Roper Technologies, Inc. (NYSE:ROP) Q3 2023 Earnings Call Transcript

Roper Technologies, Inc. (NYSE:ROP) Q3 2023 Earnings Call Transcript October 25, 2023

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

Zack Moxcey: Good morning and thank you all for joining us as we discuss the third quarter 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.

A businessperson in a technology center, surrounded by software engineers. Editorial photo for a financial news article. 8k. –ar 16:9

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 adjusted non-GAAP and continuing operations basis. For the third 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 investment in Indicor, transaction and restructuring-related expenses associated with our completed acquisitions, and lastly, a gain from the sale of non-operating assets.

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 will 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 third quarter results with you this morning, which like each of the first two quarters this year were quite good. As we turn to page four, let’s look at today’s agenda. As usual, we’ll start with the most recent quarter’s financial highlights then Jason will discuss our results. After that, we’ll turn to our segment specific discussion and wrap up outlining our increased 2023 enterprise guidance. Let’s go ahead and get started. Next slide, please. As we turn to page five, the four main takeaways for today’s call are first, we continue to perform at a high level operationally, delivering another quarter of very strong financial results, definitively demonstrating the quality of our portfolio of businesses, our leaders and our governance system; second, we continue to be very active on the M&A front, deploying about $2 billion over last quarter; third, we’re increasing our full year guidance; and fourth, we remain very well positioned for further disciplined capital deployment.

As it relates to the first takeaway, our continued strong performance, we saw total revenue growth 16% and organic revenue growth 6%. Consistent with our long-standing strategy, we continue to not only scale our enterprise, but also simultaneously improve as underlying quality and recurring revenue base with organic software recurring revenue growing high single-digits in the quarter. Importantly, the cash. As we’ve been highlighting throughout the year, we had very strong cash flow performance with free cash flow growing 19% for the most recent TTM period and 77% in the quarter. Turning to our second main takeaway, the deployment of $2 billion over last quarter was led by our acquisitions of Syntellis and Replicon, both of which are bolt-ons for Strata and Deltek, respectively.

These are each strategically interesting bolt-ons and are highly compelling from a value creation perspective as we’re able to buy these businesses for about 14 times next year’s EBITDA. More on these in a bit. In addition, in the quarter, we made a $125 million minority investment in Certinia, a professional services automation software business. We’re excited to partner with Haveli and General Atlantic Ventures to deploy the value creation thesis associated with this unique opportunity. Third, we’re increasing our full year total revenue growth to be 14% plus, increasing our organic revenue growth to be 7% plus and increasing our full year debt guidance to be in the range of $16.62 to $16.66 or up $0.21 at the midpoint versus our previous guidance of $16.36 to $16.50.

And fourth, we continue to be very well positioned for further capital deployment by having over $4 billion of M&A firepower. We remain very active in the market as we evaluate and diligence in many attractive opportunities. So with that, Jason, let me turn the call over to you, so you can walk through our third quarter results and our very strong financial position. Jason?

Jason Conley: Thanks, Neil, and good morning to those that have joined our call, and thank you for your interest in Roper. Turning to slide six, I’ll take you through our third quarter enterprise results in a bit more detail. Revenue of $1.56 billion was 16% over prior year, with 6% organic growth and a 9% contribution from acquisitions, led by Frontline. As Neil mentioned, organic software recurring revenue growth was in the high single-digit area. This was led by strength in customer expansion and net new logos across our enterprise software businesses. Additionally, our product businesses continued to deliver with 10% organic growth in the quarter, highlighted by Neptune and Verathon. Revenue converted nicely through EBITDA, with EBITDA of $652 million or 18% over prior year.

Margin expanded in the quarter to 41.7%, with EBITDA operating leverage of 46%. This all translated to depths of $4.32 versus our guidance of $4.16 to $4.20. Of note, our recent acquisitions had minimal impact on earnings this quarter. We expect DEPS accretion from these deals in 2024 as we pay down the revolver and benefit from full synergy realization. Free cash flow was very strong in the quarter and came in line with our expectations. We generated $625 million of free cash flow, which is up $272 million over prior year. As a reminder, our Frontline business delivers most of its free cash flow in the third quarter. So that, plus a terrific organic contribution drove the significant growth. Looking at cash flow on a trailing 12-month basis, as shown on the slide, provides a more relevant comparison.

With the frontline renewals tucked into the third quarter, our TTM free cash flow was $1.82 billion, which is up 19% over the prior TTM period. With the expectation for a strong Q4, we’re on track to deliver north of 30% free cash flow margins in 2023. Taking a broader view, our TTM free cash flow has compounded 16% over a three-year period, which is in line with EBITDA growth. In summary, our focus on compounding cash flow is evident in our results and will continue to guide us into the future. Next slide on page seven here. Taking a look at our financial position, we ended the quarter with net debt of $6.6 billion, including about $900 million drawn on our revolver. With trailing EBITDA of over $2.4 billion, this leaves us with net leverage of about 2.7 times.

Looking forward, we have capacity to deploy $4 billion or more over the foreseeable period even after deploying $2 billion in the third quarter. As always, cash flow growth optimization guides our strategic choices. So while our balance sheet may be primed, we will be disciplined and patient when it comes to capital deployment. To that end, private markets are slowly falling with activity picking up over the last quarter. With that, I’ll turn it back over to Neil to go through the segment results and outlook. Neil?

Neil Hunn: Thanks, Jason. Let’s turn to page nine. And before we walk through our segment details, we’d like to start with an overview of our acquisition of Syntellis and the combination with our Strata business. To remind everyone, Strata has been part of Roper for eight years as a leader in delivering SaaS-based financial planning, decision support and performance analytics solutions to US hospitals and health systems. Syntellis is a leading provider of SaaS-based enterprise performance management and data solutions to hospitals, higher education and financial institutions. As many of you know, US-based hospitals and health systems continue to face intense pressure from macro market trends, challenges resulting from care setting shifts, reimbursement rates, lagging rising costs and labor staffing issues.

The combined Strata and Syntellis business will uniquely be able to help health systems address these difficult financial and operational challenges. Together, the enterprise has relationships with about 70% of the country’s health systems. Stand-alone, Syntellis meets all our acquisition criteria, a leader in a niche market, delivers mission-critical application-specific solutions, is an HSD organic growth business and operates an extremely asset-light business model. Taken together with Strata, it only gets more attractive in terms of the combined customer base, the combined product offering, the combined financial profile and the combined future product development opportunities. For 2024, we expect Syntellis to deliver about $185 million of revenue and about $90 million of EBITDA inclusive of cost synergies.

Of note, this EBITDA is $5 million higher than at the time of our deal announcement. Considering the $1.25 billion net purchase price, the valuation is about 14 times next year’s EBITDA and will only improve from there. Operationally, the teams have moved quite expeditiously and are ahead of schedule relative to the near-term value creation plan, having implemented about 85% of the cost synergy opportunities within the first 45 days. In addition, the customer feedback has been overwhelmingly positive. Finally, the new combined leadership team headed by Strata’s CEO, John Martino, are turning their strategic attention to new combined product development ideas. Net-net, this is a highly compelling value creation opportunity for our customers and our shareholders.

And with that, let’s now turn to page 10 and walk through our Application Software segment. Third quarter revenues for Application Software segment were $803 million, up 5% on an organic basis and EBITDA margins increased to 44.6% in the quarter. We’ll start with Deltek. Deltek was solid in the quarter with sustained momentum in their SMB channel and the private sector solutions. They continue to see sluggish activity in their GovCon Enterprise segment given the backdrop of federal government spending uncertainty. Retention rates across the entirety of Deltek remain high. Importantly, over the last couple of months, Deltek released a Gen AI-enabled data collection capability for the GovWin IQ business, an LLM based processing features for their Vantagepoint product.

It’s good to see further adoption of Gen AI within the portfolio. Also in the quarter, as we outlined on last quarter’s call, Deltek closed the acquisition of Replicon, albeit about a month later than anticipated. To remind you, Replicon is a market-leading timekeeping and workforce management SaaS solution focused on professional services firms and is highly complementary to Deltek’s strategy. We continue to expect Replicon to contribute north of $70 million of revenue and $24 million of EBITDA next year. Aderant, our software business focused on the needs of law firms, continues to excel and deliver a very strong quarter. In the quarter, Aderant saw record third quarter bookings and continued success in the adoption and cross-sell of their SaaS solutions.

Also and importantly, during the quarter, Aderant continue to mature and gain market traction with their Generative AI-enabler MADDI. Aderant’s most recent Gen AI product release enables passive fee earner time entry assistance through Aderant’s iTimekeep product line. Great to see this rapid product innovation at Aderant. Vertafore, our software business that tech enables property and casualty insurance agencies continues to be a great business for us with solid performance across our core P&C business and their recent MGA solutions bolt-on. Strata, independent from the Syntellis acquisition was strong in the quarter and continued to gain market adoption of their leading decision support and financial planning solutions. Finally, Frontline had strong customer renewal season and delivered significant cash flow, as Jason mentioned, to the enterprise in the quarter.

Looking to the final quarter of the year, we expect to see organic revenue growth to be in the mid-single-digit area for the segment. Turning to page 11. Third quarter revenues for our Network Software segment were $364 million, up 5% on an organic basis and EBITDA margins were 56.3%. Let’s start with our US and Canadian freight matching businesses DAT and Loadlink, both of which grew in the quarter despite the continued challenges across the broader freight and logistics markets. Over the last quarter or two, these businesses have done a fantastic job of baselining their cost structures while continuing to invest in new product development. This led to strong segment margins in the quarter. Relative to product development, and as we highlighted a touch last quarter, DAT launched Gen AI-enabled solutions, among other initiatives targeted to combat freight industry fraud, which is a problem that plagues the entire industry.

Within the first month of release, DAT has made a significant dent in fraudulent activity and DAT’s customers have noticed and recognized this great accomplishment. This is a shiny example of why and how Roper businesses continue to innovate through and across macroeconomic cycles, which enables us to consistently deliver on market and customer opportunities ultimately leading to market share gains. Turning to our iPipeline. Our network software business that tech enabled the distribution channel for life insurance and annuities. iPipeline continues to execute at a high level and gain market share. In the quarter, they had very nice ARR gains driven by strong retention and customer expansion activity. This growth is directly attributable to iPipeline’s strategy that is laser-focused on their core life insurance and annuity customer base.

We talked about this concept during our Investor Day earlier in the year. A closely held value of Roper in our businesses is a notion that we compete and win based on customer intimacy. Customer intimacy requires focus and strategic choice. iPipeline over the last two to three years has excelled at this, the concept of focus on the core and choice, which enables further market share gains. Great job, team. Foundry, our media and entertainment postproduction software business continued their business model transition to a subscription model and is ahead of plan in that regard. Though industry demand was temporarily paused given both the Hollywood writers and actor strikes. Notwithstanding, Foundry continues to innovate their product offering and will aggressively compete for customer wallet share in the coming months as the actor Strike results.

Finally, our alternate site healthcare businesses, MHA, SoftWriters and SHP were strong in the quarter. Execution was solid and the business has benefited by having improved census and skilled nursing assisted living facilities and home health reaching the highest occupancy levels and patient volumes since the onset of the pandemic. For the final quarter of the year, we expect to see low single-digit growth for this segment based on continued challenging freight market conditions and the actor strike impact on foundry. Now let’s turn to page 12 and walk through our TEP segment. Revenues in the quarter were $396 million, up 10% on an organic basis. EBITDA margins for the segment were strong at 36.5% in the quarter. We’ll start with Neptune, our water meter and technology business.

Neptune delivered another fantastic quarter of operational and financial performance. As has been the case for several quarters, Neptune continues to see strong demand and momentum for the residential and commercial ultrasonic or static meters and increasing adoption for their meter data management software. We remain bullish about Neptune and the market in which they compete, given this market tends to be quite steady as Neptune’s customers’ budgets are typically fixed year-to-year and not tied to broader macroeconomic trends or cycles. Verathon was awesome in the quarter as well with double-digit order growth and tremendous operational execution. Specifically, Verathon saw strength across the reoccurring single-use products both Bronchoscope or Bflex and video innovation or GlideScope as well as BladderScan capital purchases.

A group of smaller businesses here Inovonics, IPA and rf IDEAS were fantastic as they were last quarter substantially working through a series of nagging supply chain challenges. Relative to the final quarter of the year, we expect to see low double-digit organic growth for this segment. Now please turn to page 14, and let’s go through our increased 2023 guidance. Based on our strong third quarter performance, we’re raising our full year 2023 guidance for total revenue, organic revenue and adjusted debts. For 2023, we now expect total revenue growth to be 14% plus, an increase from about 13% last quarter. In addition, we’re raising our full year organic revenue outlook to be in a 7% plus ZIP code an increase from about 7% last quarter and 5% to 6% in our original guide for the year.

As a result of our improved revenue outlook, we’re increasing our DEPS guidance for the year to be in the range of $16.62 and $16.66 up from our prior guidance of $16.36 to $16.50. Assumed in this guidance is the tax rate trending to the high end of our 21% to 22% range. For the fourth quarter, we’re establishing adjusted DEPS guidance to be in the range of $4.28 and $4.32. Now please turn over to page 15 and then we’ll look forward to answering your questions. We want to leave you with the same four points with which we started. First, we delivered yet another solid quarter. In the third quarter, revenues increased 16% to $1.56 billion. This growth was underpinned with 6% organic revenue growth and high single-digit organic software recurring revenue growth.

In addition, EBITDA margins were notably strong at 41.7% and cash flow was outstanding, growing 77% in the quarter and 19% on a TTM basis. Second, we successfully deployed $2 billion of capital in the quarter, led by the bolt-ons of Syntellis and Replicon. These two deals will deliver about $115 million of EBITDA next year and are priced about 14 times next year’s EBITDA, quite compelling. Third, based on the strong quarter performance, the recurring nature of our revenue stream and the importance of our solutions to our customers were increasing our full year total and organic revenue growth outlook and increasing our full year DEPS outlook to be between $16.62 and $16.66. And finally, notwithstanding this quarter’s $2 billion of deployment, we continue to be active with our capital deployment activities as we have north of $4 billion of available M&A firepower.

As we’ve been discussing over the past several quarters, we have a very large pipeline of opportunities, though, as always, we remain super patient and highly disciplined to ensure the continued optimal deployment of our available capital, just as we did with the Syntellis and Replicon acquisitions. We firmly believe that patients as is always the case with capital deployment will be rewarded. Before we turn to your questions, I’d like to share an exciting addition to the Roper executive team. During the quarter, Janet Glazer joined our team and is leading our acquisition cultivation and corporate development outreach efforts. Janet will partner with our M&A resources, our corporate leadership team and several of our business units to increase our forward-leaning posture with private equity sponsors and their businesses.

Most recently, Janet was a global sector leader and portfolio manager at Fidelity. We’re super excited that Janet has joined our leadership team and welcome aboard. 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. 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, yet we close our businesses on how to structurally improve their growth rates and underlying business quality. Finally, we run a centralized process-driven capital deployment strategy that focus on finding the next great business to add to our cash flow flywheel.

Taken together, we compound our cash flow in the mid-teens area over a long arc of time. So with that, thank you for your continued interest in Roper and let’s open it up to your questions.

See also 12 Most Expensive Luxury RVs in the World in 2023 and 10 Fastest Residency by Investment Programs in the World.

Q&A Session

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

Julian Mitchell: Thanks. Good morning. Maybe just wanted to focus on the network software business for a second. One question really trying to put a finer point on how much of a headwind in that Q4 sales guide you have from the freight markets what sort of pace of decline or softness there? And is foundry more of a sort of rear-view month of October type headwind? And then was there anything onetime in the network software margins in Q3 that made them so high?

Neil Hunn: Good morning, Julian. Thanks for the question. So I’ll try and take it in reverse order. The margins I tried to cover in my prepared remarks how DAT and Loadlink have just done a great job in Q2 and Q3, aligning the cost structure of where the business is today. And so they’re actually a little bit ahead of where they wanted to be in that regard. So that’s what drove the margins. Relative to Foundry, it’s very much in Q4. I mean, there’s still much — very much is an actor strike for Foundry in post-production. They need content flowing through the pipeline. And right now, writers are writing, but actors aren’t acting. The general consensus that will sort of resolve itself in Q4, but one never knows. Then the pipelines will build and sort of leading into maybe the second half of Q1 and Q2, Foundry’s demand will sort of get back to normal levels.

So it’s sort of as a Q3, Q4, maybe Q1 impacting. Relative to DAT and Loadlink, I’ll remind just DAT has just been remarkable over the last couple of years. It’s really been abnormal growth. It’s been exceptional. DAT has a super long history of being very steady and growing. They grew in the quarter. They continued to innovate, you know, in October here. We’ve seen sort of we’re bouncing along the bottom, if you will, maybe a slight uptick in the first handful of weeks in October. Who knows if that sort of started the trend or just some of the yellow sort of, you know, capacity coming into a different part of the market and reshaping. But we expect normal behavior for DAT. It’s just we’ve got to wait about get off the bottom here in terms of the industry freight volumes.

Anything you want to add to that, Jason?

Jason Conley: No, I think that’s right. I mean, the abnormality, if you do a straight line from 2019, you’d see the business has been up substantially, right? So we have sort of this exceptional growth. A lot of carriers come in the market, they’re exiting out. And you know, again, it’s just been a good steady growth for us over the last 20 years absent, you know, sort of this exceptional period. And just back on Foundry, I would say that what we’ve observed is the gross retention of the business has been extremely strong. We have moved to a subscription model this year, and so that gives customers pause on if they get off maintenance, they’re going to have to come back on a subscription. So we feel good to once the actor strike is done, that’s — that business is going to pick back up next year, hopefully.

Julian Mitchell: Thanks very much. And then just a quick follow-up. It sounds like Syntellis off to a strong start. But maybe my question on Certinia more, you know, maybe a slightly unusual structure for Roper to go into this minority interest approach, you know, given the attributes when you bring something in-house. So maybe just sort of explain why you went for this structure. And any sense of the scale of Certinia or the size of that business?

Neil Hunn: Yeah. So we’re partners with Haveli principally in — the Haveli partners, we know quite well. It was one of the founders of Vista and then the person who led the tech practice at Bain came together joined Haveli. So the long history of both of them as individuals. They actually approached us to see if we can lend some of our expertise to the situation. So we’re intrigued by being able to help. We’re intrigued by the value creation opportunity here. It’s a very compelling value-creation opportunity. And then we’ll also learn a thing or two along the way. I mean, this is a smart group of people that have a long history of doing this type of transaction. It’s a unique opportunity, Julian, as you mentioned. We’re not looking to do a lot more of things like this.

This is not the beginning of like a large book of minority investments. We’ll continue to be opportunistic, but it’s not going to be anything. It’s going to be few and far between in terms of our pacing and volume on this. And the scale, I think we’re on at the private business, so we’ll sort of keep the scale of the business sort of in the private domain.

Julian Mitchell: Great. Thank you.

Operator: The next question comes from Allison Poliniak with Wells Fargo. Please go ahead.

Allison Poliniak: Hi. Good morning.

Neil Hunn: Good morning.

Jason Conley: Good morning.

Allison Poliniak: Going back to the technology-enabled products, it seems like certainly a tick-up in terms of where you were expecting the second half of this year. I know you mentioned Neptune and Verathon. But any specific vertical driving sort of that outperformance in the sector, in the space?

Jason Conley: I think sort of market-based.

Neil Hunn: Oh, sorry, but you broke up just on the very end there, Allison. So I would say — so yeah, just to reiterate it, sort of Neptune is, I mean, it is a bit market-based in that, that market continues to be, you know, very healthy. The customers are — ordering patterns are consistent and robust, lots of backlog carrying into next year. So there’s market share gains and product advantage we have and also a cooperative market for sure. You know, with Verathon, the market dynamic is moving towards single-use in the category in bronchoscope from reusables because of infection control. So it’s a market that is definitely a growth market that we are very soon to be the number one player in knock on wood, maybe this quarter.

And so, that’s market related, but just tremendous execution by the team, both go-to-market and product. I mean, tons of product vitality. And then also in the segment, we have a couple — we mentioned a couple of smaller RF product businesses. That’s less market and more just clearing through just a mountain of supply chain problems that plague the businesses for many — a few quarters. And second quarter and third quarter are great in that regard to those businesses.

Allison Poliniak: Understood. And then just turning to M&A. You mentioned sort of those private markets starting to fall. Can you maybe — you know, talk through sort of the multiples that you’re starting to see there? Are they as attractive as what we’ve just seen this past quarter? Or do they still need to come in a little bit here? Thanks.

Neil Hunn: Yeah, that’s really the question. The — so this — it’s like a — the market Jason sort of referred to it as like a coiled spring. I mean, there is a tremendous amount of activity like forming activity, investment bankers, pipelines are filling processes are starting. There’s increasing pressure from the LPs onto the sponsors to start thinking about getting some liquidity back to them. The sponsor is starting to think about raising new funds, which they need liquidity to do that. So there’s a lot of the precursor activity that is required to see transactions come back into the market. The question still remains about the bid-ask spread between buyers and sellers. Here still — the number of printed deals to date is still small, right?

So this is — and we anticipate — well, we know there’s going to be more opportunities. We don’t yet know where they’re going to clear. We continue to be super patient. You know, the market is coming to us. We don’t have to chase the market. If we can find very compelling value opportunities like Replicon and Syntellis will do them. If we don’t, we’ll remain patient.