Roper Technologies, Inc. (NYSE:ROP) Q2 2023 Earnings Call Transcript

Roper Technologies, Inc. (NYSE:ROP) Q2 2023 Earnings Call Transcript July 21, 2023

Roper Technologies, Inc. beats earnings expectations. Reported EPS is $4.12, expectations were $3.99.

Operator: Good morning. The Roper Technologies Conference Call will now begin. Today’s call is being recorded and all participants will be in listen-only mode. [Operator Instructions] I would like to turn the call over to Zack Moxcey, Vice President, Investor Relations. Please go ahead, sir.

Zack Moxcey: 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; Jason Conley, Executive Vice President, and Chief Financial Officer; Brandon Cross, Vice President, and Principal Accounting Officer; and Shannon O’Callaghan, Vice President of Finance. Earlier this morning, we used 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 please turn to page 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 page three. Today, we will discuss our results primarily on an adjusted non-GAAP and continuing operations basis. For the second quarter, the difference between our GAAP results and adjusted results consists of the following items: amortization of acquisition-related intangible assets and the financial impacts associated with our minority investment in Indicor. 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 four, I’ll hand the call over to Neil. After our prepared remarks, we will take questions from our telephone participants. Neil?

Neil Hunn: [Technical Difficulty] and thanks to everyone for joining our call. We’re looking forward to sharing our second quarter results with you this morning, which like Q1 were quite good. As we turn to page four, let’s look at today’s agenda. I’ll start with our second quarter enterprise highlights then ask Jason to share our financial results. After that, we’ll turn to our segment specific discussion and wrap up outlining our increased 2023 enterprise guidance. So let’s go ahead and get started. Next slide, please. As we turn to page five, the four main takeaways for today’s call are: first, we continue to perform extremely well and had a very strong second quarter, another demonstration of the quality of our portfolio of businesses.

Second, we’re increasing our full-year guidance both in terms of total and organic revenue growth and adjusted debts. Third, Generative AI. We’re very excited by the promise of this technology and outline reasons why today. And fourth, we remain very well positioned for disciplined capital deployment. As it relates to the first takeaway, a strong start to the year and a solid second quarter, we saw total revenue grow 17% and organic revenue grow 9%. Consistent with our longstanding strategy we continue to not only scale our enterprise, but also simultaneously improve its underlying quality and recurring revenue base. Importantly, we had very strong cash flow performance with free cash flow growing 17% in the quarter. Our results this quarter are another proof point that our higher quality, less cyclical portfolio was purpose built to consistently perform at a very high level.

Given the strong second quarter, we’re increasing our full-year total revenue growth to be around 13%, increasing our organic revenue growth to be around 7% and increasing our full-year debt guidance to be in the range of $16.36 to $16.50 or up $0.23 at the midpoint versus our previous guidance of $16.10 to $16.30. Third, relative to Gen AI, we feel we’re structurally advantaged and excited by this technology as our vertical and application specific businesses, we use our specialized market positions and knowledge to provide context to these enabling technologies both to create customer value and internal productivity gains more on this during today’s call. And finally, we continue to be well positioned relative to capital deployment. We remain active in the market as we evaluate and actively diligence many high quality opportunities.

Jason, I’ll turn the call over to you so you can walk through our second quarter results and our very strong financial position. Jason?

Jason Conley: Thanks, Neil, and I hope everyone is doing well this morning. Turning to slide six, the seconf quarter was another good post in 2023. Revenue came in at $1.53 billion, which was up 17% over prior year. Organic growth was 9%, which was led by 8% software recurring revenue growth across the enterprise and outsized growth 19% in our tech enable product segment. EBITDA increased 20% to $617 million with EBITDA operating leverage of 46%. Notably, margin expanded across all three segments in the quarter. DEPS of $4.12 was $0.12 above the high-end of our guidance range and 20% above prior year. DEPS growth was in line with EBITDA growth given the offsetting impact of a higher tax rate and lower net interest expense. Moving to free cash flow.

As a reminder, the second quarter is always our lowest conversion quarter in the year as we make two federal tax payments. We delivered $295 million of free cash flow in the quarter, which was up 17% over prior year. As I previously mentioned, Frontline’s cash flow is seasonally weighted to Q3 and Q4, especially in Q3 and this is in line with our K-12 customers’ annual renewals. So we expect a meaningful increase to cash flow in the second half. Taking broader view of cash flow on this slide, recall that we acquired Vertafore in 2020 and had a one-time cash tax benefit of $120 million, of which about $60 million benefited the second quarter of 2021. We’ve therefore had very strong multi-year cash flow performance when normalizing for this 2021 tax item.

For the year, we are confident that free cash flow will be greater than 30% of revenue. Turning to our balance sheet on slide seven. Our net leverage sits at 2.2 times at the end of the quarter with about $6.7 billion of debt and just under $1.5 billion of cash against our TTM EBITDA of $2.35 million. Also our $3.5 billion revolver remains fully undrawn. To summarize, we have significant acquisition capacity and remain quite active in many bespoke processes. To that end, in Q3, we expect to close on Replicon, which is a bolt-on acquisition for our Deltek business with a purchase price of $450 million or about $370 million net of a long-term cash tax benefit. Neil will discuss the details around this exciting addition to the Deltek platform in the segment discussion.

So with that, I’ll turn it back over to Neil to talk about our segment performance and outlook. Neil?

Neil Hunn: Thanks, Jason. Let’s turn to page nine and walk through our Q2 highlights for our Application Software segment. Revenues here were $770 million, up 6% on an organic basis and EBITDA margins increased to 43.7% in the quarter. In this segment, we continue to see consistently strong performance across the entire group of companies. We’ll start with Deltek. Deltek was once again solid across both our government contracting and private sector businesses. Importantly, Deltek continues to see momentum build with our SaaS offerings and retention rates remain at historically high levels. Also in the quarter and as Jason mentioned earlier, we announced the acquisition of Replicon for Deltek, Roper’s largest bolt-on today.

Replicon is a market leading timekeeping and workforce management SaaS solution focused on professional services firms and it’s highly complementary to Deltek strategy. We expect Replicon to contribute north of $70 million of revenue and $24 million of EBITDA next year and we expect the deal to close during the third quarter. Finally, as it relates to Deltek, we wanted to brag on them for a moment. During the quarter, the Washington Post award Deltek, the number four top workplace at the D.C. Metro Area for large companies. As you know, we have a closely held belief that talent and culture can create long-term competitive advantage and this is certainly the case for Deltek. During Roper’s ownership with Deltek, the company has increased its organic growth rate, retention levels, recurring revenue and margin structure and a big contributor to that success is the structural talent advantage that Deltek continues to build.

Congrats to Mike and congrats to your entire team. Aderant, our software business focused on the needs of law firms continues to be excellent. In the quarter, Aderant saw record bookings and continued success in the adoption and cross-sell of their SaaS solutions. Also and importantly during the quarter, Aderant launched their Generative AI enabler, MADDI. Today, MADDI is enabling two solutions outside counsel guidelines management and time entry, with plans to extend this to AR cash receipt matching and docketing over the coming months. Over time MADDI will be integrated widely across Aderant’s product platforms. Generative AI for a legal space has tremendous potential. One such example in the market today is Onyx. Onyx powered by MADDI solves a massive challenge that all law firms face, namely how to navigate outside counsel guidelines or the billing requirements that clients impose on their law firms.

It’s fairly common for a large law firm to have to navigate 100s of 1,000s of bespoke client billing requirements. Today, Onyx uses Generative AI to extract contractual terms and convert them into business tools used in the time entry and billing processes, a true game changer. More broadly across Roper, we’re excited about the potential of Generative AI and large language models. We believe given our deeply verticalized and application specific business model that our businesses are structurally advantaged given that all AI, computational and generative need context specifically dated workflows and wish to train or target the technology. Internally, we’re working closely with our businesses on the productivity and product enabled opportunities associated with Gen AI.

Certainly much more to come on this. Now back to the segment performance in Vertafore, our software business at tech-enabled property and casualty insurance agencies. Vertafore continues to be a great asset for us with solid performance across our core P&C business and their recent MGA Solutions bolt-on. Our Healthcare/IT businesses also performed very well in the quarter with growth in each of our Healthcare/IT franchises, Clinisys, Data Innovations and Strata. Frontline also continues to deliver for us. Frontline’s mission is to empower the frontline of education. As many of you know, the hiring of teachers and administrative staff is particularly challenging and frontline software solutions better equip K-12 school district to navigate these challenges.

Because of this, frontline solutions are mission critical and of high importance to their school district customers. As such, frontline’s net retention is consistently strong. Looking to the second-half of the year, we expect to see organic revenue growth to be in the mid-single-digits area for the segment. Overall, very strong results and outlook for this segment. Turning to page 10. Revenues in the quarter for our Network Software segment were $358 million, up 5% on an organic basis and EBITDA margins were strong at 54.2%. As with our Application Software segment, growth and performance was solid across the segment. Relative to business specific comments, we’ll start with our U.S. and Canadian freight matching businesses, DAT & Loadlink, both of which grew in the quarter despite continued challenges across the broader freight and logistics markets.

I’ll remind you that our businesses are critical to the operation and execution of the North American spot freight market. In addition and importantly the spot market is a long-term secular beneficiary in terms of the volume of future great ships. Throughout and across the freight and economic cycle DAT & Loadlink continue to innovate and launch new products and offerings to help drive enhanced customer value and share of wallet. As we speak, DAT is launching a Generative AI enabled solution among other initiatives targeted to combat freight industry fraud. This is in addition to their existing set of computational AI and data science driven solutions like DAT iQ, which they deploy at scale over the last three or four years. By pipeline, our network software business that tech enables the distribution channel for life insurance and annuities had very nice ARR gains in the quarter driven by strong retention and customer expansion activity.

Foundry continued its string of strong performance and had terrific growth for their flagship product Nuke, which enabled continued double-digit recurring revenue growth. As we mentioned last quarter foundry commenced their subscription pricing transition for Nuke and the first-half of the year had north of 60% of their new units sold under their new model ahead of their transition plan. Finally, our alternate site health care businesses led by SoftWriters and SHP were strong in the quarter. Execution was solid and the business has benefited by an improving census and skilled nursing assisted living facilities and home health reaching the highest occupancy levels in patient volumes since the onset of the pandemic. Turning to the second-half of the year, we expect to see mid-single-digit organic growth for this segment based on sustained ARR momentum.

As we turn to page 11, revenues in the quarter for our tech-enabled product segment were $403 million, up 19% on an organic basis. EBITDA margins for this segment were strong at 36.4% for the quarter. Across this segment, business performance and execution was exceptional. Importantly, the broad-based supply chain issues continued to ease. Neptune, our water meter, and technology product business continues to be great. In the quarter, they had record revenue performance. Importantly, Neptune continues to see increasing demand and momentum for their residential and commercial ultrasonic or static meters. We remain bullish about Neptune and the market in which they compete. Given this market tends to be quite steady as Neptune’s customers’ budgets are typically fixed year-to-year and not tied to broader macroeconomic trends or cycles.

Verathon was awesome in the quarter as well with double-digit order growth and tremendous operational execution. Specifically, Verathon saw strength across their reoccurring single use products, both Bronchoscope or B-Flex and video innovation or GlideScope, as well as bladder scan capital purchases. Northern Digital or NDI was also strong in the quarter setting a record revenue for the business. A group of smaller businesses here, IPA, rf IDEAS and Inovonics were fantastic in the quarter as they substantially work through a series of nagging supply chain challenges. Relative to the second-half of the year, we expect to see high-single-digit organic revenue growth. Recall, we have a tough Q3 revenue and margin comp to lap from the prior year.

Now please turn to page 13, and let’s review our increased 2023 guidance. Based on our strong second quarter performance, we’re raising our full-year 2023 guidance for total revenue, organic revenue, and adjusted DEPS. For 2023, we now expect total revenue growth to be around 13%, an increase from 12% plus last quarter. In addition, we’re raising our full-year organic revenue outlook to be in the 7% zip codes, an increase from 6% to 7% last quarter and 5% to 6% in our original guide. As a result of our improved revenue outlook, we’re increasing our debt guidance to be in the range of $16.36 and $16.50, up for our prior guidance of $16.10 to $16.30. Assumed in this guidance is a tax rate trending to the high-end our 21% to 22% range. Specific to the third quarter, we’re establishing our debt guidance to be in the range of $4.16 and $4.20.

Now please turn with us to page 14, and then we’ll look forward to answering your questions. We want to leave you with the same four points with which we started. First, the year started strong and we delivered solid second quarter results. In the quarter, we saw revenues increased 17% to $1.53 billion. This growth was underpinned with 9% organic revenue growth and 8% organic software recurring revenue growth. In addition, EBITDA margins were quite strong at 40.3%. Second, based on the strong second quarter performance, the recurring nature of our revenue stream and the importance of our solutions to our customers, we’re increasing our full-year total and organic revenue growth outlook and increasing our full-year DEPS outlook to be between $16.36 and $16.50.

Third, we’re excited by the potential of Generative AI, both as it relates to internal productivity and using our application specificity to provide context for new product development ideas. We look forward to sharing progress and updates in coming quarters and years. And finally, we continue to be active with our capital deployment activities as we have north of $4 billion of available M&A firepower. As we’ve been discussing over the past several months, we have a very large pipeline of opportunities, though as always, we remain super patient and highly disciplined to ensure the continued optimal deployment of our available capital. Now as we turn to your questions and if you flip to the final slide our strategic flywheel, we’ll want to once again thank those of you who joined us in New York for our first ever Investor Day and for the 100s who have watched the replay over the past few months.

During that long form overview of Roper, we were excited to share with you our long-term strategy, the high quality nature of our portfolio of businesses; our operating ability to improve our businesses, our process driven capital deployment approach and our compelling long-term business model that compounds cash flow in the mid-teens area. So thank you for your continued interest in Roper. And with that, let’s open it up to your questions.

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Q&A Session

Operator: Yes, thank you. We will now go to our question-and-answer portion of the call. [Operator Instructions] And the first question comes from Julian Mitchell with Barclays.

Julian Mitchell: Hi, good morning. Maybe just the first question around in Network Software, you had a very strong margin performance up over 200 points of only mid-single-digit organic growth. So I just wondered if there was anything driving that perhaps on mix or anything kind of one-time? And then also in that division, how are you thinking about second-half growth in DAT & Loadlink versus first-half?

Jason Conley: Hey, good morning, Julian. It’s Jason. So yes, I mean, I think we had the strong performance across a lot of the businesses. I think the — by the one standout is our ConstructConnect business. We acquired a bolt-on that we closed last year and we’re seeing — realizing the benefits from that deal. And then like I said, beyond that, it’s just across the segment.

Neil Hunn: And relative to your second question, second-half for DAT & Loadlink, our freight match businesses. We continue to be cautious there and conservative. We’ve been held that posture the whole year. DAT performed very well in the quarter, it grew high-single-digits. The broker part of the business and the data analytics part of the business remains super solid, high retention rates. But as we all know, the carrier side of the market, the excess carriers are trading out of the market and that has a weighing effect on DAT. So we’ve modeled that in all year long and it’s playing out generally in line with what we thought here in Sarasota, maybe a touch better, but we’ll just stay in line with Sarasota’s expectations. And relative to the second-half for DAT, the big wildcard is what happens with Yellow and [EPSI] (ph). I mean, so we’ll see what happens there could be a pickup for the spot market, if something were to turn negative on either one or both of those.

Julian Mitchell: That’s interesting. Thank you. And then just as we look at the second-half guidance, you called out in TEP the tough comp for third quarter. Just one other thing I wanted to check on the back half. It looks like the guidance implies fourth quarter DEPS doesn’t really go up much sequentially in Q4. Historically, you’ve had often a mid-single-digit type EPS increase in Q4 sequentially. I just wondered if that was just kind of conservatism in the construct for this year. Or if there’s anything specific going on?

Jason Conley: Nothing really specific sequentially. I mean, I think we’ve talked about a little bit about just the seasonal shutdown at Neptune. We’ve had that historically, but I wouldn’t point to any conservatism and we’ve got, sort of, networks still at mid-single-digits. So maybe in the prior year, you might have seen some acceleration coming in the fourth quarter, but nothing really unusual there. What is your first question, sorry, Julian?

Julian Mitchell: Oh, no that was really just around if there was anything on the fourth quarter to kind of call out, but it doesn’t — it sounds like this year should be fairly typical in terms of seasonality.

Jason Conley: Correct.

Neil Hunn: Correct.

Julian Mitchell: Great. Thank you.

Neil Hunn: Yes. Thanks.

Jason Conley: Thanks, Julian.

Operator: Thank you. And the next question comes from Deane Dray with RBC Capital Markets.

Deane Dray: Thank you. Good morning, everyone.

Neil Hunn: Good morning.

Jason Conley: Good morning.

Deane Dray: Hey, can we start with just broadly the tone of business. There was a reference in the first quarter and I think also at the Analyst Day that you were seeing some slower customer decision making. But the way I look at this quarter with the upside on the organic side and the outlook, has that improved? And very specifically, would you measure that in new logos and SaaS conversions, but just kind of that tone of business, please?