Roper Technologies, Inc. — 2024 Q1
Transcript
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Good morning. The Roper Technologies Conference Call will now begin. Today's call is being recorded. [Operator Instructions]
Good morning, and thank you all for joining as we discuss the first quarter 2024 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.
amortization of acquisition-related intangible assets; financial impacts associated with minority investments; and lastly, transaction-related expenses associated with the completed acquisitions. Reconciliations can be found in our press release and in the appendix of this presentation on our website.
Thank you, Zack, and thanks to everyone for joining our call. We're looking forward to sharing our first quarter results and our increased outlook for the year.
Thanks, Neil. Let's dive right in on Slide 6. Q1 was an excellent first installment to 2024. Revenue was 14% over prior year to $1.68 billion. Organic growth of 8% was led by double-digit growth at our TEP segment and solid mid-single-digit growth across our application software and network software segments.
Thanks, Jason. As we turn to Page 9, let's review our Application Software segment results. Revenues here grew by 18% in total and organic revenue grew by 6%. EBITDA margins were 43.3%. We experienced strong performance across this portfolio of businesses.
[Operator Instructions] Your first question comes from Julian Mitchell from Barclays.
Maybe just a first question on the network software division. So the freight markets, I think there was a fairly sort of down the outlook from some of the U.S. trucking companies in the past couple of weeks. It sounds like that business for you on Freight Matching is playing out as expected.
Why don't you take Jason the first one, I'll say the second one.
So Julian, it's -- like you said, it's about playing out as we expected, down low singles for the year. Not much change from our perspective last quarter. So yes, that's kind of the current guiding assumption.
And as far as on the carrier side, it's actually been pretty stable for the last several months. It hasn't improved. It has been stable. And when you take that stability and you put it against the prior year comp, that's what drives to the outlook for the year.
That's helpful. And then just dialing in on the second quarter EPS guide. I think normally, you'd have maybe sort of a 3%, 4% type sequential increase in earnings in the second quarter, looks like it's basically flat at the guide midpoint for this Q2, is there anything going on sort of sequentially with any of the segment sales or margins that's abnormal or something below the line that's weighing on that?
No, not really. I mean we feel good about our guidance being raised for the full year. And if you look -- we look back a quarter ago, our Q2 guidance is consistent with what we thought 90 days ago. So I think if you go back to like '21 and '22, we were actually flat Q1 to Q2 on like a segment EBITDA basis. And that's usually the normal motion for us. Last year, we did move up sequentially, but that was driven by some [indiscernible], there were some strong deliveries led by Verathon and then this year, Verathon is coming out strong out of the gate. So we don't have that dynamic this year.
Your next question comes from Deane Dray with RBC Capital Markets.
Since it's the newest addition to the team on Procare, just some data points. So what was the contribution in the quarter? And reminds us about any kind of seasonality on the cash flow because it is tied to education. So we know that it tends to be seasonal. And any sort of like first 100-day plans for the business?
Yes. So if I can hit that, Deane. So it was about what we expected. We had a couple more days in, but it was a little over $20 million of revenue came in sort of about as we expected in terms of EBITDA margin in the mid-30s or so. And then I think what we -- from a cash flow perspective, it's more of a monthly sort of payment stream. So we don't get -- it's not like a frontline where they've got big renewals and the schools are paying them.
And the normal cadence for the monthly is revenue cadence is approximately what?
It's consistent, right? So it's just -- if you think about software is obviously consistent month-to-month. And then the payments, they might get a little bit more at the beginning of the year, but it's modest. It's pretty consistent throughout the year. Of course, they're growing, right? So it's going to -- it will ramp up sequentially throughout the year. But just overall, in terms of a business model, it's pretty consistent throughout the year, not a lot of seasonality.
If you're comparing this to front line, where most of the cash flow comes in Q3, this is not that. This is much more linear throughout the course of the year.
That's great. And then just a follow-up on the fastest growth platform right now is surprisingly on the tech-enabled products, Neptune is just how -- what's expectations for this growth rate? How much of this -- because we see similar numbers at like Badger meter. So it looks in line, but how much of this is market growth versus any sort of share gains that you might be realizing?
Yes. So for a long -- Deane, as you know, Neptune over a long arc of time is a slow and steady share gainer for sure. I think it proves out in all the market data we see and continues to research it. Relative short-term performance, we think it's a combination of a couple of things.
Your next question comes from Joe Vruwink with Baird.
When you consider the businesses that serve clients in the public sector, how are they planning for the balance of the year, just particularly around the election and then the end of stimulus in certain cases? And I ask about stimulus not because a business like frontline has benefited from that. But does just the shifting of revenue sources for a school district perhaps cause a pause in their decision-making?
Yes. So we got -- it depends on which part of the market you're talking about. Education, our frontline business was not and has not been a meaningful beneficiary of [ ESR ] funding. And so as that is coming to an end, we've not been a direct beneficiary of that. There might be some secondhand or thirdhand benefit by that, just having school districts having a lot of money over the last years and feeling good about life.
Yes, yes. No, those are the 2 that I had in mind. And then if I can ask, I guess this is a pretty targeted segment level question. But the reoccurring revenue sources for application software really look like they jumped this period, maybe about 2 points more in growth contribution than typically you see there. Just what drives that particular part of the business?
Yes. Joe, that's the Procare business coming online, right? So we talked about 75% or so of their revenue is payments. And so that's showing up in the recurring line.
Your next question comes from Scott Davis with Melius Research.
I think this was more positive in tone on the M&A side commentary wise, and I think we usually get from you guys. You're never really that bearish. But talk to us about -- a couple of things, a little bit more color there. Is it the number of deals? Is it the valuations have gotten more interesting? Is it the competition on the buy side has gotten a little bit better? I mean just drill down a little bit into that, it would be helpful. And kind of a natural secondary is you say $4 billion of fire price, is that enough? And would you consider tapping equity markets if the deal flow was going to be even more robust?
A lot in there, Jason and I'll do our best to cover all points, if we don't cover one pull us, I'll bring it back to it. So we're very optimistic at the moment. I think it's for really all the reasons you talk about. So there are a very large number of deals in the market and coming to the market.
Your next question comes from Brent Thill with Jefferies.
This is David on for Brent. I wanted to ask around there was increased commentary, I think, versus prior quarter around some of the companies and what they're doing around AI. Just if you could just give us an update on the broader AI strategy? And if you guys are charging for any of these AI products, any color there would be helpful on how AI could possibly help with the organic growth of some of your assets in the long term, that would be helpful.
Yes. We'll certainly give you an update on that. So we continue to grind away at this. So we have done a lot of work engaging with all 28 of our businesses, both on the internal productivity-based applications around R&D, customer for live customer support go-to-market, admin, HR, finance, regulatory, et cetera, have a call at lunch with a large group of our leaders today on just that topic.
Your next question comes from Terry Tillman with Truist Securities.
Maybe just the first question because it is the most recent addition to the portfolio, and I think you all calculated the opportunity here maybe to continue buying high-quality assets, but maybe even some better growth profiles, good valuations. I'm curious, just an update on where you see kind of on a go-forward basis, the Procare Solutions revenue compounding growth rate where you see that? And then as you've had a little bit of time here, where do you see one of the most untapped growth engines for that? And then I had a quick follow-up for Jason.
Yes. So on Procare when we announced the deal, we talked about how we believe, this is going to be a mid-teens organic growth business. The market is growing 10% or a little north of that. Procare is about 1.5x relative market share. And so with that leadership position and market growth, broker has the right to win that big share and grow above market.
Got it. Okay. And then just a quick follow-up. I think it was 5% to 6% organic growth and now you've firmly set 6%, so that's good to see. Jason, if you had to think about like what is the biggest driver or maybe it's just a bunch of little things. What is the biggest swing factor in just tightening that and effectively raising the organic?
Yes. I mean, obviously, we had a really strong Q1. So part of that is just carrying that through and a lot of that was at TEP and then we had some various small beats across software. So I think it's mainly what we saw in Q1 and then just the confidence that we're going to be able to sort of maintain our prior guidance for the out quarters.
Your next question comes from Joe Giordano with TD Cowen.
Just curious on the jobs in the country, like you look at the jobs data and they're pretty good, but it's generally been like an erosion of white collar type jobs replaced by like part-time blue-collar jobs. And I'm just curious like on a longer term, what are the implications on some of your software businesses that are more headcount driven? Is that trend? I know you won't see it like immediately, but is that -- are you starting to see the implications of that like an outlook basis?
So I would say no, but perhaps the reason is very -- there's some, but very little of our revenue is seat-based pricing. There's some, like I said, -- and where that exists, we're transitioning to a different metric. So as you get more disruption with GenAI or the knowledge workers sort of get more productive, we certainly want to benefit by that, not be penalized by that. But it's not been something that's been brought up by any of our companies in any of our operating or strategy reduce.
Interesting. Okay. And then just to follow up on the AI discussion in terms of like deployments and the products you're launching here. Has that been like table stakes now? Or is your competition doing the same? Or do you feel like deploying these tools has been a differentiation for your businesses?
So far, it's been very differential. I think the expectation is the competitors will have their response for sure. I'm just double-click on that a bit, though, which is we tend -- we are across all 20 of our businesses, we operate in these very small markets, and we are the largest player in the small market.
Just on that, if I could just sneak in a follow-up on that. Like is this an area -- I know generally, once you acquire a business that kind of runs on its own, but is this an area where like the corporate can flex a little bit because these solutions tend to be expensive to deploy.
So these tools are not free, but they are substantially less expensive than these large language models that have to be developed, right? And so there is the research and development part of the application of the LLM and what we're doing, and then there's the operational costs. Jason did a teach-in a couple of months ago about the ROI case studies and all of this stuff.
Yes. No, that's right. I mean we do have benefits and scale with some of the agreements with our large cloud service providers. So that's been beneficial for companies to do some experimentation at a very low cost. And then we're just allocating a lot of mind share towards that, so we can collectively get better. But in terms of like allocating capital that just hasn't been front-centered out. The company has a really compelling value proposition. We're always going to entertain that, but that's not what we're seeing today.
Your next question comes from Joe Ritchie with Goldman Sachs.
So in your prepared comments, Neil, you referenced how some of your new SaaS-based offerings were helping certain businesses. I'm just curious as you kind of think a look at the portfolio as a whole, like how far along are you in terms of rolling out additional new platforms? And how much room is there to go from here? And if there are any examples that you want to highlight, that would be great across the portfolio.
So I just want to make sure we understand it or answering the question you're asking is that essentially how far along are we on our SaaS journey? And what's that look like?
Yes, that's exactly right. And if there are examples across the portfolio where you think you're -- you have like additional opportunity, I'd love to just hear about some of those examples.
So Jason why don't you take on the first part, I'll take the second part.
Yes. At the macro level, we're a little over $900 million of maintenance today, maintenance revenue and if you go back maybe in the last 5 years, we've converted the base of maintenance probably like in the mid- to high single-digit area. So we still have a lot of room left, and we convert that maintenance revenue at 2 to 2.5x when we go to SaaS. And so that's kind of where we're at today.
As Jason said, I mean, it is this $900 million of on-premise maintenance is concentrated in a handful of businesses. The examples we give would start with Deltek. It's both on the cost point, which is our government contracting core product and Vantage Point, which is their private sector, their engineering, architecture product.
Got it. That's super helpful. I'll just leave it there.
Your next question comes from Brad Hewitt with Wolfe Research.
So you talked about the strength that pipeline in the quarter. I saw you announced a new CFO for that business with a focus on kind of driving the long-term growth strategy. Just wondering if you could update us on kind of the normalized growth profile of that business and what you see as kind of the biggest opportunities to perhaps accelerate growth in that business going forward.
Yes, I'll take the first part. I'll let Jason talk about the growth outlook. So -- it's not -- I mean, we have a new president there, Pat McDonald. He is just hired as new CFO, as you referenced, really like the leadership mindset, the competitive orientation, the learning orientation, the building capability to be able to take long term, in that short term that the new leader brings to iPipeline.
Yes. I mean I think it's playing out as we thought it would when we acquired it back in 2018, 2019 area, it's in the high single-digit plus range and maybe it tilt a little higher down the road. But that's sort of where it's tracking. And just Adam Boone was added to the team a month ago, and we're excited about him joining along with Pat. So we're excited about the process for our pipeline.
Okay. Great. And then it looks like growth in network in Q1 was maybe a few points better than expected. Your guidance for the rest of the year kind of implies revenue flattish sequentially on an absolute basis.
Yes, sure. So we talked a little bit about MHA had a really strong quarter, and we think they're still -- they're going to continue to grow this year. But Q1 was especially strong as they had a contract renegotiations. So we got a little bit of a bump in organic growth in the first quarter. And then DAT & Loadlink, they'll continue to be down this year. And so maybe a touch lower than Q1. So that's what's driving the sort of low single digits throughout the rest of the year.
Your next question comes from Patrick Baumann with JPMorgan.
Lot of ground been covered. Just a couple of cleanups here. Sticking with the Network Software segment, it's seen really good margin expansion for a couple of quarters now. Could you remind us what's driving that? And if this 56%, 57% is sustainable and could potentially move up further in coming quarters?
Yes. So we touched on this last year, just DAT getting ahead of where they saw the market was going and taking some of the fixed costs out of the business. And so we're just realizing that through the first 3 quarters of this year. We think the margins in that -- I don't think it's going to get -- it's going to expand further. We're sort of in the 55%, 56% range. We expect that to continue throughout the year.
Okay. Got it. And then lastly, just the second quarter. Any color you could give us on organic growth expectations? I know you gave it for 2Q to 4Q. Any difference between second quarter and that 2Q to 4Q guide? And then also on free cash flow, typically lumpy from quarter-to-quarter. So wondering if you could give any kind of color on that relative to the first quarter.
Yes. I mean I think the organic growth expectations are the same in the second quarter as they are for the year. So no real big swings there. And then cash flow on the second quarter, it's always the quarter that we make to federal tax payments. So it's always the lowest of the year. So that's really the only dynamic I would point out there. If you look over prior years, that's always our low point, but still expect to grow, of course.
Your next question comes from Alexander Blanton with Clear Harbor Asset Management.
I noticed that you're forecasting or guiding to organic growth of 6% for the year, correct? But you had 8% in the first quarter. So are you factoring in some economic weakness in the U.S. in that forecast?
No. I mean, I think it all plays out, Alex, in our products segment and our TEP segment over the first quarter, we just had a better compare and just the ramp that we had in Neptune last year, it's sort of the comps sort of normalize out in the balance of the year. So it's really just that. It's no more complicated than that. And so that's why Q1 was -- and that's -- when we came into the year, that's what we had indicated that Q1 was going to be the kind of the high mark in terms of organic unless things change in our assumptions.
And I would just add, Alex, to what Jason said, we assume that there is the freight conditions and whatnot that, that is muted, but we've assumed that all the way through, it's not a new assumption, but there is definitely back half macroeconomic weak impacts in that part of our business. That did not change, but it's embedded from our original guidance.
And which part of the business? I missed that.
The transportation part, the DAT & Loadlink inside of network, the Freight Matching business.
This concludes our question-and-answer session. We will now return back to Zack Moxcey for any closing remarks.
Thank you, everyone, for joining us today. We look forward to speaking with you during our next earnings call.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.