line scales. For Procare, we expect mid-teens top-line growth with improving margins from an already strong position for the years to come. Let’s talk about what the company does. Procare is the leading provider of mission-critical and purpose-built software to 37,000 owners and operators of early childhood education centers which they used to run their business. The software provides all the needed functionality to run the childcare center ranging from parents and family engagement, staff and teachers scheduling, classroom management, tuition billing and payment processing.

The market itself is quite attractive. And in the midst of a long-term secular tailwind of young dual income families seeking higher levels of early childhood education versus daycare. In addition, like most industries, this one is undergoing long-term tech-enablement. Given these factors, this market is growing annually in the low double digits area. As mentioned, Procare is the leading player with a 1.5 times through all their market-share advantage in this space given their super compelling value proposition that combines both software and the integrated payment capabilities. Given this, Procare has very high gross retention and compelling net retention as well. Finally, from a extensive due diligence of the business, we are encouraged by the fact that Procare has multiple strategic and operating pathways available to deliver mid-teens growth and long-term margin expansion.

Net-net, this is a highly compelling value creation opportunity for Roper, and our shareholders. And to Joanne, your leadership team and all the Procare family, welcome to Roper. So with that, Jason, let me turn the call over to you so you can walk-through our fourth quarter and full-year results, as well as our very strong financial position. Jason?

Jason Conley: Great. Thanks, Neil. I’ll walk-through the enterprise and segment results for Q4, and enterprise results for the full-year along with a review of our balance sheet. Starting with Q4 on Slide 7. We had an excellent finish to a strong year, revenue over $1.6 billion was 13% over prior year, led by 8% organic growth with acquisitions adding four points and less than a point of currency benefit. Organic outperformance was led by our TEP segment, highlighted by Neptune and Verathon. Gross margin of 69.7% was down 30 basis points versus prior year given the higher mix coming from our TEP segment. EBITDA grew 11% to $659 million with EBITDA margin coming in at a solid 40.8%. With the offsetting impact of interest and taxes, this translated into DEPS growth of 11% to $4.37, above our guidance range of $4.28 to $4.32.

Also from a cash perspective, free cash flow finished strong at $596 million, up 30% over prior year. This was in-line with our expectations with a good renewal season across our software businesses. We turn to Slide 8, I’ll briefly click into the segment performance in Q4. Application Software delivered revenue growth of 15% over prior year to $852 million with organic growth contributing seven points and the balance coming primarily from our bolt-on acquisitions of Syntellis and Replicon. EBITDA margin of 43.2% in the quarter was below prior year’s high watermark of 45.6%, which as we discussed last year, was driven by lower incentive-based compensation. Network Software was up 3% to $363 million with EBITDA up 10% to $208 million. As we have discussed before, our freight matching businesses are navigating a drawdown of carriers, following exceptional marketplace growth over 2021 and 2022, which is mixing down the growth rate for the segment.

However, our business leaders DAT and Loadlink have aligned the cost base with reduced carrier subscribers to still drive solid EBITDA growth in the quarter. Our TEP segment grew by 17% in the quarter to $399 million with EBITDA of 13% to a $134 million. Growth was led by exceptional performance at Neptune, with continued increasing demand for ultrasonic technologies and overall favorable market conditions. Also Verathon continued its remarkable growth with strengthened single-use products across Laryngoscopy and Bronchoscopy. EBITDA margin of 33.6% was down from prior year given some one-time investments and incentive compensation in the quarter. Turning to Slide 9, I’ll walk through our full-year 2023 performance. As Neil just mentioned, revenue was just under $6.2 billion, up 15% over prior year with organic growth of 8% and acquisitions contributing seven points, mainly Frontline and Syntellis.

Looking at a three-year revenue CAGR on this slide, similar to 2023, it’s also at 15%. Further, the organic — average organic growth rate over the three-year period has been about 8%. So as Neil mentioned, we benefited from some market conditions over that time period. EBITDA of just over $2.5 billion was up 16% over prior year yielding EBITDA margin of 40.6%. Our three-year EBITDA over this period was also up 16%. So the story remains the same at Roper. We own and continually grow a portfolio of high gross margin businesses and generally convert EBITDA — growth to EBITDA in the 45% range, which allows for ample investment back into the business for future sustainable growth. Free cash flow for the year was just shy of $2 billion, which represents a 32% margin and is coincidentally up 32% over 2022.

Full-year contribution from our Frontline acquisition and excellent performance across the enterprise drove this result, underpinned by strong renewals, favorable DSO and improving inventory turns. Of note, our net working capital as a percent of annualized revenue was negative 19% in Q4 to the new record for Roper. Importantly, over a three-year period, we have compounded cash flow at 16%. Our consistent focus on growing cash flow and the strength of our new portfolio following our divestitures demonstrates a solid base from which to continue our long-term growth algorithm. To that end, we expect free cash flow margin to be 30% or more in 2024. With that, we can flip to Slide 10 to discuss our strong financial position. From a liquidity standpoint, we finished the year with $3.14 billion available on our revolver, with over $200 million of cash.

Regarding leverage, we brought down net-debt to EBITDA from 2.7 times at the beginning of 2023, to a year end figure of 2.4 times despite deploying $2.1 billion towards acquisitions. We expect to close on Procare later in Q1 and will utilize our revolver to fund the transaction. So this will be our pro-forma leverage to about 3 times. Our solid balance sheet coupled with strong cash generation gives us capacity to deploy $4 billion or more of capital, while remaining committed to our solid investment-grade rating. Since our October call, deal activity has demonstrably increased with a corresponding lift in asset quality. That said, our market optimism remains balanced by our disciplined process in patient posture. With that, I’ll turn the call back over to Neil to talk about our full-year segment performance and the indications for 2024.

Neil?

Neil Hunn: Thanks, Jason. As we turn to Page 12, let’s look-back on the year for our Application Software segment. Total revenues grew 21% and organic revenues grew 6% to $3.19 billion, while EBITDA margins remained strong at 43.7%. Within the segment, results were consistent with strength at Deltek, Aderant, Vertafore, Strata and Frontline. Deltek continued to see strong gains in our SaaS solutions, especially in the private sector markets. As discussed throughout the year, the GovCon market was tempered given all the uncertainty regarding government spending, notwithstanding Deltek delivered mid-single-digit organic growth for the year. In addition, they continue to innovate and add capabilities during times of uncertainty, which is a hallmark of Roper strategy, highlighted by the bolt-ons of Replicon and ProPricer.

ProPricer, a smaller transaction about $80 million purchase price that closed late last year and delivers the leading contract pricing solutions and software for government contractors and federal agencies, an ideal strategic fit for Deltek’s cost point product family. Aderant was just amazing last year. They had record bookings and significant adoption of their anchor SaaS solutions and add-on products. Also, Aderant is one of the leaders within Roper and the legal software market as it relates to productizing generative AI solutions within their product stack. Great job by Chris, Rossi, and the entire team at Aderant. Continuing on, Vertafore was solid with strong ARR gains throughout the year. Additionally, Vertafore made great strides with our product strategy deployment and the MGA systems bolt-on is trending well-ahead of our investment case.

Strata also was quite good last year, both in terms of organic ARR gains, and their acquisition and integration work associated with Syntellis. Finally, Frontline executed well, delivering strong retention and cash flow during the year. As I mentioned earlier, we will report Procare solutions in this segment and expect the deal to close this quarter. As it relates to our 2024 outlook for this segment, we expect to see mid-single-digit organic revenue growth. Please turn with us to Page 13. Full-year organic revenue for our Network segment grew 5% to $1.44 billion and margins were strong at 55.2%. We’ll start with our freight matching businesses, DAT and Loadlink, which both grew in the year despite the year long muted freight market conditions.

Similar to that of Deltek, both businesses continue to innovate during the sluggish market with particularly interesting Gen AI innovations at DAT to help combat industry fraud. Pipeline delivered record bookings and had very strong customer retention and expansion activity, leading to strong ARR growth. Foundry, our post-production media and entertainment software business muscled through the year given the writers and actors strikes and made meaningful progress in the transition to a full subscription revenue model. Finally, our alternate site healthcare businesses, MHA, SoftWriters and SHP were strong throughout the year as census levels and senior care facilities improved. As it relates to our full-year 2024 guide for the segment, we expect to see low-single digit organic revenue growth based on the expectation of continued muted freight market conditions, but with continued strong EBITDA margin performance.

Now please turn to Page 14 and let’s review our TEPs segment’s results. Organic revenues for the year grew 15% to $1.55 billion and EBITDA margins remain consistent at 35.3%. As we look back over the year, we entered the year with a high degree of supply-chain uncertainty. During the year, the vast majority of these uncertainties are resolved and our business has done a tremendous job of capturing the opportunity. As we exit ’23 and look to ’24, we do not see meaningful supply chain constraints. As usual, we’ll start with Neptune, our water meter and technology business. Neptune was just great and continues to see strong demand and momentum for their residential and commercial ultrasonic or static meters, and increasing adoption of their meter meter data management software.

We remain bullish about Neptune and the market in which they compete. Verathon was awesome as well for the year. Verathon was strong across all three of their product families, ultrasonic, bladder volume measurement, video-assisted intubation and single-use Bronchoscopy. As. As a reminder Verathon’s reoccurring single-use offerings now make up about 55% of the business’ annual revenue stream. Just an amazing product and business execution journey to both scale and improve the underlying quality of the business. Finally, our RF product businesses, Inovonics and rf IDEAS did a terrific job managing through their supply chain challenges and delivered very strong 2023 financial performance. Looking to our 2024 guidance for this segment, we expect to see high single-digit organic revenue growth for the full-year, and the expectation that Q1 will grow in the mid-teens area.

Now please turn with us to Page 16. This morning, we’re establishing our 2024 full-year and first quarter guidance. For the full-year, which includes the impact of Procare solutions, we expect to see total revenue growth between 11% and 12%. On an organic basis, we expect to see full-year 2024 revenue grow between 5% and 6%. And finally, we expect to see full-year adjusted DEPS to be in the range of $17.85 – $18.15, which includes about $0.10 to $0.15 of DEPS dilution associated with the Procare deal. Assumed in this guidance, the tax rate in the 21% to 22% range. We want to take a moment, set our guide in context of our long-term strategy and execution model. To remind everyone, historically we operate at a 5% to 6% organic growth portfolio.

Our strategy and ambition to structurally improve organic growth rate to be in the 8% to 9% area. Over the last three years, we grew 8%, 9% and 8% on an organic basis. So these years were benefited to some extent from certain market conditions. As such, our view is our current course and speed of organic growth rate is in the 7% to 7.5% area. We are very pleased with our progress to date and continue to work to achieve organic growth aspirations. As it relates to organic revenue outlook for ’24, we enter the year mindful of two factors; continued subdued large customer activity in our Application Software segment and our freight matching businesses within our Network segment being below trend based on our expectations for continued muted freight market conditions.

As it relates to the first quarter, we expect to see adjusted DEPS in the range of $4.30 and $4.34. Now please turn with us to Page 17, and then we’ll look-forward to your questions. As per our custom, we’ll will conclude with the same key takeaways with which we started. One, we delivered another great year performance. And two, we have continued positive momentum heading into 2024. Relative to 2023s performance, we delivered 15% revenue growth, 16% EBITDA growth and 32% free cash flow growth, with free cash flow margins also at 32%. Our total revenue growth of 15% was underpinned by 8% organic revenue growth. Importantly, free cash flow was growing 16% on a three-year compounded basis and we delivered our first-ever quarter of a $1 billion of software recurring and reoccurring revenues, quite an important milestone for enterprise.

In addition, we deployed $2.1 billion towards high-quality vertical software acquisitions, highlighted by our bolt-ons of Syntellis and Replicon, and year we’re deploying capital was structurally challenged and we did so at very compelling values, leading the strong value creation for shareholders. As we enter 2024, we do so with strong momentum. We continue to see robust demand for our mission-critical solutions, a strong outlook for organic growth. Also, you can count on Roper to improve the underlying business quality as we scale our enterprise. Adding to the momentum for the year are the contributions from our 2023 acquisition cohort and last week’s announcement of Procare Solutions. Finally, we are well-positioned to continue our capital deployment execution.

We remain very active in the M&A market and environment that expect to be notably improved in 2024. We do this with a strong balance sheet, a large pipeline of attractive opportunities and unwavering levels of patience and discipline. Now as we turn to your questions and if you can flip to the final slide, our strategic flywheel. We’d like to remind everyone that what we do at Roper is simple. We compound cash flow over a long arc of time by operating a portfolio of market-leading application-specific and vertically oriented businesses. Once the 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 the 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 in the mid-teens area over the long arc of time . So with that, thank you for your continued interest in Roper, and let’s open it up to your questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Today’s first question comes from Deane Dray with RBC Capital Markets. Please go ahead.

Deane Dray: Thank you. Good morning, everyone.

Neil Hunn: Good morning, Deane.

Deane Dray: Can we just start with Procare, and it’s interesting. This is the first time I recall where you made a deal announcement and I had not one but two people at RBC Research contact me and say, hi, that they were you’re active customers. And so — and they show them the apps on their phone and it was really interesting to see that dynamic. And my question here is, I’m really glad that you highlighted how they’re a maturing leader and within that category. And what surprises me is how much growth there is, I mean, low-single digit, maybe a low-double-digit to mid-teens. As you start to see that type of growth, might the private equity sellers have a bias, where maybe that’s a public company exit, that’s always been the kind of adage if you go for these more orphan businesses, there is no public company exit, they’re more apt to sell to you at a reasonable price.

If you start looking at some of these growth to your businesses like Procare, even at a maturing leader category, might that stretch the multiples because the private equity players might have a public company exit in mind? So maybe we can start there.

Neil Hunn: Yes, so I think — first, appreciate the comments on Procare. I think there’s like 80,000 five-star ratings in the app store. So your colleagues are a couple of many about the liking the application and the engagement with their kids in their early childhood education centers. Relative to the question about the IPO is a competitor, I mean maybe on some transactions, but most of what we’re going to look at are going to be sub-scale for the IPO market. The TAM here is sub $1 billion, that’s not a very IPO-able type market. So this is again small market leader. The market is growing low-double digits that we talked about, which underpins the mid-teens growth rate we’re underwriting to hear. In terms of valuation in multiples, I think we’re just in a world where sellers, especially private equity sellers understand the cost of capital, where the world is.

They have constraints from their LPs. They need to get liquidity back to them. They can’t raise new funds without it. And so, I mean, it’s hard to guess with this asset would have traded for 12 months to 18 months ago, but substantially — substantially higher on a multiple basis. So we think for the moment the valuations are coming to us because of the market for us that we just talked about.

Jason Conley: I think in this current environment liquidity is really key. So, if you do an IPO, you don’t get your liquidity right away. So I think that’s pretty important

Deane Dray: And this might be more of a nuance, but at your Analyst Day you talked about a willingness to look at businesses that might be at an earlier stage of development. And is — on that spectrum, this Procare is a maturing leader. Is that something you could have acted sooner on? And when Jason talked about the level of activity, how — within the funnel are there businesses that are at that earlier-stage that might look attractive?

Neil Hunn: I think Procare is like a perfect example by earlier stage, right? So these are not early-stage companies. They are earlier than what we’ve typically acquired in the past. So they meet all of our criteria. I have to emphasize that every time we talk about maturing leaders. So it’s a leader in a small market. The base, the competition is understood and observable in the marketplace. The relative market share advantage this company has is particularly interesting. So those are common traits of everything we’ve always acquired. In this case, the market is growing a little bit faster and the underlying business model — margins are going to scale as the business grows. So that’s the earlier part of what we’re talking about.

Historically, we would have maybe waited by Procare until the next trade, the one after, the one that just occurred. And so when we look at the model of this over a long arc, it’s just much more value for our shareholders to do this type of transaction. In terms of the pipeline, it is as Jason said in his comments, as I said in my comments, just a noticeable change in activity since our last call in the marketplace for some of the reasons that we talked about, and it’s a variety of opportunities. I mean, we know we’re leaning into doing more bolt-ons, so there’s a fair amount of bolt-on activity in there. That’s a lot of what Jan and her team are working to build, and then there’s a fair number of these emerging, maturing leader, excuse me, maturing leader type profiles and will just ask them, we’ll be patient and disciplined to figure out the right ones for us.

Deane Dray: That’s all great to hear. Thanks. Congratulations.

Neil Hunn: Thank you.

Operator: And our next question today comes from Julian Mitchell with Barclays. Please go ahead.

Julian Mitchell: Hi, good morning. Maybe just following up on Procare. If you could clarify a little bit just the financial impact. I think you said maybe $0.10 to $0.15 hit for the year in that guide. So maybe just sort of clarify around that. Is it kind of a smaller hit in Q1 because of the timing of the deal close and then we just spread the rest out over the balance? Any thoughts on kind of the seasonality of the Procare business and then how quickly you’ll get that sort of related debt down?

Jason Conley: Yes, sure, Julian. So we expect to close in March. That’s sort of our assumption right now. So the way that plays out is of the $0.15, maybe $0.02 in the first quarter. So we expect for the calendar year around $75 million of EBITDA. And then we’ll obviously from an interest perspective, we’ll reload on the revolver, which is going to be at around 6%. And so, and obviously, and so that will cast out through the rest of the year. So that’s how you get to your $0.10, $0.15 for the year. In terms of seasonality, not a ton of seasonality for the business. And then, of course, it’s growing nicely. So that’s sort of works through any aberrations you’d have between quarters.