Joe Giordano: Hey, good morning, guys.
Neil Hunn: Good morning.
Jason Conley: Good morning.
Joe Giordano: Hey. So on M&A, like if we’re going into like kind of a more murky kind of macro environment here, a little bit more uncertain, I get why it would kind of open up those markets a little bit. But do these large like larger-scale bolt-ons become incrementally more attractive to you in — like times like this just because you kind of know the markets more, you probably have kind of more certainty around an outcome than like, you know, bringing in something that perhaps is an adjacency or something that you’re just less familiar with in general?
Neil Hunn: Well, Joe, I would say, yes and no to that. I would — I mean, first of all, times of uncertainty relative to our capital deployment, our history and pattern recognition says, those are great times for us, right? If you go back to like the pandemic, we do Vertafore. Like in the late summer of 2020, it was an — it’s a terrific business for us, a great asset for us, our largest deal because of our balance sheet strength and our flexibility, we were in business when nobody else was and the sellers need to sell. Frontlines, very different reasons last year, very similar. Syntellis, I mean, it’s opportunity in this uncertainty. So we like that. Now as it relates to going to be deployed to a platform or bolt-on, we’ve built over 20 years, the ability to understand — be a great, if you will, humbly a business picker.
And part of that is understanding the markets and understand the competitive advantages. But in that, we’re looking for stability, right? We’re looking for stable competitive forces, observable competitive forces, small markets, clear leadership position, high gross and net retention, that’s a formula for stability which — from which to grow from. And so if we see things like that and these uncertain times, we’ll certainly lean into that. At the same time, as we talked about at our Investor Day, for our capital deployment strategy, we are trying to lean in to do more bolt-on activity because they’ve historically been the best value-creative deals we’ve done, they help our businesses once they turn organic grow faster. That’s a gigantic part of what we brought Janet in to do to help lead that part of our investment strategy.
And so, we’ll do either, but you understand sort of the dynamic between the — the interplay between the two.
Joe Giordano: Yeah, that makes sense. And then just last, we still don’t have a speaker of the house, we may have a government shutdown coming at the end of the year. What are the implications of something like that on Deltek’s business?
Neil Hunn: I think all of that is factored into the current environment. I think the large government — the enterprise class government contractors based on just the uncertainty have — or just are being very cautious in their activity. They’ve been cautious over, you know, fits and starts this year. So I think it’s baked in. It’s certainly reflected in our balance of the outlook for this year, sort of continued uncertainty. And this but the good news is this will eventually clear itself and then the government to get you back to spending, and that will be a catalyst for Deltek.
Joe Giordano: Great, thanks. And I’ll just echo Deane’s. I’ll just echo Deane’s comments and great hire on Janet. We’ll miss her as a client, but a good home for her and a great hire for you guys. Thanks guys.
Neil Hunn: Thank you.
Operator: The next question comes from Steve Tusa with JPMorgan. Please go ahead.
Steve Tusa: Hey, good morning.
Neil Hunn: Hey, Steve. Good morning to you.
Steve Tusa: Congrats to Janet as well. Yeah. Can you guys just, obviously, great cash in the quarter, I guess, you know, you guys have talked about the seasonality here. How do we kind of think about the 4Q from a working capital perspective now? Like how should we look at history? And you know is there anything that kind of gives back when it comes to Frontline in the fourth quarter? Like what do — how do we think about working capital? Should we expect another strong working capital performance similar to what we just saw in the third quarter, like history you know?
Neil Hunn: Yeah. I mean before Frontline, Q4 was our — you know, our strongest quarter of the year. You know, we have a lot of large renewals at our enterprise software businesses. We expect it to be strong again this year. I mean, I don’t think Frontline is going to really give back. They’re just not going to give, right? They’ll be kind of flattish on cash. So we feel good about sort of the — you know, the fourth quarter and how it’s going to close out the year. We still expect to be north of 30% free cash flow margins for this year. And so, Q3 was obviously strong, and we expect the same in Q4.
Steve Tusa: And anything else year-over-year in Q4 from a cash tax timing perspective or outside of working capital we have to be aware of?
Neil Hunn: Not really. Yeah.
Steve Tusa: Okay. So effectively, net income growth and then some working capital benefits?
Neil Hunn: Right.
Steve Tusa: Okay. Great. And then just following up on the environment and enterprise software. You guys mentioned there’s like there’s pockets of softening. I think can you just clarify like what you’re just seeing broadly there from customers into ’24. It just seems like the economy is mixed, but a lot of the software businesses out there holding up really well. How would you guys kind of characterize the environment maybe a little bit deeper there?
Neil Hunn: I mean, I think it’s — again, just to remind everybody, right, I mean we’ve got a business model that’s like built on durability, right? So it’s very highly incurring. What we do is mission-critical. So we’re not on the fringe, generally speaking, something that can be turned off and on. We’re just — we’re system of record. You know, we operate sort of the freight markets like our customers need our software that leads to high retention. There’s pricing, that’s routine in the growth algorithm. Most of the cyclicality has been taken out of the business. And so this is — the macro is it’s a very durable set of businesses. So we’re talking about a point or two here or there relative to the impact of all of this. There isn’t — we talked quite a bit getting rid of this call, Steve, about is there some broad brush pan room for macroeconomic impact.
And what we say is what we said from the beginning of the year is we just expected from our January call that software would be a little slower because generally you’re not going to buy new large software with uncertainty in the market. So the impact on our growth algorithm is gross retention should is — we expect that it is a little bit higher. Cross-selling and up-selling should be a little bit lower because you’re not going to grow as much with your customers and then we’re not so. Our net retention is going to net out to be in the same area code as it always has been. And then you’re not going to sell as many large new things and that’s essentially what’s played out across the enterprise, but there’s pockets of differences. You’ve got a ton of strength at Aderant.
You have a little bit of weakness in GovCon at Deltek. You’ve got strength you know at — you know and help me with — iPipeline, sorry, tons of strength in iPipeline, improving strength at ConstructConnect, but then you have the DAT headwind. So it really is a mixed bag of things.
Steve Tusa: Got it. Okay. Great color. Thanks a lot.
Neil Hunn: You’re welcome.
Operator: The next question comes from Joe Ritchie with Goldman Sachs. Please go ahead.
