Roper Technologies Inc (ROP) — Q1 2021 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 Chief Accounting Officer; and Shannon O'Callaghan, Vice President of Finance. Earlier this morning, we issued a press release announcing our financial results. The press release also includes replay information for today's call. We have prepared slides to accompany today's call, which are available through the webcast and are also available on our website. Now if you'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 to this presentation on our website. For the first quarter, the difference between our GAAP results and our adjusted results consist of the following items: amortization of acquisition-related intangible assets; purchase accounting adjustments to acquired deferred revenue and related commission expense; and lastly, a gain on sale related to a minority investment in Sedaru. And now if you'll please turn to slide 4, I'll hand the call over to Neil. After our prepared remarks, we will take questions from our telephone participants. Neil?

Good morning, and thanks for joining us. For this morning's call, I'll start with a brief summary of this quarter's results and activities. Rob will then highlight our P&L performance and balance sheet metrics. I'll then walk through our segment details, our increased outlook for the year and our concluding comments. As usual, we'll leave plenty of time to talk to your questions towards the end. Next slide, please. As we turn to page 5, we got off to a better start than we expected. Business execution was strong across the portfolio and was also broad based. We are encouraged by seeing nice improvements across the vast majority of our software and product-based end markets. In addition, we continue to see accelerating software recurring revenue growth, growing approximately 6% on an organic basis. Importantly, our 2020 cohort of acquisitions led by Vertafore continued to perform very well versus our expectations. When you put this altogether, we experienced double-digit growth across virtually all financial metrics: revenue, EBITDA, DEPS and cash flow. The growth in cash flow performance in the quarter allowed us to continue our rapid leveraging with about $500 million in debt paydown during the quarter. Based on this encouraging start, we're increasing our outlook and guidance for the full year. And with that let me turn it over to Rob to review the financial details. Rob?

Thanks, Neil. Good morning, everyone. Turning to page 6 and covering the Q1 financial highlights. Total revenue increased 13% to $1.53 billion which was an all-time record for any Roper quarter. Organic revenue for the enterprise declined 1% versus last year's plus 4% pre-pandemic comp. EBITDA grew 20% to $561 million. EBITDA margin increased 220 basis points to 36.7% on really great incrementals across the portfolio. Adjusted DEPS was $3.60, 18% above prior year. Free cash flow was $543 million up 54%. We continue to benefit from our business transformation to a more software-weighted model where working capital boosts cash flow as our growth accelerates. Our results were enhanced a bit by approximately $40 million of accelerated payments that were the result of wins at our UK-based CliniSys laboratory software business. Aided by our outstanding cash flow performance, we reduced our debt by approximately $500 million in the quarter. More on that to follow. So in summary, a great start to 2021. Next slide. Turning to page 7, an update on our deleveraging. The charts on this page are a good preview for how we expect 2021 to look as we follow through on our commitment to reduce debt after our 2020 opportunistic capital deployment. As each quarter passes by we will benefit from meaningfully improved trailing EBITDA as the performance of last year's acquisitions rolls into Roper's financials. EBITDA is then further enhanced by our accelerating organic growth. Concurrently, our strong cash conversion allows us to apply our high levels of excess free cash flow toward consistent reduction of our debt. In the first quarter, we reduced our debt by approximately $500 million. Over the first three months of the year, our EBITDA growth, combined with debt reduction, enabled us to lower our net debt-to-EBITDA ratio from 4.7 to 4.2. We expect this downward trend in leverage ratios to continue moving forward. So with that, I'll turn it back over to Neil to discuss our segment performance.

Thanks, Rob. As we turn to page 9, revenues in our application software segment were $578 million, up 2% on an organic basis. EBITDA margins were an impressive 44.9% in the quarter. Across this segment, we saw organic recurring revenue, which is about 75% of the revenue for this segment, increase approximately 6%. This recurring revenue strength is based on strong customer retention and continued migration to our SaaS delivery models. Of note, this quarter should be the last quarter of nonrecurring revenue declines, as we come across the COVID comp from last year. From a business unit perspective, Deltek continued its long string of great performance. As we expected, Deltek's recurring revenue grew nicely. Of particular importance, Deltek saw an increase to their perpetual revenue during the quarter, coming off a decently strong quarter a year ago. Also encouraging, was the nature of the bookings activity which was broad based across our architecture, engineering, creative and government contracting end markets. For reference, the professional services end markets tied to AEC and creative have been slow since the onset of COVID. Also CliniSys, our European lab software business, just crushed it during the quarter. As Rob mentioned, CliniSys had exceptionally strong cash flow, as they gained tremendous market share within the clinical lab consolidation occurring within the United Kingdom. CliniSys has approximately 85% market share in the UK and is now recognized as one of four critical IT vendors for the entire National Health Service, just outstanding execution by the CliniSys team and congratulations. We also saw thawing in the higher education markets that CBORD serves, certainly encouraging. Finally, our 2020 cohort of acquisitions continues to perform very well. Specific to Vertafore, we continue to be encouraged by their customers' comfort in having Roper as a long-term owner for the business. Also, Amy and her team have done a great job transitioning to Roper and our governance model. As we turn to the outlook for the balance of the year, we expect high single-digit organic growth for this segment. This is based on the expectation for sustained levels of recurring revenue growth and the resumption of nonrecurring revenue growth. As it relates specifically to the second quarter, we expect our growth to be a touch below high single digits due to our global lab software group coming off, across a challenging comp from a year ago, as they are instrumental standing up COVID testing on a global basis, a solid and encouraging quarter for sure. And with that, let's turn to our next slide please. Turning to page 10. Revenue in our network segment were $440 million, flat versus last year and down 3% on an organic basis. EBITDA margins were 40.9% in the quarter. Our software businesses in the segment, about 65% of the revenues were up 4% on an organic basis. This revenue was broad based among our software businesses and driven by organic recurring revenue growth of approximately 6%. Recurring revenue growth is underpinned by strong customer retention. Recurring revenues are also benefited by increasing network participation. At the business level, our Freight Match businesses both in the US and Canada continued to be solid growers for us. As a reminder, our Freight Match networks are critical and necessary elements to help organize and transact the trucking/shipping spot markets. Strength in our businesses has been on both sides of the network, brokers and carriers. We also continued to see nice organic gains at ConstructConnect, as their network enables commercial construction planning and bidding to occur in a more efficient and transparent manner. And lastly, as it relates to our network software businesses, we saw improved end market activity, especially in the middle market for Foundry, our media and entertainment compositing software business. Our non-software businesses in this segment were down 13% for the quarter, a touch better than we anticipated. TransCore's New York project work continues and is tracking well. TransCore's tag volumes declined versus a year ago based on lower traffic volumes across the US. Turning to the outlook for the balance of the year, we expect to see high single-digit organic revenue growth for this segment with consistent high single-digit growth through the balance of the year for our network software businesses. As it relates specifically to the second quarter, we anticipate our segment organic growth to be a touch below high single digits, given TransCore should be stronger in the second half versus next quarter based on timing of project execution and tag shipments. All in all a solid outlook for the balance of the year. Please turn to the next slide. As we turn to Page 11 revenues in our MAS segment were $381 million, up 2% on an organic basis. EBITDA margins were 34.8% in the quarter. As usual in this segment, we will profile the three macro parts: medical products, Neptune and our industrial businesses. To start, our medical product business has performed very well this quarter. Verathon continued its strength based on consistent factors: GlideScope unit placements and recurring consumables pull-through and continued momentum and share gains with our single-use bronchoscope product offering. What's also encouraging to see is the growth in their BladderScan product line. We believe this was based on a broader-based trend of hospitals resuming some normal level of clinical capital spending. We saw similar strength in our other medical product businesses as well. For instance, Northern Digital had their best Q1's bookings quarter in history. This trend bodes well for the balance of the year. Neptune as expected declined in the quarter for the same reasons discussed in each of the last three quarters having limited access to indoor meters in the Northeast United States and Canada. However, we did see some easing of these restrictions in March, and Neptune's customers are beginning to increase their maintenance schedules throughout Q2 and into the second half of the year. Finally, our industrial businesses benefited from improvements in their end market conditions. For the balance of the year, we expect high single-digit growth for this segment. This is based on broadly improving conditions both in medical and industrial end markets and increases to access and indoor meter replacements at Neptune. This strength will be somewhat offset by the extraordinary prior year COVID demand at Verathon. We're encouraged by our expected high single-digit growth for the balance of the year. Now let's turn to our final segment Process Tech. As we turn to Page 12 revenues in our Process Technologies segment were $131 million down 10% on an organic basis. EBITDA margins hung in at 31% in the quarter. The short story here is, we're seeing improving end market conditions across virtually every one of our businesses in this segment after nearly two years of declines. For instance, at CCC, we're seeing the resumption of previously deferred projects and demand for field services to come back online. Also, Greenfield bidding activity is back in full swing especially on an international basis. Cornell continues to perform well for us. This is particularly partially based on market conditions but also based on Cornell's product innovation as they're seeing very nice demand pickup for their IoT connected pumping solutions. As we look to the outlook for the balance of the year we see double-digit organic growth based on improving end market conditions and continued easing comps. Now please turn to Page 14 where I'll highlight our increased guidance for 2021. Based on strong Q1 performance and our increased confidence for the balance of the year, we are raising our full year adjusted DEPS to be in the range of $14.75 and $15 per share and organic growth to be in the 6% to 7% range. This 6% to 7% organic growth is against a 1% organic decline in 2020. This demonstrates that we have meaningfully improved on an organic basis since 2019. The compounding continues. Our tax rate should continue to be in the 21% to 22% range. For the second quarter we're establishing adjusted DEPS guidance to be between $3.61 and $3.65 and expect second quarter organic revenue growth to be in line with the full year organic growth rate. Now let's turn to our summary and get to your questions. Turning to Page 15 and our closing summary this was an encouraging start and we're raising our outlook for the year. We performed well across virtually every financial metric with double-digit increases in revenue, EBITDA, DEPS and cash flow. EBITDA margins expanded nicely and free cash flow grew 54% to $543 million, which enabled us to continue our rapid deleveraging in the quarter. Importantly, we are well positioned for continued double-digit compounding. We're seeing improving conditions across virtually all of our end markets. When combined with our leading market positions, we expect high-single-digit organic growth for the remainder of the year. As owners or prospective owners of Roper Tech, you should be encouraged by our increasing levels of recurring revenue and the stability of our recurring revenue growth. Also, our 2020 cohort of acquisitions are performing very well and Vertafore has proven to be an excellent addition to our growing portfolio of software businesses. We continue to focus on deleveraging our balance sheet and remain committed and focused on our long-term capital deployment strategy. To this end, our pipeline of M&A candidates is active, robust and has many high-quality opportunities. As our balance sheet becomes more offensive towards the end of this year, our active pipeline of M&A targets will enable us to resume capital deployment in our usual process-oriented and disciplined manner. In closing and as we turn to your questions, we recently announced that Amy Woods Brinkley will become our new Board Chair effective June 1. Amy has been a tremendous Board member since 2015 and will be a fantastic Board Chair. I certainly look forward to working with Amy and the full Board for many years to come. But, as we turn to your questions, I would like to take a moment to acknowledge and thank our outgoing Board Chair, Bill Prezzano. Bill has been a Roper Director since 1997 and has reached our mandatory Board retirement age. He served as our Lead Independent Chair, Director and became Board Chair during the CEO transition from Brian Jellison to myself. Bill has been a wonderful Board Chair, enabling a smooth CEO transition and the continued evolution of our strategy and business model. On a personal note, Bill has been a tremendous mentor to me, which I hope will continue on an informal basis for years to come. Bill, thank you for your years of service to Roper shareholders. I think the share price is around $16 when you started. And thank you for helping me become a better leader and Chief Executive Officer. With that, we'd like to open it up to your questions.

Hey, thanks. Good morning, everybody.

Good morning.

So, strong margins across the board, I was curious. In particular, Application Software was particularly better than expected. I don't know if Vertafore had some incremental revenue versus what you expected, but what kind of drove up the App Soft margins in the quarter?

Hey, Chris. Good morning. Yes, there's strength across those businesses. I think Neil mentioned CliniSys was strong, Sunquest had a nice quarter. Deltek, sort of perpetual license wins there. All that stuff comes in at really high incrementals, and that drove most of the margin performance.

Okay. And then, a question on acquisition philosophy. You've kind of highlighted financial profile and returns and characteristics over strategic end markets. But, it strikes that Vertafore and iPipeline two out of your three biggest deals ever, both kind of serve in the insurance marketplaces. I'm wondering if there's any emerging prioritization in types of end markets.

Hey, Christopher, I appreciate the question, and the opportunity to talk about that. The short answer is no. I mean our M&A strategy, for 20 years, is centered on picking the best businesses and business models that we can identify from the range of opportunities in the marketplace. If you go back to really starting in 2011, you might have thought from 2011 to 2013, we're all about health care IT; and then maybe from 2014 to 2017 about professional services ERP; and then the last couple of years about insurance tech. But all of those steps are completely coincidental. We really just evaluate the range of opportunities and pick the very best business that we can find.

Thank you. Good morning, everyone.

Good morning, Deane.

Good morning.

First question is, how would you characterize the software demand this quarter? It might be hard to parse this out, but how much might have been pent-up from the COVID shutdown kind of a catch-up versus a true recovery and resumption of growth? I'm not sure you can characterize it broadly, but maybe some individual examples within the businesses. Thanks.

I don’t believe there's much pent-up demand from our interactions with businesses this year. This quarter is more of a recovery narrative. For example, we mentioned in the prepared remarks that the professional services end markets served by Deltek, such as architecture, engineering, and creative agencies, began to show signs of recovery this quarter, which is encouraging. Vertafore maintained stability and was not significantly affected by the pandemic. Aderant's law firms continued their transition process. We also observed some recovery in the education and health care markets at CBORD. The middle market at Foundry is showing positive signs as production transitions from live production to post-production. Overall, it marks a nice beginning to recovery. Additionally, whenever there were inquiries about software, we highlighted the recurring revenue stream, which showed about 6% organic growth across both segments and in total, indicating a positive outlook for the future.

That's great to hear. And then just a second question. Since it is such a high-profile project, any updates on the New York City congestion tolling? I saw in the slide it says that work has continued, but any update there would be helpful? Thanks.

The project is ongoing, and the customer remains eager for us to complete it so they can start discussions on how to implement the tolling. The overall environment is more favorable now with the current administration and Secretary Pete, which is an improvement compared to a quarter or two ago.

Hi. Good morning. Maybe my first question just to try and circle back on to the margin aspect. So in Application Software, you did have a very substantial margin increase year-on-year in the first quarter. You've laid out some of the reasons why. But maybe just help us understand sort of as we think about the balance of the year for that business and maybe for Roper firm-wide, what type of incremental margins or margin trajectory we should expect? Because it looks as if the sort of drop-through margin is maybe around 20% in the guide for the balance of the year. I just wanted to sort of check how you are thinking about that?

Yes. I can address that. On an EBITDA margin basis, Vertafore has a higher EBITDA margin business, which is around 50% or slightly below that. This positively impacts our overall margins. For our other businesses, I expect the EBITDA margins to remain relatively consistent year-over-year. The conversion rate is around 40% to 50%, aligning with the growth characteristics of these businesses. They typically exhibit strong cash flow growth, often outpacing EBITDA growth due to very low working capital requirements. This segment has a strong outlook, and we anticipate maintaining high margins in that area.

And Julian, this is Neil. Just to underscore one thing Rob said, I mean the incremental EBITDA margins for the year are 40% as he said. I just want to underscore again.

Yes. That's right.

Thank you very much. My second question is about network software. How are you approaching this, particularly excluding TransCore? Last year, network software was significantly impacted by COVID, especially in healthcare, food, and media, which you previously mentioned. Could you clarify the pace of top-line growth you're observing in these COVID-affected areas and describe any cyclical recovery you're seeing in network software?

Yes. So, the network software businesses are strong high single-digit organic for the rest of the year. That's the consistency in the recurring which we talked about has been growing all along. But then you do get a little bit of a bounce back in some of the markets. You mentioned Foundry and others. So, I think you're on the right track there. Neil do you want to add anything to that?

Yes. Just to color on the three the health care entertainment and food. So, MHA is the health care business that was tied and indexed to patient and volumes going through long-term care, skilled nursing assisted living facilities, that's normalized. That business also has added products to its contract portfolio. So, that business is on its way to recovery as we speak. We talked about Foundry in the prepared remarks which is there's just tremendous content budget not surprising in the marketplace and all that content requires postproduction and we're a critical element in that post. And then finally iTrade, iTrade is going to be one of the longer recovery cycles for us. It'll be a second half this year and the next year as they're indexed partially to retail/food, but also partially to what I'll call institutional food which is think about that as restaurants, schools, universities, a little bit of stadiums. And that's going to come back on a longer recovery curve.

Hi everyone. Good morning. I wanted to follow up on Deane's question regarding the reopening theme in Q2, as it seems you are noticing some positive developments. I'm looking to understand how you foresee the rest of the year playing out. It appears that you anticipate a gradual recovery in some of those sectors. Can you provide any insights from your customers on whether they still have concerns about the impact of COVID? Do they believe there may be pent-up demand as we approach the end of the year? Any thoughts on this would be appreciated.

We need to go through the portfolio carefully. My comments will focus on the product businesses rather than the software ones. To start, the tag volumes at TransCore are expected to see a recovery in the second half of this year, due to when the tags were purchased last year and this year, alongside customers using up their existing inventory as traffic patterns return. Regarding medical products, we did face a COVID-related setback for a quarter or two at Verathon, but the other sectors saw a noticeable increase in capital purchases of medical equipment during the quarter. It's unclear if this is due to pent-up demand or a one-time occurrence, but our conversations with customers did not indicate one-time purchases. Notably, NDI achieved record bookings this quarter. In the industrial sector, Struers showed an improvement across our portfolio, with record bookings in March indicating a gradual enhancement. In the Process Technologies segment, we experienced a positive trend similar to what we observed at Struers, with March performance surpassing February, which in turn was better than January.

Great, that's helpful. And then a strong deleveraging in the quarter. You talked about an active pipeline maybe more comfort towards the end of the year. Any change to thinking just given the strong performance so far? Obviously, strong cash flow characteristics that you would have some comfort level of staying slightly above your comfort range at this point. Or are you still focused on getting that down in terms of the net debt leverage?

Yes, Allison, it was a great start to deleveraging for Q1. So, that certainly helped boost our ability to pay down the debt faster and we'll continue to do that throughout the year. And as Neil mentioned, we're making sure the pipeline is active and there are some exciting things that we're looking at in the early stages and we'll be ready to deploy capital at some point. But for right now, we're really focused on the deleveraging.

Hey, good morning guys.

Good morning Joe.

Hey Rob, I want to ask a bit about the guidance. You're anticipating revenue growth of 6% to 7% for the year, which is an improvement from the mid-single-digit range previously. The first quarter performed well with good margins. Are you suggesting that we might see a slight increase beyond that for the full year? What challenges, if any, are you encountering? Everything appears to be on track or slightly better than expected, so I'm trying to understand the situation better.

Yeah, I think that's right. I think it was one quarter, right? We had a really nice first quarter. And we felt it prudent to raise the guide, because it certainly gives us more confidence for the rest of the year. But it was one quarter and this is an unusual environment where we're coming off of a sort of hopefully once-a-lifetime pandemic. And so we're trying to be balanced in the outlook and sort of what we do with the businesses.

Yeah. That's fair. And maybe can you talk us through just like the structural differences between the lab software businesses in the US and in Europe, and how businesses in each region are like differently positioned and why CliniSys is able to do so well here?

In the US, the lab was the first part of hospitals to automate. Twenty years later, thanks to government stimulus, hospitals implemented electronic medical records. Hospitals generally recognized the value of connecting lab software to EMRs, which led to competitive challenges for Sunquest over the past several years. However, in Europe, the situation is quite different. Health systems vary by country, and there isn't a uniform EMR landscape across nations. Instead, it's marked by local providers and country-specific systems. CliniSys has excelled in this environment, achieving notable successes in the UK, while also expanding across Europe, including progress in France, Benelux, and a recent acquisition in Spain to enhance laboratory infrastructure. Each country is working towards laboratory consolidation to reduce costs for their health systems, and CliniSys stands out as a major provider with proven success and the ability to gain market share effectively.

And just so I understand, what gives you confidence that sort of like integration of labs with the broader hospital systems is not something that's a near-term threat to the business?

I believe that the primary competitor in the US is Epic, which does not have a presence in Europe. When they do operate there, it is limited to specific countries or small regions, making their efforts somewhat isolated due to the country-specific decision-making process. Additionally, the level of competitive activity in those markets is minimal.

Thanks, good morning. First question on free cash flow. The conversion from EBITDA has been very strong over the last several quarters on top of already strong margins. How should we think about conversion going forward through the year, in relation to what you achieved in the fourth quarter and first quarter? I would assume the recovery in nonrecurring software is benefiting the working capital profile. So I'm really just curious about how sustainable that trend is as the recovery slows down through the year?

In the first quarter, there are no federal tax payments, which results in a high cash conversion quarter. This will normalize more when federal payments begin in Q2. The growth from the software businesses is impressive, as they operate with negative working capital, leading to strong cash performance. As software growth increases, working capital becomes more negative, which is a structural aspect of our model. High conversion is ingrained in our operations, and we anticipate that free cash flow conversion will continue to improve over time as we enhance the quality of our portfolio. We are optimistic about the remainder of the year and expect to maintain high cash conversion along with continued double-digit cash flow compounding.

Excellent. Just wanted to circle back on M&A. So plenty of puts and takes with potential US tax increases and yields moving higher. I'm wondering if you could help us think about these inputs in the context of historical private software pricing in the pipeline. Some of these changes come through taxes rise, yields rise. How would you expect asset pricing to evolve, or how has it evolved in the past? I think we've discussed this before about it being a net positive for Roper.

Yes. We certainly believe balance that's the case. So, well obviously, when taxes went down rates are – sort of private prices went up a touch. I think the - it was 14 times, 15 times for Deltek and 16 times for PowerPlan and really the only difference in the market there was the tax change. So that gives you a sense of the order of magnitude. Maybe a couple of turns but it depends on what the magnitude of the tax change is. Relative to interest rates going up we think that does greatly benefit us in the compounding model. If you think as interest rates go up we're competing against private equity firms, who have a levered acquisition model. So as interest rates go up the amount of leverage they can put on a transaction goes down. And subsequently, the total equity that they put into a deal goes down and multiples compress more so with interest rates going up I think than what you see conversely with taxes. And then in our case, the majority of our acquisition proceeds come from our cash that we generate. And so we're relatively insensitive to interest rate where our competitors for acquisitions are. So in the long arc of time that's a good thing for us.

Hi, guys. Good morning.

Good morning, Steve. Thanks for joining in.

Thanks for having me. Just to clarify on the answer before on kind of the degree of leverage you're comfortable with before doing a new deal is kind of three times, a bit of a line in the sand there, where you would get back down to below that before doing another deal, or maybe just talk about kind of that three times level and how that kind of plays into your thoughts?

Yes, sure. I wouldn't say a line in the sand. I think once you get into the low threes that –certainly it's more reasonable. I think the – we spent a lot of time with the rating agencies, when we did our last couple of acquisitions. I think they understand the high quality of the cash flow that we have and our incredibly high cash conversion. And so it's really about how good our business model is, how fast we can pay down any leverage that we put on the business. I think we've demonstrated that time and time again and we can do it pretty quickly. So once we get into the low threes then I think we have the ability to deploy capital.

Okay. Great. And then just lastly when you kind of look out to next year are there any – you're obviously not going to have any deals here at least in the near term. But are there any moving parts and items from a headwinds perspective whether it's the Vertafore tax benefit or some of these Sunquest deals around COVID? How do those play out for next year? Do they generally offset – are they offset by growth in some of the other businesses? Maybe if there's anything mechanical that kind of happens next year that you want to call out?

So I'll – let me just hit a couple of things and then I think Neil wants to add on. But yes, you're right, there's this $100 million-plus tax benefit around Vertafore that we talked about that will hit throughout Q2 through Q4. We did not benefit from that in the first quarter. And then there's about $60 million or so of this payroll tax deferral which is a bad guy this year for the rest of the year, given that was part of the COVID rules that you can defer some of those payments. And there's always going to be pluses and minuses in sort of that part of the world, but I'll let Neil talk about some of the growth.

Well, I think it's always appreciated in a quarter that we have here you highlight the headwinds going into next year Steve, so we appreciate that. But as a general matter year two, out of a pandemic should be pretty good.

Hi. Hi, good morning. Congratulations. That's a great quarter and it looks like you're going to have a very good year. I just wanted to comment that so far there've been seven analysts and every one of them has been cut off before they finished with their second question. None of them said, thank you, and I'd like to ask the moderator to please stop doing that because that is really not a very good way to conduct a call. You need to allow dialogue with the management on the second question. Don't cut people off before they say thank you. Let them finish, please. I wanted to ask about the backlog of opportunities that you mentioned that you might get back to accessing it at the end of the year, as you start to deploy capital. Could you just say, a little more on the nature of that pipeline, the size of the companies in there? Because as you get bigger, it's obviously important to find bigger and bigger companies in order to keep the growth rate constant. So could you just give us a little bit on that? And perhaps, characterize the kinds of markets those companies are in that you're looking at in the pipeline?

Alex, it's Neil here. Appreciate the question and appreciate your opening comments. The – let me give you a broader view to the – to your question. First, why we're active now with our M&A pipeline is that, we – and we're meeting with companies is that every company of size that we bought from 2016 forward we met with roughly 9 months to 12 months at the earliest – at a minimum before buying the company. So we're establishing a relationship getting to know the management team, getting to know the business, and then sort of if you will have a running start when the business actually comes for sale. So we're active. And the work we're doing now is going to pay dividends 9, 12, 18 months from now in terms of deploying capital, and our ability to do that in companies that we have a high level of conviction in. To your question about doing bigger and bigger deals, I would beg to differ with that a little bit. When you look at our model over the next seven years, we have to deploy somewhere on a run rate basis $2 billion to $2.5 billion a year based on our cash flow and the leverage profile that we just talked about. And in doing so, when you're looking at the types of businesses that we look to buy, small market vertically focused, leading software-type or software-type business models, I think the sweet spot in that is going to be somewhere in the $750 million to $1.5 billion range. So we're talking about doing a couple-ish deals a year and then we'll always do a small number of tuck-ins or bolt-ons to the existing portfolio. So I think we can – at least for the next seven years on a per-year basis we don't have to do bigger and bigger deals to keep the growth rate at the sustained double-digit rate.

But would you say that these companies the margins and the cash flow and the EBITDA and so on are such that you can keep increasing those metrics like EBITDA margin and the operating margin and the gross margin, the way you've done for many, many years by buying companies that have margins that are above the corporate average? Can you keep doing that?

I think so. The answer to that is yes, Alex. So it's really about the target the businesses that we target right? Businesses that have higher organic growth than Roper has historically businesses that have very good margins often better than Roper at least at the same level now that we've improved ours over many, many years. And then we buy those businesses. They grow. We hope – we believe we can make them better. They accelerate growth. They generate more cash and you get this compounding effect. And so it's really the same strategy that – I appreciate you've followed us for a long time – we've had for – for over a decade now. And it's – the good news is as you get more and more into software and these types of opportunities we find more and more companies that fit that model that will allow us to continue to improve all those metrics for many, many more years to come.

Right. Well, this has been the company's strategy since I started following it in 1992, when you went public. It's been a great ride. Thank you very much.

Thank you, Alex.

Thank you.

Yes. Yes. Good morning and thank you.

Hi, Richard.

Good morning, Richard.

Yes, Good morning. Just a question or two around the Application Software business. And when we look at the lab software business as part of that in aggregate around CliniSys and Sunquest, you've spoken nicely about CliniSys's share gains in Europe and the rationale for that. Could you just talk a little bit and maybe characterize the US business around Sunquest? Has Sunquest's share stabilized? And maybe post-COVID what does the recovery environment look like for Sunquest domestically?

Yes. Sunquest has experienced benefits recently, particularly in the US laboratory sector, largely due to the ongoing COVID testing efforts. They have been actively investing in their public health and molecular offerings, and the leadership team has managed this well. However, this positive development has unfortunately postponed the bottoming out of the business. We initially expected this process to occur this year, but it now looks like it may take an additional year or two before the business addresses all the known challenges and reaches a stable point from which it can grow.

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