Roper Technologies Inc (ROP) — Q4 2021 Earnings Call Transcript

Good morning and thank you all for joining us as we discuss the fourth quarter and full year 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 will please turn to Page 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 Page 3. Unless otherwise noted, we will discuss our results and guidance on an adjusted non-GAAP and continuing operations basis. For the fourth 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 commission expense, a Sunquest trade name and technology asset impairment related to the merger with CliniSys; and lastly, income tax restructuring associated with our pending divestiture of TransCore. Reconciliations can be found in our press release, and in the appendix of this presentation on our website. And now, if you please turn to Page 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. Thanks for joining us. Let’s turn to Page 4 and review today’s agenda. As usual, we will start with our quarterly and full year highlights. We will then provide details regarding our segment performance, followed by sharing our first quarter and full year 2022 guidance. At the end, we will leave plenty of time to address all your questions. Next slide, please. As we turn to Page 5, the main takeaways for today’s call are: first, our strong finish to ‘21; second, that we are set up very well for solid 2022 organic performance; and third, we have substantial M&A capacity given our rapid deleveraging last year. As it relates to the fourth quarter and closing out 2021, financial performance was excellent with double-digit growth in revenue, EBITDA, DEPS and cash flow. Additionally, because of our strong cash performance last year, our balance sheet is in a great spot as we exceeded our deleveraging plans for the year. As we look toward our 2022 outlook, we have considerable tailwinds that set us up for a very strong year. Underpinning this outlook is our software recurring revenue growth momentum. Given strong market demand, continued innovation in new products and an increased shift towards our SaaS solutions, we exit 2021 with robust ARR growth that carries momentum into ‘22. In addition, our product businesses are experiencing strong demand and record levels of backlog, which provide these businesses with an unprecedented level of in-hand orders and revenue visibility heading into the year. Factoring all this together, we expect 6% to 8% organic revenue growth in 2022. In addition to this organic outlook, our balance sheet is well-positioned to allow us to be more meaningfully offensive with M&A in 2022. So, the table is set for us to have a great 2022 and continue our long-term track record of double-digit cash flow compounding. Now, let me turn things over to our CFO, Rob Crisci, to walk through our financial summary. Rob?

Thanks, Neil. Good morning, everyone and thanks again for joining us. Turning to Page 6, looking at our Q4 income statement performance, as Zack stated earlier, all the financials here are reported on a continuing operations basis unless otherwise noted. Both organic revenue and total revenue for the quarter increased 13% to a total of $1.51 billion. EBITDA grew 12% to $576 million. EBITDA margin was down 10 basis points versus prior year at 38.1%. That all resulted in adjusted diluted earnings per share of $3.73, which was above our guidance range. Free cash flow grew 4% in the quarter on top of last year’s 23% fourth quarter growth. Cash conversion was once again very strong at 35% of revenue and 92% of EBITDA. Q4 was a nice finish to a very strong year and positions us well for a great 2022. Next slide. Turning to Page 7, reviewing the Q4 results by segment, Neil will discuss the full year segment performance in more detail a little later, but we wanted to just highlight the Q4 results by segment here. All four segments grew double-digit organically as our businesses executed very well and continued to win within their niche markets. Application Software segment grew 10% organically with broad-based strength throughout the segment. EBITDA margin increased to 43.8%. For Network Software, excellent 14% organic growth with EBITDA margin increasing to 52.3%. For Measurement & Analytical Solutions, 15% organic growth was broad-based with double-digit growth at Neptune, medical products and our industrial businesses. EBITDA margin was 31.3% as our businesses continue to navigate supply chain challenges. Lastly, for Process Technologies, a nice rebound from last year’s decline, with 17% organic revenue growth and EBITDA margins of 31.2%. Next slide. Turning to Page 8, which is a summary of our full year 2021 financial highlights. For full year 2021, organic revenue growth was 9%. We benefited from both our strong organic growth and meaningful contributions from our recent acquisitions to achieve 19% total revenue growth. EBITDA grew 22% for the year to exceed $2.2 billion. EBITDA margin increased 90 basis points to 38.2%. Full year DEPS increased 23% to $14.18, which was above the high-end of our guidance range. Free cash flow performance was outstanding for the year with 19% growth to $1.8 billion. Our free cash flow represented 31% of revenue and 82% of EBITDA. Excellent cash conversion, which is of course a key component of Roper’s business model and value creation flywheel. We are well-positioned to continue our double-digit cash flow compounding moving forward.

Thanks, Rob. Let’s turn to Page 11 and walk through the 2021 highlights for our Application Software segment. Revenues here were $2.38 billion, up 8% on an organic basis and EBITDA margins were 44.2%. Across this segment, we saw organic recurring revenue, which is a touch north of 75% of the revenue for this segment increased 8% for the year. This recurring revenue growth is enabled by strong customer retention, continued migration to our SaaS delivery models, cross-selling activity and new customer additions. Across this group of companies, the financial strength was broad-based. To highlight a few companies, Deltek, our enterprise software business that serves the U.S. federal, contractor, architect, engineering and other services end markets, had another great year. Deltek had nice gains in both our government contracting and private sector end markets, gaining share at each and driving considerable SaaS adoption. Deltek continues to benefit from having favorable secular tailwinds. Turning to Vertafore a great year, exceeding the EBITDA expectations that we outlined at the time of the acquisition in 2020, Vertafore had impressive demand from their enterprise customers as they continue to partner with P&C agencies to tech-enable their customer acquisition, quoting and underwriting workflows. Notably, Vertafore had record quarterly bookings in Q4, which only adds to their ARR momentum. Amy, to you and your team, congrats to a phenomenal start as part of the Roper family. During the fourth quarter, we combined CliniSys and Sunquest to create the largest global lab diagnostics and informatics business. Together, the businesses will begin integrating their go-forward product roadmaps and innovation efforts and operate under the CliniSys brands. Also of note, both CliniSys and data innovation set records by a wide margin for bookings activity in 2021.

Aderant continues to be a solid performer for Roper, taking share in ‘21 from our primary large law competitor. Also, starting in 2020 and gaining momentum last year, Aderant is seeing a meaningful shift towards our cloud offering, helping drive substantial increases in their recurring revenue stream. Finally, we completed a small tuck-in acquisition, American LegalNet, which will extend and enhance Aderant’s court docketing software solution. Finally, Strata’s combination with EPSI has worked out wonderfully well. Today, Strata partners with about half of the U.S. acute care hospitals to help them manage forecasting and plan their operating and capital expenses and continues to extend both market share and product cross-selling. Looking to the outlook for 2022 in this segment, we expect mid-single-digit growth that is driven by our ARR or recurring revenue momentum, making for a solid year for this segment. And with that, let’s turn to our next slide.

Turning to Page 12, as a reminder, the financial performance for this segment, as well as in X2, MAS and PT are shown on a continuing ops basis. 2021 revenues in our Network segment were $1.34 billion, up 11% on an organic basis and EBITDA margins clocked in at 51.1% for the year. The exceptional organic growth performance in this segment was underpinned by very strong growth in recurring revenue, which is roughly 80% of the segment’s revenue. The growth in margin performance in this segment was broad-based and well distributed. As we dig into business-specific performance, our U.S. and Canadian freight match businesses were just amazing throughout 2021. Market conditions were very favorable, which led to record levels of network adds especially on the carrier side. More so, the leadership team at DAT did a terrific job scaling infrastructure to meet the market’s demands, while maintaining aggressive new product innovation efforts, which led to higher ARPU as well. Over the longer arc of time, our freight match businesses continue to be well positioned to enable the digitization of the spot freight markets. Also, all of our other businesses in this segment saw increasing levels of ARR growth throughout the year, which helped to set up for a strong 2022. To highlight a few, Foundry did a terrific job of continuing to extend their product advantage by using AI ML to automate tasks within the media and entertainment post-production workflows. In addition, Foundry has benefited from the continued increases in content creation budget for streaming, animation and theatrical releases. iTrade, our network food supply chain business, rebounded very nicely in 2021 following the 2020 COVID shutdowns. In addition to benefiting from foodservice reopening, iTrade was able to meaningfully expand their food supply chain network in 2021.

iPipeline continues to benefit from tech enabling the life insurance distribution model and our long-term care GPO, pharmacy software and home health analytics businesses continue to benefit from the post-COVID recovery and the longer-term demographic aging of America. Finally, both RFID and Inovonics had good years, improving in the second half, especially within their healthcare applications. Turning to the full year outlook, we expect to see high single-digit organic growth for this segment, driven by a combination of strong recurring revenue momentum and favorable market tailwinds. Please turn to the next slide.

As we turn to Page 13, revenues in our MAS segment were $1.56 billion, up 8% on an organic basis. EBITDA margins for the segment were 33.1% for the year. Again, these results are on a continuing ops basis. Before getting into business-specific details, across this segment, demand continues to be very strong. As previously mentioned, product backlogs ended the year at record levels. Also, each of these businesses are navigating the current supply chain environment. Strong demand at Neptune continued throughout the year, picking up in the back half as Neptune’s end markets continue to fully reopen. Also, the Neptune team continues to do a great job innovating their core product offering both in terms of metering and meter reading technologies. These innovative product advances helped set Neptune up for many great years. Verathon was very good last year. Remember, they had a great 2020, which was aided by COVID-related demand, but Verathon’s 2021 was meaningfully higher than 2019, roughly 40% larger. Over the last two years, this team has innovated like crazy, going from zero to number two in the U.S. single-use bronchoscope market, launching several new Video Laryngoscope products and developing a new ultrasound core platform. Perhaps more importantly, in 2021, Verathon’s largest product offering is now a mission-critical consumable medical product. Our other medical product businesses, especially NDI and CIVCO, recovered nicely in 2021 as healthcare spending started to normalize. These businesses entered 2022 with record levels of order backlog. Demand across our industrial businesses rebounded with better end market and capital spending conditions, but somewhat hampered by supply chain challenges. As it relates to the 2022 guidance, we expect to see high single-digit growth for this segment, underpinned by strong demand and backlog levels, but somewhat constrained by the current supply chain environment. Net-net, we expect a very strong year for this group. Now, let’s turn to our final segment, Process Tech. As we turn to Page 14, revenues at our Process Tech segment were $499 million in 2021, up 8% on an organic basis. EBITDA margins were 32.2% for the year. These results are also reported on a continuing ops basis. The story here is we saw improving end market conditions across virtually every one of our businesses in this segment and very strong demand in the second half. Cornell continues to perform well for us. This is partially based on market conditions, but also based on Cornell’s product innovation as they’re seeing very nice demand tick up for their IoT connected pumping solutions and the share gains they’re enjoying as a result of their niche-focused go-to-market teams. Similar to that of our MAS businesses, these businesses are being impacted by supply chain challenges, but continue to navigate well through the issues. Across this group, the business has exited 2021 with record levels of order backlog. As we turn to the outlook for 2022, we expect mid-teens organic growth based on strong levels of backlog and solid market conditions. Now please turn to Page 16 as we’ll walk through our 2022 guidance. For 2022, we’re establishing adjusted DEPS guidance on a continuing ops basis of $15.25 to $15.55. Underpinning this DEPS guidance is organic revenue growth of 6% to 8% and a tax rate of 21% to 22%. As we said throughout the call, we feel quite bullish about our 2022 based on our 2021 recurring revenue growth and the momentum it carries into this year with strong product demand and the record levels of order backlog. As you look to the first quarter, we’re establishing adjusted DEPS guidance to be in the range of $3.63 and $3.67, again, on a continuing ops basis. Now some concluding comments, and we’ll get to your questions. As we turn to Page 17 and our closing remarks, we want to leave you with the same three points we started with: We had a strong ‘21; we are set up very well for a solid 2022 organic performance; and we have substantial M&A capacity heading into the year. As it relates to 2021, our revenues grew 19% to $5.8 billion and 9% on an organic basis. EBITDA grew 22% to $2.2 billion, which was 38.2% of revenue. Free cash flow grew 19% to $1.8 billion, 31% of revenue and 82% of EBITDA. Finally, we exceeded our deleveraging plan by reducing net debt by $1.7 billion and ending the year with 3.1x leverage. As we discussed throughout this call, we are set up to have a very strong 2022. Our 2021 software recurring revenue growth provides significant momentum heading into the year. Additionally, our product businesses had and have broad-based demand and record levels of backlog. Taken together and further aided by favorable market tailwinds, we expect to see 6% to 8% organic revenue growth this year. In addition, we have reloaded our balance sheet and continue to have a highly active and engaged pipeline of M&A opportunities. We anticipate having about $5 billion of available M&A firepower over the course of 2022. As a result, we have a high level of conviction that we will continue our double-digit cash flow compounding in 2022. And with that, let’s open it up to your questions.

Thank you. Good morning, everyone.

Good morning, Deane.

Maybe we can start with the impact of Omicron supply chain, etcetera. It did come up a couple of points, parts in your prepared remarks. But in the scheme of things, it did not sound as impactful as we’ve heard from other companies. So not surprising in measurement and process, it did have an impact. So could you size there, what might have been either revenue pushouts, because I’ve seen record backlog, so that implies that you might not be able to get some of the product out the door. And then just confirm on the software side, what the impact is, if any. I mean it’s probably limited site access, maybe some landing new logos and so forth. But just how did that play out? And what’s the expectations in the first quarter when, hopefully, we get to some sort of normal level of activity and access.

Yes. So Deane, I’ll start, maybe going in reverse order. And then there is a handful of technical difficulties, there is no supply chain fortunately. So there wasn’t an impact in any meaningful way on our software businesses. The businesses have been working remote for the last 2 years. And so that’s a complete non-factor. Bookings activity, as we talked about, was super strong in Q4 there. So that’s our view there. On our product businesses, yes, it was more about supply chain, less about Omicron and shutdown of facilities. I mean it happened for a week here or there, not an impact really in the quarter and the issue on supply chain, as you hear it from some of the companies, it’s not one thing. It is really sort of a hornet’s nest of small things. One of the nice things about our organization, as you know, is we’ve got 25 or so product businesses and 25 groups of people focused on their bespoke issues, and they did a very nice job in Q4 working through that. A little bit of margin pressure in those businesses at the gross margin line in Q4, just sort of expediting and sort of pulling things forward to be able to meet demand. A couple of other things I’d say, and I’ll turn it to Rob, is as we look to 2022, those issues haven’t abated. We expect them to sort of lessen in the second half, but still persist to some degree. And the final thing is the companies, their teams have done a very nice job of sort of taking price and offsetting going forward in 2022, the impact of the inflationary environment associated with this. Rob, anything you want to add?

Yes. That’s right. So yes, it clearly impacts the product margins a little bit. You saw that in the fourth quarter. We’re assuming Q1 is similar and then a little bit of gradual improvement throughout the year on margins for the product businesses.

And did you size or can you size any missed revenues or was it not meaningful?

It was not meaningful.

Yes, I mean, we’re at record backlog levels as all other businesses are that sell products. And so we will benefit from that moving forward. But we wouldn’t say it was meaningful to sort of revenue in the quarter.

Yes, thanks. Good morning, everyone.

Good morning.

So congrats on rebooting the balance sheet there. Just wanted to ask about the pipeline, how are you seeing the toggle between what’s currently most actionable versus decision trees around holding fire? I think sometimes you’ve talked about don’t do the very good at the expense of great.

Well, I want to make sure we understand your question. I mean I think the – in terms of the opportunities that are out there for acquisitions, I mean, it is – there’s a lot of opportunities. There are always a lot of opportunities. The pipeline activity is full, there’s lots of discussions, diligence. We’re always in some phase of diligence at some point, something. The thing that we said for a very long period of time, the 10 years I’ve been here, is that we continue to invest through cycle. We’re a permanent home. We’re trying to find the very best businesses we can find because we’re going to own them over a very long arc of time. And that the compounding effect overwhelms any sort of short-term value. We’ve been here and there and compounding overwhelm that in sort of a cycle benefit. That feature is going to have perfect visibility on what the future holds, which we don’t claim to have.

That’s great, it’s helpful. Thanks. And then you’re pretty bullish kind of even multiyear comment on Neptune. I’m just wondering if you could drill in there a little bit and what you’re seeing specifically for 2022 for Neptune and the particular compounders into 2023, ‘24?

Yes. I think it’s – we’re not going to – we try not to give guidance on the forward year for a specific business. But you’re right, the commentary and our view of Neptune and what Don and the team are doing there is quite bullish. It’s rooted in three things, principally around the products, both the meter itself going more static from mechanical, the reading technology going from – going to more cellular. And then once you have both of those elements in place, then Neptune becomes more of a data business, helping its customers sort of navigate the data and work with their customers in a more meaningful and impactful way. Importantly, on the first two, especially the meter technology itself, we think we have some very real proprietary advantages in the static ultrasound technology that we’re using, both on the residential side and the commercial side that we are quite bullish about going forward.

Hi, good morning. Just want to talk, I know you mentioned strong freight matching. Obviously, I’m a little biased here in terms of what I cover. But when we think about that, obviously, the network challenges have put a huge spotlight on that market. And I know DAT certainly supports some of the new entrants. But how are you managing a, I would say, that risk in terms of the viability of some of the new entrants that are coming on to your system or utilizing your system, as well as competitive dynamics? Any thought there?

Yes, so DAT, as you know, is wonderfully positioned and the spot freight market is one of two primary competitors or players that help match the shippers and the brokers and the carriers, I should say. And as you think about the tech enabling of the brokerage model, DAT sits right in the center of that and as their business model in future is only aided by that. In terms of the tech-enabled brokers, they are just – all brokers are becoming tech-enabled. There are some that are native tech-enabled and some that are sort of migrating their business models, all of which are customers and all of which we're helping do their job to sort of do their business with less human interaction to more computer-driven connectivity.

Got it, that’s helpful. And I guess, leaning on that competitive dynamic, meters, obviously, the growth and opportunity certainly attract new innovation there. Do you know any change in competitive dynamics or things that you’re concerned around? Obviously, Neptune seems like it’s growing quite nicely for you. Any thoughts on that?

Is your question, Allison, on the competitive dynamics on DAT and freight matching or on Neptune?

Freight matching, originally first. But this one will be...

Okay. Yes. So on – no, so hey, we – it's something that we pay very close attention to. The team at DAT has a very open ecosystem. They partner with many folks, and so we pay attention to all of that. But this is a very vibrant two-sided scaled network. Scale matters a ton here. And I mean, when I say a ton, I mean it’s a huge rate limiter for competition. You’ve got to have scale on both sides of the network to be effective, very hard, not impossible but super, super hard to create from scratch. But we pay attention to that and any competitive activity, and we need to think about how to counteract that. On the Neptune side, hey, I think this is over a very long arc of time when we think that the metering technology can render a market share advantage. I’ll remind you that Neptune seemingly every year ekes out 50 to 100 basis points of market share. I think we’re clearly the leader in the North American water utility metering space, and we expect that will just continue eking out a little bit of share gain each year.

Hi, good morning. Maybe just wanted to dial into the EBITDA margin guidance a little bit, so I think you are guiding sort of EPS up around 9% for the year at the midpoint, sales up maybe 1 point or 2 lower than that right now. So when we’re looking at EBITDA margins, are we expecting those to be up sort of 20, 30 bps or so at the midpoint? And any color around those product businesses, just to understand in measurement and analytics and in process? Are we expecting margins up much for the full year as a whole in those two divisions?

Yes, so we’re – we have EBITDA leverage, right, on organic growth around 40%, which is generally pretty normal. So that on a full-year basis I think you’re right. We’ve got total EBITDA margins up a little bit sort of embedded in the guidance. Software businesses are, right, 44% EBITDA for application, 51% for network. We’ve got that about the same year-over-year, very stable there. You’re growing, you’re investing, we have very nice organic growth in those businesses this year. So that will drive a lot of organic EBITDA growth at those margin levels. And then – and as we mentioned on products, it’s a little bit lower margins in the first half of the year, similar to Q4. And then I think we’ll benefit from a lot of the price cost things that we’ve been doing as we get to the second half, margins get a little better. So I think on a full-year basis, again there, margins are pretty flat year-over-year, maybe a little bit of improvement as we get to the second half.

That’s helpful. And just my follow-up question on the free cash flow outlook, very good performance last year with sort of 82% conversion out of EBITDA, anything you’d call out sort of one-time items helping that and how should we think about cash flow conversion in 2022?

Yes, so there were a couple of things that helped us this year for sure. I mean, we had great working capital performance, which we view we’ll always have, especially when you have highly negative net working capital of revenue minus 15%. That drives great conversion. In ‘20 in particular, there were some tax benefits that we benefited from. And so the 80% to 83% conversion is great. We generally feel like if we’re plus or minus 80% conversion, and that’s kind of where we start and then we see sort of the one-off items that happened year-over-year. So that’s – we always sort of I think we’ll be around 80% and then sometimes it ends up a little bit better.

Good morning guys.

Hi. Good morning.

Neil, can you talk a little bit about what you are trying to accomplish with combining CliniSys and Sunquest? And is – and how do you really combine businesses like that? Do you – can you integrate that – can sales, for example, be combined? Certainly understand any other functions, but just trying to think about holistically how that helps you guys out.

Yes, I appreciate the question. Good morning. So first, I would say, as we have gone through just our portfolio work over my time as being CEO, there is – we have tried to see if there are a little – small pockets where it makes sense to put businesses together. We did it a couple of years ago with Seaboard and Horizon that are both doing very similar things into the education market. And now with CliniSys and Sunquest, as you know, they are doing literally the same thing, just Sunquest historically in the U.S. and CliniSys across Europe. So, in terms of this integration, there are still going to be three core technology platforms for the lab information, U.S., UK and global. But this integration is really all about then sharing the innovation from that going forward. The microservices or service-oriented architecture allows us to do that. The first three in the Q are advanced analytics that helped the laboratorians do their job and make better decisions. The acceleration of anatomic pathology, which is the tissue side of the lab into the cloud and then increasingly, the adoption of molecular or genetics into the lab space. So, this is more about the product integration, if you will, on a go-forward basis. Go-to-market teams remain very similar as they are selling bespoke into their very specific geographies. So, the go-to-market motion is the same. Final thing I would say here is the teams are totally excited about this internally. There is a ton of enthusiasm and excitement as the team is now 1,300 people, 12 countries, 21 languages and is part of the largest lab diagnostics business in the planet now.

Okay. That makes a lot of sense. Just a quick follow-up on that, are the customer needs essentially the same when you go around the world now, Neil, when you think about that product offering?

The customer needs are remarkably similar in that you have the fluid side of a lab, the tissue side of the lab and increasingly, the genetics or molecular labs. And then the integration of the ologies, if you will, rarely now do you have a genetic test without some sort of tissue or blood or urine test. So, how do you integrate the pathologies is a major theme. So, those things are very similar. And so if you are a lab in the UK, in NHS or your lab in the U.S. or a lab in France or Spain or wherever it is, the needs are very similar.

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