Roper Technologies Inc (ROP) — Q1 2019 Earnings Call Transcript

Good morning, and thank you all for joining us as we discuss the first quarter financial results for Roper Technologies. Joining me on the call this morning are Neil Hunn, President and Chief Executive Officer; Rob Crisci, Executive Vice President and Chief Financial Officer; Jason Conley, Vice President and Controller; 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'll please turn to slide 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 slide 3. Today, we will discuss our results for the quarter primarily on an adjusted non-GAAP basis. Reconciliations between GAAP and adjusted measures can be found in our press release and in the appendix of this presentation on our website. For the first quarter, the difference between our GAAP results and adjusted results consists of the following items: amortization of acquisition-related intangible assets, purchase accounting adjustments to acquire deferred revenue and lastly, we have adjusted our income statement to exclude the gain on sale from the divestiture of our Scientific Imaging businesses. We have also adjusted our cash flow statement to exclude the cash taxes paid as a result of the sale. GAAP requires this payment to be classified as an operating cash flow item even though it is related to the divestiture. And now if you will please turn to Slide 4, I will hand the call over to Neil. After our prepared remarks, we will take questions from our telephone participants. Neil?

Thanks, Zack, and good morning, everyone. We'll start our call today with the enterprise highlights and financial results for the quarter. We'll then turn to our segment detail and outlook followed by an update to our 2019 guidance and the establishment of our second quarter guidance. And then turn it over to questions. Next page. We characterize the first quarter here as a strong start to the year with solid organic growth, operating leverage and cash flow as well as capital deployment. Revenue grew 7% to $1.29 billion with organic growth coming in at 6%. EBITDA improved 13% to $438 million, and margins expanded 170 basis points to 34%. Importantly, we saw margin expansion across all 4 segments, which indicates the breadth of the strength of the quarter. Free cash flow improved 15% to $312 million or 24% of revenue. It's always great to see the expansion down the P&L. Revenue grew 7%; EBITDA, 13%; free cash flow grew 15%. So the leverage expansion down the P&L is always something we'd like to see. Also in the quarter, we announced our new segmentation, and we'll talk about that in a few slides. Importantly, we completed the sale of our Scientific Imaging businesses on February 5th. And we also completed the acquisition of Foundry earlier this month. Certainly a good quarter. And now I'll turn it over to Rob to walk us through the P&L.

Thanks, Neil, and good morning, everyone. Turning to the income statement metric page. Revenue grew 7%, 6% organically, as Neil mentioned, to $1.288 billion. We had our 3 largest segments, each grew organically between 6% and 9%. Our smallest segment, Process Technologies, grew 1%, which did exceed our expectations for the quarter. Gross margin expanded 50 basis points to 63% as we continue to benefit from our increased mix of high-margin software businesses. So we are very well-positioned should any macro headwinds build around tariffs and material cost inflation or anything like that, really would have minimal impact for Roper as they have historically had very minimal impact. EBITDA grew 13% with EBITDA margin expanding to 34%. We really had very high leverage in the quarter aided by a couple of items: the timing of some perpetual software license wins where revenue is recognized at the time of delivery and also some compliance payments in our GPO network business that really come in at close to 100% margins. So that impacted the leverage in the quarter, which was very strong. Earnings before taxes grew 15%. As you can see, our tax rate was lower than expected at 9.7%. This includes a $43 million or $0.41 discrete benefit due to foreign restructuring. We've been simplifying our legal entity structure to make it easier to access and repatriate our foreign cash and as a result, we will be able to realize some net operating losses in the future. So overall, our DEPS of $3.30 was an increase of 26%. If we adjust out for the tax item, we were still at $2.89, which was a very strong quarter for Roper overall. Moving on to the next slide. Always one of our favorites, the asset-light business model. So the networking capital position at the end of the first quarter: inventory 4.5% of revenue; receivables, 16.6%; payables, 10.8%; deferred revenue grew to 13.5%. The deferred revenue grew 19% on a year-over-year basis, ending the quarter at $694 million. So if you add that altogether, we had negative 3% of working capital really for the first quarter 3 years in a row down to 3.3%. Foundry, our recent acquisition, which we'll talk more about shortly, has a significant negative net working capital balance that will further enhance our position and continue to expand our ability to compound cash flow moving forward. The net working capital for Roper remains a source of cash. Next slide. On compounding cash flow, so aided by our negative networking capital, organic growth, disciplined capital employment, we continue to produce excellent cash flow results and excellent cash flow compounding. The Q1 operating cash flow was $330 million, an increase of 17% versus prior year. As Zack mentioned at the beginning of the call, this excludes the $39 million cash payment related to the Scientific Imaging divestiture completed during the quarter. Free cash flow, as Neil mentioned, grew 15%, represented 24% of revenue. So if you look at it on a TTM basis, we are nearly $1.5 billion of operating cash flow, up 30% versus prior year, really fantastic result. And that represented 28% of revenue over the previous 12 months. So certainly, we believe that cash remains the best measure of performance. Next slide. So moving to the strong financial position in the balance sheet slide. We ended the first quarter with our gross debt of $4.5 billion, net debt of $4.1 billion against TTM EBITDA now approaching $1.9 billion. So our gross debt-to-EBITDA of 2.4x and our net debt-to-EBITDA down all the way to 2.2 times at the end of the quarter. Subsequent to the end of the quarter, we did close and fund the Foundry acquisition where we really used a combination of cash and debt. So if we adjust for the Foundry acquisition, we are still down to 2.4 times net debt. Furthermore, the Gatan divestiture would bring an additional $700 million of cash. When that is closed, we're assuming the end of the second quarter in the guidance. And so that would further decrease our leverage position. So in summary, we remain very well positioned to continue to deploy capital moving forward towards our pipeline of high-quality acquisition targets. So with that, I'll turn it back to Neil to review the segments.

Thanks, Rob. If we can turn now to Page 11 where we're summarizing our new segments. Earlier in the quarter, we did announce the new segments. To remind everyone, our resegmentation process was not a portfolio or a business review. Also, the resegmentation does not have anything to do with how we run or operate our governance model but rather how we summarize the activities of our 45 businesses in a manner that is more easily understood by investors and is more consistent with our strategy. So to this end, we chose to resegment based on a business model construct versus end market. As you know, as we deploy capital, we are not constrained by end markets as we are in pursuit of acquiring the best business models available, the essence of our cash return on investment-led strategy. Hence, it makes the most sense to organize in this manner. Starting with Application Software. This is the first of our 2 software segments. This segment has businesses that are delivering software applications to customers. You can see the businesses included in the segment, Aderant, Deltek, PowerPlan, Strata, to name a few. Perhaps the easiest to understand is Aderant. Aderant delivers enterprise Application Software to law firms. These customers will run their business on Aderant software. This segment represented 28% of our 2018 revenues, has gross margins of 67% and EBITDA margins of 40%. Now turning to our Network, Software & Systems segment. This is our second software segment. These businesses are ones that have a network component to their business model. Think of situations where the customers derive benefit not only from our software but also being part of a broader network. An example of a network business is DAT. DAT is our two-sided network that matches thousands of brokers and tens of thousands of carriers into the full truckload spot freight market. This segment represented 26% of our 2018 revenues, has gross margins of 68% and EBITDA margins of 43%. On the bottom left is our Measurement & Analytical Solutions segment. Think of this segment as one of our 2-product segments that is diversified in terms of end markets and has quite stable long-term growth. This segment has our medical product portfolio as well as our industrial test and measurement type businesses. The segment represented 33% of our 2018 revenues, had gross margins of 59% and EBITDA margins of 33%. And finally, on the bottom right is our Process Technologies segment, by far our smallest segment and our second product segment. This segment has 10 businesses that are largely indexed to the oil and gas end market. While this segment represents only 13% of our revenues last year, they have incredible business model: 56% gross margins and 36% EBITDA margins. Clearly, they are still a collection of assets in the space. Turning to the Application Software segment, revenue for the quarter was $382 million, accounting for 30% of our first quarter results, and representing a 7% organic growth. EBITDA for this segment was $149 million, marking a 23% increase from the previous year and yielding a margin of 39%. Deltek performed well, achieving high single-digit revenue growth alongside great operating leverage and securing multiple large customer wins. We also observed continued double-digit growth in their SaaS and subscription revenue, driven by new customer acquisitions and successful transitions from on-premise to SaaS. A notable aspect of Deltek's growth is the robustness and diversity of their growth drivers, which include small and medium-sized businesses as well as large enterprises, a focus on government contracting, product lines, and the professional services market across North America, Europe, and beyond. Importantly, their growth is not dependent on a limited set of factors but rather spans a wide range of opportunities. Kudos to the Deltek team for their successes. Strata also showed impressive growth, mainly due to strong Hospital Decision Support SaaS bookings. Strata offers essential solutions for hospitals, particularly for CFOs, to navigate the evolving economics of healthcare. Dan, John, and their team at Strata deserve recognition for their outstanding growth. We are also seeing share gains in large law firms, along with a successful uptake of Aderant's new SaaS billing product. PowerPlan is working on building a pipeline in its core product offerings after a strong demand for lease accounting software recently. Additionally, CBORD is experiencing growth in its food and nutrition software sales to the healthcare market. Looking ahead for the rest of the year, we anticipate 4% to 6% organic growth in this segment, with second-quarter EBITDA margins expected to be similar to those of the first quarter due to an increased mix of SaaS versus perpetual licensing. This is influenced by our approach to pacing SaaS conversions according to customer preferences, which may lead to some quarter-to-quarter variations based on the balance between SaaS and on-premise sales. For example, Deltek had a significant perpetual sales performance in the second quarter of last year and the first of this year. Last quarter, we discussed our SaaS and cloud migration strategy and its long-term benefits for our customers and our business model. To summarize, we prioritize moving at our customers' pace rather than enforcing our timetable for conversions. This strategy has proven effective as we have gained customers from competitors who pushed their timelines too aggressively. We recognize that the SaaS deployment model offers various benefits, such as easier upgrades, lower total ownership costs, reduced technical operations, and streamlined support. The transition to the cloud significantly enhances our ability to sell and implement add-on products, roll out new features efficiently, boost back-office and tech stack productivity, and improve cash returns, all while driving growth. Our software solutions remain targeted at specific customer challenges, reflecting our niche strategy. All our software businesses are at different stages of their cloud migration, aligned with customer interest. A notable example is Deltek, which introduced its cloud offering in 2011 and has successfully transitioned over 10,000 customers to the cloud. During Roper's ownership, we have invested over 15% of revenue into R&D, focusing on user experience and developing new products like VantagePoint while modernizing our tech stack. By aligning with clients' readiness to embrace cloud solutions, Deltek has maintained a contemporary code base and tech stack while innovating and enhancing product features. This approach has led to consistent high single-digit organic growth, an increase in recurring revenue to approximately 70%, and a very high customer retention rate. Next slide, please. Network Software & Systems revenue in the quarter represented 27% of Roper's revenue and was $346 million, which indicated a 9% increase organically. EBITDA was $150 million and represented a 43.3% margin. In the quarter, we saw just excellent growth at DAT from continued net subscriber adds and increased revenue per customer. It's important to note that this network has value to its constituents in different macroeconomic environments. Regardless, the value is very strong whether the trucking and shipping market is running hot, there's value to the participants or if it cooled off a little bit as we saw in the second quarter, it still has tremendous value as shippers and carriers are trying to match networks for the loads. So we saw a very nice growth in the quarter at the DAT business. We also saw strong performance at MHA for market share gains and vendor contract compliance. To remind you, MHA is our network that connects thousands of healthcare providers to hundreds of vendors in the marketplace in a procurement network. And so it's great to see the strong performance in MHA. iTrade grew based on strong renewal activity and net subscriber additions. And late in the first quarter, iTrade announced a blockchain initiative with the goal to increase safety, sustainability and visibility of the food supply chain. Using blockchain or a decentralized ledger, iTrade will more easily enable interested parties to gain access to the relevant data. iTrade will leverage its network of over 5,000 growers, retailers, distributors, restaurant operators, and logistics providers in building the network. Importantly, most of the data needed for this farm to fork traceability blockchain already exists natively within the iTrade application. The iTrade blockchain is designed for interoperability, using the same industry standards utilized by IBM Food Trust and others. This is a great example of the leadership position that many of our businesses take within their industry niche. We saw double-digit growth from RF IDeas in a secure print and identity management solution. This business we acquired a number of years ago. It's really a fantastic business. What they do is think of the security badge you have to get into your building from a physical perspective. RF IDeas makes an integrated reader that reads the hundreds of protocols for those security badges, and the readers use a non-security situation. So imagine secure print. The printer companies and OEMs embed a reader in the printers, and then you can go use any of these security protocols to then credential you to have a secure print. Or in the healthcare setting, think about secure sign-on for doctors and nurses relative to the electronic medical records. Instead of having to type their name and password in, they can use their credential. It allows them to see more patients. So the company has done a great job at working with, scores of OEMs embed their technology into their end application. And we've seen great growth over several quarters at RF IDeas. We'll return to TransCore. They had, again, excellent execution in the back office software and services, and they always do a great job with the tolling project execution. And we saw low single-digit growth in that business. And as we mentioned earlier, we completed the acquisition of Foundry last week. That business is a network. We'll describe that here shortly. So as we turn to the outlook for the 2Q to 4Q, we see 4% to 6% organic growth for the segment for the balance of the year. We also see Q2 '19 EBITDA margins to be similar to that of Q1. Before we move to the next slide, we would be honored to be chosen as the technology and implementation partner for the Manhattan congestion pricing initiative. TransCore is currently in procurement and has assembled its best team, eager to collaborate with the authority if the opportunity arises. Now, regarding the Foundry acquisition, this is a fantastic addition for us that meets all our criteria. It has excellent cash flow characteristics and negative net working capital, clearly aligning with our cash return goals. The management team we met was exceptional. Typically, when meeting a management team, you might connect with most members but have reservations about one or two; however, in this case, the entire team impressed us from beginning to end. We are looking forward to collaborating with them. Soon, we'll discuss their niche focus and their strong leadership in that area, establishing them as the standard in their field. Additionally, they possess extensive domain expertise, high recurring revenues due to their longevity in the industry, and multiple growth opportunities. The acquisition cost is $410 million, and we anticipate it will be immediately accretive to cash flow. In the first year of ownership, we expect approximately $75 million in revenue, with around 40% EBITDA margins, leading to about $25 million in unleveraged free cash flow. We view Foundry as a solid organic growth venture with high single-digit potential. Foundry is an outstanding niche software company that offers various network advantages, and we're thrilled to welcome them to the Roper family. So, what does Foundry do? Foundry software is utilized for creating visual effects, animation, and 3D content in the media entertainment and digital design sectors. For instance, if you're a fan of Game of Thrones, the software enables the seamless integration of historical scenes, computer-generated dragons, and live-action elements like fire, along with virtual armies. With two decades of experience, Foundry has established itself as the benchmark for compositing in the media entertainment landscape. In digital design, they fill a gap in the market by providing artist-friendly 3D software for creation and design. Clients using Foundry can develop visually striking product concepts much faster while dramatically reducing supply chain risks. Their customer base includes notable names like Pixar, Mercedes, and New Balance. The business boasts over 30,000 customers and has cultivated a robust global network of advocates. Most college students studying computer graphic arts are trained using Foundry's applications, learning compositing techniques with their software. As demand for computer-generated visual effects has surged across media productions, the industry has evolved with Foundry as the primary standard for outsourcing visual effects. Furthermore, Foundry has been instrumental in every VFX Oscar-winning film for the last ten years. We believe that Roper's long-term ownership and investment strategy will further enhance Foundry's network effects and its leading position in the industry. Foundry represents another exceptional software venture for Roper. Next slide, and turning to our Measurement & Analytical solution segment. The revenue is represented 31% of our aggregate revenue across the enterprise in the quarter and was $402 million, an increase of 6% organically. EBITDA came in at $128 million and represented a 31.9% margin. We'll start, as we always do, with highlighting Neptune's continued high single-digit growth from their continued share gains driven by their customer-focused innovation. No weather impact there. Verathon had very solid execution of its new product launch for its next-generation GlideScope systems. It's off to a good start from the launch perspective, but it's still early. And we'll watch closely how it unfolds for the balance of the year. We had a record quarter in Northern Digital, driven by optical measurement systems and consumables growth. From time to time, we talk about Northern Digital, but just to remind you, this is our measurement science business that has 2 core technologies, electromagnetics and optical, that's used principally in health care applications and embedded in OEM solutions. And they measure with great precision where the tip of a surgeon's instrument might be in brain surgery or where the tip of a catheter might be in the cardiac procedure and many others, so it's just a fantastic business. They are clearly the world's best at what they do, and we see it in the financial results consistently. So really a great job by Dave and the team up in Canada for doing a great job not just this quarter but over a long period of time. CIVCO Medical Solutions had very broad-based growth driven by channel investments that we made over the course of last year, so it's great to see that business get even more intimate with the customers and see the results financially. Struers growth came from sales of equipment and consumables to multiple industrial end markets. And to remind you, Struers is our industrial materials prep and analysis business. Gatan saw double-digit growth from the delivery of its next-generation cryo-EM backlog. And as I mentioned at the onset of the call, we completed the divestiture of our Scientific Imaging businesses, but we did so a bit earlier than expected. It actually provided between $0.02 and a $0.03 headwind or impact versus what we thought would happen simply based on closing that transaction a bit earlier than we thought. As we turn to the outlook, we see segment revenues plus 4% to 6% organically for the balance of the year. However, for the second quarter, we expect low single-digit growth due to the timing of Gatan shipments pushing out of the second quarter. This is a $0.05 DEPS negative impact as compared to our expectation from a quarter ago. Finally, we continue to assume Gatan's sale to Thermo will close at the end of the second quarter. Process Technologies, which represented 12% of our revenue in the quarter. Revenue was $158 million, or an increase of 1% organically, and EBITDA was $53 million, or a margin of 33.5%, just a spectacular business this year. Cornell grew double digits from great performance in its industrial end markets, and we saw particular strength in its aftermarket activity. As we have highlighted in the past quarters, CCC grew, in this quarter, high single digits from execution against new LNG construction projects. Currently, there are 11 projects slated for construction around the globe. We're spooled for 10 of them and have a chance to be spooled in the final one. So we believe there'll be a series of quarters here of strong performance at CCC. We saw declines, as expected, from our upstream oil and gas businesses due principally to prior comps in the prior period. So upstream oil and gas in this segment is about 25% of the segment. Based on this quarter's slightly better performance versus our expectations and our quarterly views with our businesses, we are modestly increasing our outlook to be down 1% to 3% organically for the balance of the year versus down 1% to 5% for the whole year. We expect the second quarter to be roughly sequentially flattish to that of the first quarter. This equates to the second quarter being down high single digits, which is consistent with our initial outlook and due principally to a plus-20% comp from a year ago. Again, we see flattish revenue sequentially. For the second half, we see the business roughly flat on a year-over-year basis based on easing comps. So we remain cautious in our outlook here. If planned takeaway capacity comes online as expected and/or energy prices remain higher, then there may be some second half upside. We'll have to wait and see. Now let's turn to our guidance. We continue to be positioned for a strong 2019. And as such, we're raising our full year 2019 guidance. Adjusted DEPS is now $12.70 to $13, where previously it was $12 to $12.40. This includes the Foundry acquisition which closed on April 18. The guidance continues to assume the June 30th Gatan close. We're also improving our organic growth outlook to be 4% to 5% where previously it was 3% to 5%. Our tax rate, we assume, is approximately 22% for the balance of the year. Also, we're establishing our second quarter 2019 guidance with adjusted DEPS in the range of $3 to $3.04. Turn to the Q1 summary. Again, a great start. Our diversified portfolio of business delivered another excellent quarter, record first quarter results. We saw organic revenue grow 6%, EBITDA grew 13% and importantly, margins expanded in all 4 of our segments, so very broad execution. Free cash flow grew 15% to $312 million, which represented 24% of revenue. So great to see the leverage down the P&L. Again, organic revenue plus 6%, EBITDA plus 13% and free cash flow of plus 15%. It always starts with our CRI discipline, and we believe our proven business model provides a very scalable platform for continued growth. To this end, following our announcement of Satish Maripuri last quarter, we are delighted to share that Harold Flynn recently joined the Roper leadership team. Harold will focus his efforts on providing group leadership to a number of our product businesses. Harold is a very seasoned executive with experience at IDEXX Laboratories, Abbot and Zimmer. The combination of Jeff Paulson, Chris Krieps, and Harold will provide leadership to our portfolio of product companies. Like Satish, Harold deeply understands Roper, our model, and our approach. We're very excited to welcome Harold to our leadership team. Now turning to capital deployment. We are excited to have closed the Foundry transaction earlier this month. As we described earlier, we view this to be a near-perfect fit against our niche strategy and our network strategy and are excited to welcome Craig, Martin, Jody, and the entire Foundry team to the Roper family. Setting Foundry aside, we continue to be excited about our capital deployment prospects in 2019. As Rob mentioned, our balance sheet remains super well positioned for a strong capital deployment for the balance of the year. The number of very high-quality assets we've seen in the last several months continues to be encouraging, and our pipeline is quite full. Importantly, our CRI orientation and M&A process help us identify the very best businesses to acquire. Now as we turn to questions, we want to remind everyone that what we do is very simple. We compound cash flow by running a portfolio of operating businesses that have market-leading positions in niche industries. We provide the business leaders with Socratic coaching about what great looks like relative to strategy, operations, innovation, and talent development. We incent our management teams based on growth. We have a culture of mutual trust and transparency and finally, we take our excess free cash flow and deploy it to buy businesses that have better cash returns than our existing company. These simple ideas deliver powerful results. We'll now turn it over to questions.

I wanted, just to start off with a comment that we appreciate all the hard work that went into that the resegmentation. And as promised, this recasting just makes a lot of sense since it's easier to see and explain the portfolio, so thank you for all, getting that to the finish line. And on Foundry, just your comments this morning. Just to let you know, you had me at Game of Thrones, so that actually worked for us. So first question is on Deltek. And it was interesting that you recently had a big database software cloud provider actually call out Deltek as an opportunity for them. Our experience is has been with good businesses with attractive margins. It can attract new competitors, but what do you make of this? And maybe some comments about the moat that Deltek has? And how you expect this to play out?

Yes. I appreciate the question. We read the same comments. There's a series of companies that were listed, so we'll talk specifically about Deltek. I can't comment at all about the other companies that were listed. And we certainly highlighted a number of those when we went through our SaaS strategy with Deltek. But I think perhaps the most important thing to start with is that not just Deltek but all of our businesses are in niches and have very specific built-for-purpose software aimed at a specific user. And so if you think about Deltek, government contracting, right? it is a, we are the ax in that space from a software perspective. Virtually every large enterprise uses our software because of it does what it does so well, you don't have to customize it or tweak it or tune it. It's both on-premise and in the cloud. And then you have a considerable amount of R&D resources that are just 100% focused on making that product better. Same thing can be said for the professional services end market. Deltek does not attack professional services broadly. They attack architects, they attack engineering firms, they attack marketing services firms, accounting firms, so very targeted. And the way those businesses run their business are not just generic to professional services. And so you buy our software out of the box, and a normal marketing services firm can actually deploy without any customizations at all in any way, shape or form where the larger places, you have to go through a SI layer and do sort of customizations, then you have to worry about upgradability of those and whatnot. So the core of what we do is preferred by our customers and that seen time and time again with win rates in excess of 50% when you go head to head for net new opportunities against the larger players. And then from a code-based, tech stack cloud strategy, I think we're as current as anybody can be in that business.

That's all really helpful. Appreciate it. And then just as a follow-up, can you clarify what the drivers are on the boost to the low end of organic revenue growth for the year?

Yes. Sure. Good morning. This is Rob. I think overall, we certainly had some outperformance in the first quarter. And I think if we look at all of our segments, we see sort of at least as good as originally planned or a little bit better. I think specifically in the Process Technologies segment, which is the smallest segment, we upped our outlook there where we're not seeing sort of a downside as bad as we thought coming in. And so we're just up the bottom of the range a little bit. I'd say, overall, a little bit of outperformance everywhere and a little bit of a better outlook everywhere.

Some of the businesses you acquire have interesting implications regarding the network effect. Clearly, Foundry seems to mitigate competitive risks. I'm particularly curious about the network segment and whether any of the stronger results indicate that you might be experiencing an acceleration of a network effect breakout. I’d like to frame my question around MHA and iTrade to explore this dynamic further.

I'll start with a broad overview and then focus on iTrade and MHA. I wouldn’t describe this as a significant network breakout; however, we have observed consistent trends at DAT. It’s a two-sided network where both parties gain more value as the network expands. ConstructConnect and iTrade are examples of one-sided networks that rely on having key participants—like general contractors for ConstructConnect and retailers for iTrade—to be effective. This helps improve supply chain efficiency. Overall, we’ve seen solid execution in these businesses. While there is a network effect, it primarily arises from the effective software execution, sales, and distribution capabilities. Regarding MHA, this group purchasing organization has excelled at retaining customers, adding new clients, and expanding its product portfolio for healthcare providers. Additionally, we have ongoing compliance activities to ensure both sides of the network meet their payment obligations. There has been considerable activity in this area this quarter, which is encouraging to see.

Hi guys. Thanks for taking my question. This is actually Pat Baumann for Steve Tusa. Quick follow up to Deane's question on the bridge on your organic raise. Can you bridge us on the EPS raise for the year as well to $0.65 at the midpoint?

Sure. The $0.41 discrete tax item we mentioned includes about $0.07 net of incremental M&A. We estimated around $0.14 for Foundry, but we lost about $0.02 or $0.03 due to the Imaging transaction closing sooner than anticipated. This impacted the first quarter. Additionally, there’s approximately $0.05 related to Gatan shipments that are occurring in a period when we no longer expect to own the business. When you combine all of this, it results in $0.07. The remaining amount of about $0.17 reflects improved operations, better margins, and stronger organic growth across the portfolio.

Got you. That's really helpful. And then maybe circling back to, a lot of obviously, commentary on Deltek given the comments from that large company. You said it was up high single digit organically in the quarter. Just wanted to kind of step back. And if you could offer some perspective on how is that business grown organically since you bought it back in 2016? I think you were kind of alluding to a high single-digit type growth rate but just wanted to confirm that. And then on...

No. That's right.

Yes, it's been high single-digit organic since we bought it, which is better than we expected. We expected mid-single.

Yes. Yes. And then also just wondering have you guys done any deals there since acquiring it? Just curious what kind of deals you've done to try to bolster the business if at all. There's been a couple of bolt-ons. Now the high single digit we talked about is organic, right, so the growth there is not...

It's quite a bit higher if you include the M&A that we've done.

Exactly.

We've done several acquisitions also that add to that business.

So what is the revenue base now if you don't mind sharing some color on that?

We don't like to give exact revenue numbers on our businesses, but I think we said it would be $550 million. The first year we owned it, it's way over $100 million on top of that $550 million.

This is Lee Sandquist on for Julian. You highlighted double digit SaaS growth in application software. How big is the SaaS business today? And secondly, could you just provide a little bit of color about the margin differential here versus other software models in your own portfolio?

So I'll take the first part of this then let Rob follow up. So we talked about the double-digit SaaS at Deltek. I just, I want to be clear in our commentary there, that's not a broad Roper statement. And I'll let Rob talk about the percentage of the total revenue of Roper that's software and SaaS.

Yes. I mean where we sit today of the software revenue is pretty evenly split from a SaaS subscription model and a license on-prem model, and that's been moving more towards SaaS and we expect that to continue. But as we sit here today, the business models are roughly the same, about even. And then as we've talked about in the past, EBITDA, software EBITDA for Roper is in excess of 50% at this point in time.

Okay. And then compressor controls has put together several nice quarters in a row now. How far below peak are we? And then secondly, how large is the LNG exposure since you called it out in that business?

Yes. So compressor controls is historically a late-cycle business, so it just bottomed out later than the rest of the oil and gas businesses, and it has begun growing since sometime late last year. And I think it's an opportunity there with a lot of, Neil mentioned there's a lot of LNG opportunities out there that we expect to get our fair share of. So this business is the size that is roughly 20% of our Process Technologies segment, so I think those upsides, sort of tailwind opportunities that are exciting. But again, it's a recently small part of the overall Roper portfolio and a small part of the segment.

Yes. And I would add. It's obviously highly indexed to LNG, it's what they do. But it's not just tied to new. I mean there's a lot of retrofit Brownfield activity as well that they consistently add channel capacity to identify and the capability to drive upgrades there.

Hi. This is Robert McCarthy on for Robert McCarthy. How are you today?

Thank you for joining us.

I think many people are currently connected and on various calls. One thing I wanted to address seriously is an update regarding Gatan and the potential divestiture there, if I missed this in your prepared remarks.

So the update is, as we talked about, it's in our guidance through the end of the second quarter. We're in, along with Thermo, we've been working through the regulatory process with the U.K. CMA. And we're hopeful that concludes here at the end of the second quarter.

Okay. So you're still confident that this can be done?

Certainly. There's lots of resources working on clearing the CMA objections.

Thank you for that information. Could you elaborate on whether Harold Flynn is involved?

Yes.

Yes. Maybe you could just amplify kind of what he's going to bring to the table and talk about his background, his experience and what you're really looking for? Two or three key things that you think that's really going to help you kind of use him to enhance the governance and kind of coaching across the platform.

The role of the Group Executive is to coach the company and its leaders to help them achieve greatness. We focus on three main areas: developing strategy, executing that strategy effectively, and managing talent. The strategy should be shaped by external factors and should answer two key questions: where to play and how to win. Execution of this strategy needs to be a sustainable process rather than just a project for the leadership team. We also prioritize how our teams nurture and engage their talent. The Group Executive, including Harold, Chris, and Jeff, is dedicated to these objectives. They are growth-oriented, process-driven, and have a strong cultural fit, which is crucial for our small team in Sarasota. This emphasis on cultural fit is vital for success as we integrate individuals into our system. Furthermore, our executives are committed to continuous learning and adapting, ensuring they embody our governance principles. Financial acumen is also essential for this role, and that encapsulates what Harold and his team are focused on.

If I can just sneak one more in since I showed up in person. Maybe you could just talk about level setting our expectations for more acquisitions in terms of firepower, opportunity set? And maybe if you could comment on the pricing of assets in the competitive environment.

Okay. So as Rob and I both mentioned, Foundry is just the beginning. We have a very strong balance sheet. We've worked hard to get the balance sheet to be offensively positioned, which it clearly is, and so we're, we feel great about that. The pipeline, we said it now for several quarters, it's very robust. The quality of the assets is quite high. As you know, we're always trying to buy things that are a little bit better than what we are. It's been the hallmark of our strategy for a long period of time. So relative to the pricing, with the assets we want, the things that have all the defensive characteristics and network characteristics, great management teams, the negative net working cash flow, mid- to high single-digit organic growers, low capital intensity, those assets are not inexpensive. But in our CRI orientation, there's always value to be gained by our shareholders by deploying capital against those types of assets. So we feel very good about it. We feel very confident about our future here for that type of plan.

And on the balance sheet, I think we both mentioned in our comments earlier that the balance sheet is very well positioned, so in the low 2s from a net debt-to-EBITDA standpoint, we're obviously deeply committed to investment grade, but we also have TTM EBITDA approaching $2 billion. So we also have $700 million that would come in as the Gatan deal closes. So with or without that $700 million, we could easily deploy $1.5 billion or more on M&A whenever the opportunity arises.

Yes. And from a competitive situation, I would say it's largely unchanged. If there is a super strategic that's going to bear a lot of synergies, we are not and have never been a viable competitor for that target. We're almost always the feedstock of candidate targets for us. It principally come out of private equity. And then at the finish line, we're normally competing against private equity. And so in the asset that we described where the management teams are builders and growers and are attracted to our model, we tend to compete and win at a very high clip when all the things line up.

Congrats on the quarter.

So I think when you announced Foundry, when you go through the financials of it, it clearly fits the profile, but I think there was at least some thought of, okay, now we're getting into Pixar and some things that we're not used to. Can you maybe just talk about how you guys conceptualize these things internally? As there almost seems like there is no bridge that's too far when you're looking at it strictly from a financial standpoint, but how do you get comfortable with key man risk at those individual businesses and your ability to be able to run those businesses in that kind of framework, things like that.

Sure. So I might have misunderstood a part of that question, but I'll just, I'll clarify so it's on the record. So it's not a bridge too far financially. So these are always...

No. Definitely not. It's definitely not. It's not just financial.

Okay. Now I understand. So we'll go through our process. The first question is whether it meets our CRI thresholds, and this one clearly does. Next, we evaluate if the management team will thrive in our environment. A straightforward way to assess that is by determining if they are genuinely motivated to build their business. In our interactions with this team prior to the process starting, it was clear that they are extremely passionate about what they do and have been in the industry for a long time. The technology officers in this business have received personal awards for their work in animation and compositing, indicating they are well-suited for this role. Then we consider if it’s a business we like, looking at factors like its niche status, leadership, network effects, and other criteria we've discussed previously. As a team, we thought about whether it fits our criteria, but also if it does something that stands out in an exciting way. Ultimately, since it met all our criteria so well, we concluded that it is a software business. They create content that you can see on platforms like HBO, which is different from other things we’ve encountered, but fundamentally, it remains a relatively routine software business.

Are there examples of companies that have met the financial criteria? However, when you evaluate them closely, do you find yourselves questioning whether you truly understand their business and if you might not be the right owners?

We often come across numerous outstanding CRI businesses, but as we begin our evaluation, the primary reason we often decide to walk away, even if they meet our financial criteria, is the management team. For various reasons, they may not be effective builders, leading to concerns about chemistry or the likelihood of their departure in the near future. Additionally, if we have concerns about a product or if there's any indication of zero in the Monte Carlo analysis, we typically choose to walk away. As long-term owners, we aim to avoid taking on that kind of risk, so we invest significant time in this assessment.

And if we don't yet know the industry well, we do a ton of work around the industry with outside consultants, and there's a lot, a lot of work that goes on. There's many readouts. And if anything scares us away, we just say no, and we walk away. And that happens all the time.

Hey guys. Can you hear me?

Yes good morning.

Hey, how are you doing? I wanted to revisit the annual contract value because I recall you mentioning at a conference that you've been reporting 50% higher annual contract values in ConstructConnect within just the first year and a year and a half of ownership. We had some internal discussions about whether this indicates they were possibly underpricing their product at the time or if the goal was to recover the purchase costs sooner. Where might you challenge someone who suggests that?

Yes. So I appreciate the question on ConstructConnect. So I think we talked about a couple of times in the past, ConstructConnect, again to set the context is our network that connects general contractors and subcontractors to building product manufacturers in its large network. And the strategy since we've owned this business since the fourth quarter of '16 has been to basically drive habitualization of the core product to the contractor community. And to do that, we had to actually build, and we've work to do this, a number of software elements that go on top of and interlink with the contents that we have. And so the increase in revenue per user at ConstructConnect are early gains of our new product launches because we just have more value to sell. So it's not the construct, like you said, that try to cover our purchase price or anything like that. It's just the continuation of the strategy and the commitment we have to the long-term ownership of the assets.

Great. Thanks for that. Can you provide an update on TransCore? You mentioned it would be more of a nationally interoperable solution coming online this year. What progress has been made, and could you share some insights on that?

I think it's quite good. That reflects the recent wins we've had and the ongoing tolling projects. The team has executed well.

And last one for me, sorry about that. In terms of just the organic growth guidance, is that just a function of the lower end of process solutions, sorry, Yes, process solutions just kind of moving up? Or is there something else there that I should be looking at in terms of the segments?

Yes. I think it's a combination of that and the combination of the outperformance in the first quarter, building that into the full year numbers. Maybe a little bit net, more good guys than bad guys if you look everywhere else. But that's the majority of it.

What was the dollar amount you paid for Foundry? You could give it in pounds, but I want to know what it was in dollars.

Yes. If converted to $530 million or so in dollars. $535 million in dollars.

$535 million. Okay. And on compressor controls, you mentioned that it's well below the peak. Is that right?

Certainly, if you look at the performance of the business over the past several years, they're just sort of on the way back up given the fact there was no new construction for several quarters, and now the new construction business is starting to come back. As Neil mentioned, they've done well in retrofits and Brownfield activity and doing a great job of covering their install-base and doing a lot of great things for customers. But the new construction projects are just now starting to ramp up with LNG taking the lead.

How much is that of the total? When that, When you acquired that business in 1992, most, almost all the business was retrofit because none of the OEMs were using software. People would buy the compressors using the OEM software, and then they would retrofit it with CCC. So, But it sounds to me like that has changed and that you're getting a lot of business now with the OEMs delivering your software with their compressors. Is that the case?

Yes. It's a pretty small percentage. I don't have the exact number, but it's pretty small.

Thank you, everyone for joining us today. And we look forward to speaking with you during our next earnings call.