Roper Technologies Inc (ROP) — Q2 2019 Earnings Call Transcript

Good morning and thank you all for joining us as we discuss the second 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 two. We begin with our safe harbor statement. During the course of today's call, we will make forward-looking statements which are subject to risks and uncertainties as described on this page, in our press release and in our SEC filings. You should listen to today's call in the context of that information. And now please turn to slide three. 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 second 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, transaction related expenses for the Foundry acquisition and lastly an adjustment to the income tax expense related to the gain on sale of our Scientific Imaging businesses. 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. As usual, we'll start with our second quarter highlights. I'll then turn our call over to Rob to discuss our financial results. I'll then walk us through the segment details and outlook, followed by our Q3 2019 guidance, then we'll open it up for Q&A. Next slide. We had another very strong quarter here at Roper. Revenue grew as expected, margin execution was strong and operating cash flow increased 13%. It was nice to see gross margins expand 90 basis points in the quarter increasing in both of our product segments. And we always like to see leverage down the P&L with EBITDA growing faster than revenue and cash flow outpacing that of EBITDA. Our software segments continued their strong momentum led by 6% organic growth in our network systems and software segment, which saw broad-based growth highlighted by DAT, iTrade, MHA, and SoftWriters. Application software grew 2% despite a difficult comparison against significant perpetual wins a year ago. Deltek continues to win in the marketplace with bookings up double-digits and SaaS adoption accelerating in the quarter. Growth in our Measurement & Analytical Solutions segment was led by high-single-digit growth in our medical product businesses as new products gain traction following recent investments. Neptune strategic concepts continued with another solid quarter of growth. However, this was partially offset by expected declines and a short cycle pause late in the quarter for industrial businesses, which represents approximately 8% of our annual revenue. We will discuss this later in the call, but we're maintaining a cautious stance and not assuming investment improvement in the second half of the year. Process technologies continue to do an impressive job executing through expected declines in the oil and gas market. As many of you know, we closed the Foundry transaction in the quarter and onboarded the company into our operating and governance model; very early, things are off to a good start. And finally, our acquisition pipeline is quite active, and our balance sheet positions us exceptionally well to deploy capital in the second half. I'll now turn the call over to our CFO to walk you through our consolidated quarter results, Rob.

Thanks, Neil. Good morning, everybody. Turning to page six, I would like to recap some of the numbers behind our strong second quarter financial performance, starting with revenue. Revenue was $1.332 billion in the quarter, an increase of 3%, and an organic increase of 2%. This was right in line with our internal guidance model coming into the quarter. We had organic growth in three of the four segments; the one that was down was our process technology segment, as expected against a very difficult plus 20% comp last year. Margin expansion was very strong, so gross margins increased 90 basis points to 64%, EBITDA increased 5%, and EBITDA margin was up 70 basis points. So, really good margin expansion for the quarter, probably a little bit better than we had anticipated coming in. So that all adds up to DEPS for the quarter of $3.07, which was a 6% increase over last year and a little bit better than our guidance coming in of $3 to $3.04. Next slide. Turning to the asset-light business model slide. We will look here at the net working capital as a percent of the Q2 annualized revenue, so slightly different view this quarter. Looking back over the past six years of the trend gives a little bit of a perspective on what's been going on with working capital here for Roper over a long period of time. So, if you look back and compare the June 2013 quarter to the June 2019 quarter, you will see our inventory is down 200 basis points to 4.3% of revenue. Receivables are down 240 basis points to 17.3% of revenue, payables down a little bit to 10.5%, but deferred revenue up 680 basis points to 13.5%. If you add all that together, you see this consistent negative working capital we talked about at Roper at minus 2.4% for the quarter, which is over a thousand basis point improvement versus the same period in 2013. So, we really believe the negative net working capital accelerates our cash flow compounding. Next slide. Speaking of cash flow compounding, we had excellent cash results in the quarter. On page eight, Q2 operating cash flow of $301 million is now at a 30% increase versus the prior year. Free cash flow was $286 million, which represented a 14% increase versus the prior year. So, if we look now at the trailing 12 months, we reached $1.51 billion, certainly a record, plus 23% over the prior year 12-month period and representing importantly 28% of revenue. In the first half of the year, we are up 15% on cash flow, and we’re certainly on pace for continued double-digit compounding at Roper. Next slide. So importantly, due to the strong cash flow performance, we really see exceptional deleveraging over the past year; between acquisitions, we generate a lot of cash and we pay down our debt very quickly so that we're always well-positioned to make the next acquisition and deploy capital. If you look at the past year, gross debt is down $900 million from $5.6 billion down to $4.7 billion, and net debt is down $800 million from $5.2 billion to $4.4 billion. The TTM EBITDA is up $191 million, and you can see our gross debt to EBITDA is now down to 2.5 times, and net debt to EBITDA is down to 2.3 times. We were recently upgraded at Moody's, which we're very happy to see, and we also have a BBB plus rating at S&P. So, we really are exceptionally well positioned as we sit here today to continue our disciplined capital deployment and take advantage of the very high-quality pipeline and acquisition opportunities that we have in front of us. With that, I will turn it back over to Neil.

Thanks, Rob. Let's go and turn to our application software segment. In the quarter, the segment represented 29% of our revenue, and revenues came in at $391 million, which was up organically, and EBITDA was $155 million, which represented a 39.7% margin. Starting with Deltek, we saw a continuation of a few trends that we've discussed over the past several quarters. First, we saw an acceleration in bookings and recurring revenues as a result of an increased mix of business towards Deltek SaaS offerings. In fact, in the quarter, Deltek signed their largest Vantagepoint's SaaS contract. As a reminder, Vantagepoint is Deltek's new enterprise software offering targeting professional service firms. Also, the business continues to see a nice balance of activity across their two macro end markets: professional services and government contracting. To remind you, Deltek had a very difficult comp given a very large volume of perpetual deals signed a year ago. Adjusting for this, Deltek grew their bookings double digits in the quarter. The Deltek team continues to execute exceptionally well. Aderant experienced double-digit growth, as a result of continued share gains in the adoption of their newer staff solutions targeting law firms. Over that period of time and since 2015, Aderant has added approximately 40,000 timekeepers to their core platform, roughly 30,000 of which have been competitively won from their largest competitor. Deane and her team at Aderant have done and continue to do a great job. At PowerPlan, we saw nice increases in recurring revenues based on continued strong retention rates and an expanding customer base. Importantly, the PowerPlan team is working aggressively and systematically to increase the volume of new pipeline ads and their sales funnel. This is particularly important following the regulatory-driven increase in license implementation revenues due to the new lease accounting standards. We also saw nice increases again at CBORD with excellent cash performance. As a reminder, CBORD is our software business that delivers integrated security and payment solutions to higher education and healthcare campuses. Finally, Strata logged another great quarter based on very strong renewal activity, adoption of their new products and continued market share gains for their cost accounting and Decision Support SaaS products in the hospital market. As we turn to the outlook for the second half, we continue to expect 4% to 6% organic increases for the segment. The comps for Deltek will normalize in the second half, and we expect the segment's organic growth to be slightly better in Q4 versus that of Q3. Next slide.

And turning to our Network System, Software & Systems segment. This segment in the quarter represented 28% of Roper’s revenue, and revenue was $368 million, which was a 6% organic increase. EBITDA was $159 million, which represented a margin of 43.2%. The quarter was highlighted by continued growth at both of our freight match businesses in the U.S. and Canadian markets. In particular, we saw strength in demand for our rates data offering. MHA’s performance in the quarter was highlighted by several strong trends. To remind everyone, MHA is the largest group purchasing network for the non-hospital market, with a leadership position and long-term care of pharmacy, long-term care facilities, and home infusion marketplaces. The team continues to gain market share relative to on-boarding new pharmacies. Importantly in the quarter, MHA started to see the benefits of increased customer purchasing volumes due to several new pharmaceutical products being on contract. Also, pricing appears to stabilize, and the business's food and nutrition portfolio grew nicely in the mid-single-digit range. Additionally, our Pharmacy Automation and Workflow Software business, SoftWriters, had a very nice quarter continuing a trend, developing and deploying the core pharmacy automation workflow software that closed door or non-retail pharmacies use in their day-to-day operations. The economics of this business and for our customers are unlocked as they cross-sell the recurring revenue transactional products, specifically electronic claims submission and e-prescription. So, as this business adds more and more pharmacies to the customer accounts, their economic model expands at a more rapid pace as the recurring revenues accelerate. Nice job by the team in Pittsburgh. iTrade grew high single digits in the quarter based on strong renewal activity and an increase in trading partner growth. Over the last couple of years, the team at iTrade has worked to structure their business model and customer contracts, or iTrade benefits from volume increases from their trading partners, and we saw the benefits of this in the most recent quarter. Again, we saw strength at RF Ideas; in fact, it was a record quarter for the business, based on continued adoption of RF Ideas core reader technology in the secure print and secure sign-on marketplaces. At TransCore, the quarter was marked by an exciting new product release. TransCore’s proprietary integrated toll technology and partnership with Gentex was released in rearview mirrors in Audi's new electric SUV. Currently, other OEMs are evaluating the technology and considering the timetable for potential adoption. Though it is very early, this is another example of great innovation by Roper business. And before we return to the outlook for the segment, we wanted to briefly discuss our most recent acquisition, Foundry. We closed the transaction during the second quarter. Soon after, we had the opportunity to onboard the team and do our normal introduction to our governance model and CRI framework. We’re excited to announce that Jody Madden, previously Foundry’s Head of Product, was named our CEO. Jody is perfectly suited for this role, given her long history in the visual effects industry, as well as her specific history with Foundry. So far, it has been a very easy transition. Importantly, Jody was able to successfully close a couple of very large planned transactions with customer prospects in the early days of her new leadership role. Congrats to Jody and welcome to the entire Foundry team. Now turning to our outlook. For the second half, we continue to see 4% to 6% organic growth for this segment. As for TransCore, the new project pipeline remains robust, although it's difficult as usual to forecast the timing of new project wins and implementation timetable. Next slide.

Our Measurement and Analytical Systems segment in the quarter represented 31% of Roper’s revenue. Revenue for the segment was $408 million, which is a 2% organic increase, and EBITDA came in at $140 million, which represented a 34.3% margin. Neptune had another record quarter. Neptune's strategy is rooted in customer intimacy, and product innovation continues to help Neptune systematically gain market share in the North American market. NDI had another great quarter, with strength rooted in their electromagnetic and optical measurement systems used by several OEMs in surgical applications. Dave and his team in Waterloo continue to do a terrific job. Verathon's growth was led by increases in our glide scope consumables recurring revenue and demand for the next generation bladder scan systems. The Roper Board of Directors is looking forward to a site visit at Verathon during the upcoming September board meeting to see all the progress the company has made over the past couple of years. Our CIVCO MMI, our Multi-Modality Imaging business located in Iowa City, had a very nice quarter that was highlighted by strong execution in their ultrasound guidance and infection control markets. CIVCO's ultrasound guidance products have extremely high levels of intellectual property and meaningfully aid doctors during ultrasound-assisted procedures. Our particular interest is CIVCO's most recent innovation regarding infection control. For many years, CIVCO has been a market leader in providing covers for ultrasound assisted surgical procedures, namely image-guided biopsies. One of the risk factors of these procedures is the potential for cross-contamination of the gel used for ultrasound conductivity. The smart team at CIVCO appears to have solved this problem. They created the first-ever, IP-protected solution that does not require gel in ultrasound guided procedures. The team is launching the product in North American and Europe, and we congratulate the team on its innovation. We look forward to working with them to make this the standard of care. Our industrial businesses, which represent about 25% of this segment’s revenues, were impacted by a short cycle pause late in the quarter and were down mid-single digits. We experienced a general slowdown in our industrial businesses due to project push outs and consumable destocking. As such, bookings for this group were down high single digits during the quarter. Importantly, this group managed margins and cash flow very well as it navigated the challenges. Gatan declined in the quarter as we expected. As we announced, the agreement to sell Thermo has been terminated due to regulatory concerns. As we turn to the guidance for the second half, we see organic revenues increasing 1% to 3% for the segment. Our medical products and Neptune businesses, roughly 70% of the segment's revenues, are expected to increase mid-single digits for the remainder of the year. For the short-cycle industrial businesses, which represent 25% of the segment’s revenues, we expect these businesses to be down high single digits for the second half of the year, assuming the late second-quarter industrial slowdown continues. As for Gatan, the sale of Thermo was terminated during the quarter. We have now included Gatan in our full-year and second-half guidance. Specifically, we added approximately $0.20 of DEPS to the second half based on its expected contribution. We also expect a modest organic decline for Gatan considering the record 2018 comps. Finally, we have reengaged a sales process for Gatan. While early in the relaunch process, we received strong interest from several parties. Gatan is a solid business with an exceptional management team, and we are committed to completing the sales process with Gatan. However, if we do not receive compelling economic and contractual offers, we look forward to owning Gatan over the long term and engaging with Saunders and his team to invest in its long-term success. Next page.

As we turn to our process technology segments in the quarter, the segment represented 12% of Roper's revenue, with revenue at $164 million, which was down 5% on an organic basis. EBITDA was $60 million, which represented an impressive 36.6% margin. Our upstream oil and gas businesses declined as expected against a very challenging comp, which was plus 20% from a year ago. That said, the business executed very nimbly in the quarter and drove outstanding margins across the segment. EBITDA margins were up 200 basis points in the quarter. With CCC, we continue to see strength in our LNG product pipeline. Finally, Metrix delivered a record quarter based on strong demand for their vibration monitoring systems and controls across multiple end markets. Turning to the outlook, we see a minus 1% to 3% organic growth for the segment for the balance of the year and do see easing comps in Q4 versus Q3. As we have discussed, the potential for upside may exist based on expanded takeaway capacity and/or higher oil prices, but we have not assumed this is going to happen in our outlook for the second half.

Now let’s turn to our guidance update. We’re updating our DEPS guidance to a range of $12.94 to $13.06 compared to our prior guidance of $12.70 to $13. This increase to our guidance range primarily relates to the inclusion of Gatan, which we expect to add approximately $0.20 to second half DEPS. Given the dynamics around the divestiture process, we do expect there to be greater than normal variability in Gatan’s second-half results. Our DEPS and organic growth guidance assume that the short cycle industrial pause we saw late in the second half continues for the remainder of the year. While recent trends may just be a soft patch, we do not have visibility into the second-half recovery for our industrial businesses, and more importantly, we do not want our business leaders to assume a bounce back occurs. Accordingly, we are lowering our revenue assumptions for those businesses and expect our industrial business leaders to focus on continuing to deliver high margin and strong cash flow. Should industrial trends improve, our guidance for those businesses could prove conservative. It should be clear from the content of our remarks on this call that the vast majority—approximately 80%—of our enterprise continues to have strong momentum, growing roughly 5% on an organic basis. Rolled up to our tax rate, we assume the rates for the second half to be approximately 21%. Finally, we’re establishing our Q3 adjusted DEPS guidance to be in the range of $3.16 to $3.20. Now let’s turn to the Q2 summary. We saw great execution and cash performance across the enterprise. EBITDA increased 5%, margins expanded, and free cash flow grew 14% in the quarter. Importantly, our CRI discipline improvement business models continue to provide a scalable platform for long-term systematic growth. Now turning to capital deployment. First, as the primary source for our capital deployment funding, our excellent cash performance will continue. With leverage approaching two times trailing EBITDA, our balance sheet is very well-positioned to be offensive. Through the extent we’re able to successfully complete the sale of Gatan, we will be even better positioned to accelerate our cash flow compound. It is nice to see the Moody’s upgrade to BAA2 and a sustained S&P BBB+ ratings for our bond. Rolled to the outlook for acquisitions, we continue to see a very large number of high-quality assets. We’ll always remain patient, but we are very active in maturing a number of opportunities in the pipeline. Importantly, it’s always good to remind everyone that our CRI orientation and M&A processes help us identify and execute on the very best acquisition ideas. Now as we turn to questions, I want to remind everyone that we do it very simply: we compound cash flow. By running a portfolio of operating businesses that have market leadership 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 incentivize our management teams based on growth, maintain a culture of mutual trust and transparency, and finally, we take our excess free cash flow and deploy it to acquire businesses that have better cash returns than our existing company. These simple ideas deliver powerful results. Now let's go and turn it over to the questions.

Thank you. Good morning, everyone.

Good morning, Deane.

Good morning.

I don't normally have the opportunity or the responsibility of asking you about short cycle industrial softness in the quarter; it's just not typically something that we're talking about, but it's presenting itself here. Can you provide some more color on the cadence in the quarter, the push-out, and some of the destocking? And what visibility do you have? If you can get it by business, that might give us some context? And start there, please?

I appreciate the question. I'll give you some thoughts and ask Rob if he has any additional. First, we have to note that we're talking about 8% of our business, involving six or seven businesses out of over 45. We may not be the best read across to other things. What we saw was that April was just fine; really no issues there. May saw a little weakness, and June saw significant weakness. Interestingly, it was across really all of the industrial businesses that we have and was across geographies too—Europe may have been a little weaker than North America but nothing discernible and not isolated to one end market. What we saw was projects push, and then a bit of consumable or spare sort of destocking, right? So, it's across both the capital piece and the recurring piece. Interestingly, in the first three weeks of July, we saw a pretty meaningful recovery. But we don't yet know if that's just a bounce back from June or if there's some root cause, whether trade tensions or some folks waiting for lower interest rates. We don't yet know. So, it's really a little too early for us to call a specific direction. So, we chose to remain relatively cautious here. Our assumption is to expect down mid-single digits for the second quarter and down high singles for the balance of the year. We're managing the businesses with that assumption in mind. Rob, if you want to add anything?

Yes. Sure. Just to clarify, as Neil mentioned, that 8% of the company's revenue is about 25% of that segment. This is not included in Neptune. Neptune continues to grow at exactly the same mid-single-digit rate; it's just the businesses that Neil mentioned. The bookings were down in the high single digits, therefore we're assuming high single-digit declines for the second half of the year when we used to have flat, which translates to about $25 million of revenue that comes out of the second half. That's really the only sort of change in the entire company and what we're seeing at this point versus three months ago.

It's helpful. And if I'm looking to calibrate how the slowing on the organic side ripples through into your guidance. Just to make sure I've got the right pieces here: Gatan adding back $0.20, it looks like the tax rate a bit lower is adding $0.08 versus our estimate. So then when I look at the midpoint raise, it does look like there is a second-half lower operating guidance. It's something in the high teens sense if that's right, and maybe try some context there.

The tax rate is slightly lower; that's offset by a higher share count and a little bit higher interest. We are losing some proceeds from Gatan that impact our interest. Those other things sort of cancel each other out; it’s really around $0.10 on industrials that’s the big change.

That's helpful. Just last one for me on Gatan: Was there any loss of momentum in the sales process?

The team at Gatan really should be applauded for how well they executed and performed over what has been a really long and drawn-out 18-month process. The business performed amazingly well last year with a new product cycle, and as expected with Gatan, it has driven a new product cycle but moderated a little bit. The team has done a fantastic job despite the distraction of the sales process, which was immense given the regulatory landscape in the last six months. So congratulations to the team there; they’ve done exceptionally well, and we're adding momentum to try to re-market the process, focusing on a better outcome.

And I would just add that they performed very well in the second quarter. So, good performance.

Thank you.

Thank you.

Hi, guys. Good morning. Sorry, I'm about to jump from call to call, but I guess the first question is building on Deane's excellent questions: In terms of the short cycle, you are not planning for any kind of contemplated balancing guidance here, right? You’re telling your business heads to focus on cash and margin, which is sensible. You said, I think, six or seven of your segments are really affected; have you highlighted in the past exactly which one of these segments or sub-segments these are? Could you just kind of highlight what you're seeing with that level of granularity?

I should have mentioned in response to Deane's question that this includes businesses like Stew and Danisco, Hardy, and several other smaller businesses. The trends I've discussed are consistent across all of them; they aren't limited to one business but reflect a uniform perspective across our seven or eight companies regarding the trends we've talked about. This encompasses the industrial complex, which accounts for 8% of our revenue.

And then regarding Gatan, I was under the impression that there were not that many natural buyers or potentially private equity. But could you talk about the fact that you think you've got a lot of interest because that doesn’t square with what I have heard? Maybe I'm just misunderstanding.

We know what Gatan is, right? It’s a clear market leader, it has excellent growth prospects, a strong team, and amazing cash flow. So as a result, there are a lot of people interested in a business like that—both strategic and private equity sponsors.

Okay. And then the final question: It sounds like you’ve addressed the Foundry acquisition, and I am curious about the elevation of Jody Madden, as you’ve kind of taken out the key man risk or key creative soul risk. It’s a complex business with a creative nexus. Would you say she rises to that level?

Well, first I would say Foundry, like all of our software businesses, is just a really robust software business. It’s not the creative part of the ecosystem; we're the enabling toolkit that allows that to happen. The breadth and depth of the Foundry team is strong. When we engaged with the team about our long-term orientation, it became clear that the most natural fit for long-term success was Jody. She's fantastic, has been the face of the company regarding the product for the last four or five years, and we're expecting her to do great things with the business.

Thanks for entertaining my questions. Congratulations on a great quarter.

Thank you.

Thanks. Good morning. I had a question about some of the pipeline dynamics that seem to come up a lot, whereby you have kind of a surfeit of actionable deals but opportunity cost dynamics are always at play. I'm wondering how that works as a partial gate to the timing of deal flow. And as a curiosity, when was the last time you had kind of an air pocket in actionable pipeline dynamics?

I've been at Roper for eight years, and I cannot recall a real air pocket in terms of the pipeline. It’s always a steady drumbeat of multiple deals presented at near final stages to our board five times a year. So, air pockets? I can't recall. If Rob agrees with me, we’ve always had strong activity.

There is always an opportunity, and it’s just about finding the best deals at the right price and completing them.

Okay, thanks. And then follow-up on TransCore; the product implementing without you. That seems pretty groundbreaking. Can you elaborate on that thought?

Well, it’s very early. We have a great partner in Gentex, the clear market leader in smart mirror technology, making a nice collaboration. I do believe it has the potential to be groundbreaking. Think about cars 10 years ago; now, auto sensing and lane departure systems are almost standard. I don't know if this technology will become that standard, but it’s our hope that it would. It’s exciting to have Audi as the first partner, and there's a lot of work that had to be done regarding intra-tolling agency and customer relationships, which the partnership has addressed. This is early, but we consider it one of the highlights today.

Sounds good. Thanks.

Thank you.

Hi, this is Jason on for Julian. Good morning.

Hey, Jason.

Maybe just a question on the Gatan add-back guidance. It was sort of our impression that the annualized Gatan divestment impact would be closer to $0.60 of EPS, adding back $0.20 just kind of wanting to reconcile the difference there. Just sort of on a half-year basis, that seems like it would be closer to $0.30. Is this sort of seasonality of earnings or are there other dynamics at play, just lowering the organic sales growth outlook? Even just as we're modeling for 2020, etc?

I think you have too high of a number for Gatan. The full year of Gatan would be consistent with what we saw for the year all along. There’s certainly a lot of variability in their performance in the second half. Their fourth quarters tend to be the highest quarter of the year, so there's some seasonality there. They should have a better fourth quarter than the third.

Understood. And then moving a little bit away from short cycle businesses to Deltek, I know it's been mentioned for a couple of quarters that there's bolt-on M&A, sort of going on there. Is that still the plan for Deltek moving forward? It seems like the bookings growth is doing quite well. I just wondered if that was still a strategic focus for the business?

Sure, it has been and will continue. It even predates our ownership; Deltek has typically done one-ish bolt-on a year before we owned it for several years. We're probably at that pace or maybe just a touch higher in our ownership, and we would expect that to be the case going forward.

Understood. And it seems like the, moving on to CCC, just in the new construction business seems like it had the expected strength that you called out in previous calls. Just kind of wondering where you view that strength of the LNG pipeline as still extremely early innings or four to six quarters seems like a reasonable baseline timeline for that?

Yeah. So, what's characterized is some of this is that the projects are in development; they're actually smaller and quicker to come online than what we might have seen years ago. Your estimated four to six-quarter timeline sounds reasonable. You might drag that out a little bit longer; as you know, these projects can tend to do that, but these are not five to ten-year projects—or three to seven-year projects. They tend to be smaller and quicker to turn on.

Understood. Thank you very much.

Hey, guys, good morning.

Good morning, Steve.

Good morning.

I appreciate the use of the term Socratic coaching. That was a political science major. I'm not quite sure what that means, but I kind of get it. On the software businesses, I guess, the application software business. I read all these other companies' transcripts, and I don't quite know what I'm reading, but they use the term bookings a lot. How is the booking, like the organic bookings growth as you guys define it for, I guess that segment?

Steve, let me Socratically walk you through this. Bookings for the segment now require a company-by-company view. It’s a more complex answer as we don't know anything at the segment level.

Bookings and gap sort of bookings.

Sure. So, bookings in this case, or another term you might hear is order intake. Essentially, it includes what businesses actually contracted within a given time period. There is a fair amount of equivalency work between perpetual and SaaS deals. It’s important to note that when you book something, especially if it's all SaaS, it might take four quarters to reach the revenue recognition run rate. Conversely, if you booked something in the second quarter, there could be delays in revenue recognition due to implementation timelines. So, bookings might be an earlier read of the ongoing business activity, and in Deltek's instance, we highlighted that we had a hard comp against a strong second quarter last year, but when we normalize for the outsized perpetual growth a year ago, bookings are up double digits in this quarter, indicating healthy activity inside that business.

Got it. Okay. And so, that’s up inside that business that was up like—I don't know, those bookings are like double-digit or like high singles, and that's kind of what gives you confidence for the second half, if you will?

That's right. It derives from the combination of the bookings, and then we also monitor several quarters ahead for pipeline coverage and conversion rates. So, that combination, along with near-term bookings, offers us confidence.

Okay. Were there any businesses in the application software side that were down on revenue?

Well, your favorite topic of Sundquest is in this segment and it was down mid-singles, as we expected. It actually performed marginally better in the first half here but everything else was up pretty much.

Okay, that’s great. And then one last one: acquisition pipeline, standard question. Are you more bullish about the second half relative to a couple of months ago? Is there any loosening up or has the macro environment delayed some of the activity you may have thought you would have seen?

I would say we feel the same today as we did last quarter to quarter before. The activity remains strong, and deals are flowing as they always have. You just never know until the last minute in a deal whether we want to execute it and whether it will deliver value for shareholders. It is steady as she goes on the M&A front.

There’s nothing in the macro environment that impacts deal processes at all; they are ongoing.

Okay. Super. All right, guys. Thanks a lot. Appreciate the detail.

Our pleasure.

Hey guys, good morning.

Good morning.

So now that we're getting into a little bit of an industrial cycle, I guess the question that you guys typically get asked will get asked a lot more: How does this make you think about some of your industrial businesses from a long-term basis? Does it become somewhat of a nuisance when 8% of your company becomes something that gets talked about more than 8% of the time as we enter these types of cycles, and how do you think about the positions of those businesses within the context of Roper long-term?

First, these businesses are amazing. I would just draw your attention to the profitability of both the industrial businesses and the process segments. They're clear leaders in their niche and they're fantastic. Yes, they have a bit of cyclicality associated with them. We have worked over the last decade to markedly reduce that cyclicality, and we have moved from being roughly 50% tied to these more cyclical businesses a decade ago, now about 20%. That trend will persist as we deploy capital; we're generally focusing on non-cyclical businesses. Though we still like them in the portfolio.

And they're designed to be incredibly profitable at all points of the cycle. We are always looking at breakeven analysis, knowing our fixed and variable costs. Our business leaders are very proactive. They will generate strong cash across all environments and are positioned to succeed long-term. We're a great owner for those businesses.

Okay. Yeah, you guys have been very consistent with that answer over time, so I appreciate that. Are there any specific cost actions that you're looking at as we enter this period? Is there any unique cost-out opportunities that you can execute as things slow for them?

I wouldn't say unique, but what might be unique about the Roper model, building on Rob's statements, is that these businesses are structurally highly variable. Therefore, they can execute cost actions quickly and without substantial costs to get reductions, so we are engaging and understanding what they are managing. They naturally begin doing so upon sensing softness in trends, and we ensure their assumptions are aligned with ours regarding expectations for the future.

Okay. And maybe last for me: Just curious about your customers' standpoint regarding some of the commercial building sectors you're exposed to. Are your customers kind of getting raised antennas about the health of the or directionality of their businesses over the near-term of very robust levels?

It's hard to get a read across that, like you said at ConstructConnect, which is in the pre-construction part of commercial real estate development. We actually root for a neutral to slightly positive or slightly bearish market because it increases the value of what we deliver. However, as we sit here today, I don’t have a great read across for broader construction themes.

Fair enough. Thanks guys.

Yes, thank you.

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