ROPER TECHNOLOGIES INC Q3 FY2024 earnings call

Delivered solid third - quarter financial results with an expectation of an acceleration in sequential organic revenue growth heading into Q4. Completed the acquisition of Transact Campus, a highly attractive business. Grew free cash flow by 15% in the quarter and 20% on a trailing twelve - month (TTM) basis. The application software segment witnessed strong organic enterprise software bookings momentum, with businesses like Aderant, Deltek, PowerPlan, Frontline, and Healthcare IT performing well. The network software segment was affected by freight market conditions and strikes but showed signs of stabilization. The TEP segment resolved Neptune's production issue and had strong performance from Verathon.

Total revenue grew by 13%, organic revenue by 4%, and EBITDA by 10%. The application software segment saw total revenue grow 23% and organic revenue grow 5.5%, with an EBITDA margin of 43.6%. The network software segment had organic revenue growth of 1%, with mid-single-digit growth excluding freight matching and Foundry. The TEP segment had total revenue growth of 4% and organic revenue growth of 4%, with an EBITDA margin of 35.4%. Neptune resolved mechanical meter production challenges, Verathon performed exceptionally well, while NDI and Inovonics/rf IDEAS faced prior year comparable challenges.

Raised the full - year total revenue growth outlook to above 13% and maintained organic revenue at approximately 6%. Increased the full - year adjusted diluted earnings per share (DEPS) guidance to the high end of the prior range. For the fourth quarter, expects adjusted DEPS to be between $4.70 and $4.74, with Transact expected to be approximately $0.03 dilutive in the quarter.

Freight market conditions could have an impact on the network software segment. Foundry continues to face headwinds from industry strikes. Neptune previously had mechanical meter production challenges, although resolved, there could be potential for recurrence. Uncertainty in government spending may impact Deltek's government contracting (GovCon) business.

Q: Good morning, everyone. Maybe we can start with the strategy around Transact Campus...

A: Yeah, appreciate the opportunity to talk about that, Deane. The short answer is yes. Even going back to our Investor Day 18 months or so ago, we outlined a modest evolution of our capital deployment strategy to focus on a bit more of what we call bolt - on activity and then also the kind of businesses that are a bit faster - growing, call it, mature leaders. Since then, we've done acquisitions like Strata, Syntellis, and Procare, and now Transact. We've tooled up the capital deployment team and have folks focused on partnering with our businesses, doing a lot of development work in the marketplace.

Q: Good morning. Neil, you mentioned some of these macro headwinds...

A: Sure. So I'll -- I'll take the first one, Jason will certainly take the second one. First, we've worked hard over the last handful of years to really beat a lot of the cyclicality and macro out of what we serve. But still, we're not immune. We're talking about interest rates and economic slowdown affecting enterprise class buying activity across software. Also, the transportation macro with our DAT and Loadlink businesses, where we're seeing a stabilizing in the freight market. Jason will talk about Neptune.

Q: Hi, good morning. Maybe I just wanted to follow up on the sort of the macro context as it pertains to network software specifically...

A: So I'll take the first part. So, on DAT and Loadlink, it was intentional that we changed our word choice this call to be stabilizing. It is very much a stabilized market. We anticipate for until we see anything other than stabilized, that we're going to be in this position from just a tonnage or load volumes that are going over the roads and into the network. That said, DAT does have a pathway and a plan, a high confidence plan to return to some modest levels of growth next year with no assumed improvement in carrier network participation through packaging price. And then on Foundry, it's just the -- waiting for the post - production employment to return to its historical levels. I think we're about 15% below pre - pandemic or pre - strike, I should say, employment levels and post - production and we just need -- the content is being produced, it's just got to matriculate through the pipelines and that will be sometime in 2025.

Q: Yeah, thanks. Hi, Neil, Jason and Zack. And my primary question is actually on the enterprise software bookings...

A: Yeah, I'll provide some color there, Terry. I mean, I think you're right. The fourth quarter for us is not necessarily a budget flush, it's probably just more customer behavior. It's typically our biggest quarter. So we're obviously keen to see how that plays out. You're right, the last couple of quarters have been strong. I think just a little bit of color. Neil mentioned that Deltek, GovCon Enterprise got a little bit better. Also, Verathon was really strong, specifically in the carrier space. Also had good broker expansions, but carriers has been an area that has been a focus for them. So good to see some new logo wins there. And then Aderant has been really strong as we've mentioned, but it's really good to see the balance of both expansion of existing customers and then some new logo wins with their Sierra Cloud products.

Q: Hey, good morning, guys. I wanted -- just a little bit of a high - level question, but there was a lot of price in the last couple of years...

A: I would say just, I would -- I seem to recall you asking a price question a few years ago as well. So for us on software, we've always had a pricing mechanism in the ARR snowball. Right. As a general matter, we trip -- we have 95 - or - so - percent gross retention. So we're going to trip 5 - or - so - percent. We're going to offset the vast majority of that at each business unit level with price. It's just in the algorithm, it's in the price expectation with the customers, it’s in what we do from a new product feature point of view with the R&D and efforts we support that obviously [cross - sell itself] (ph) from there to get you net retention in the 105 - ish range across the blended enterprise. And we have net new on top of that. On the tech businesses, I would say that's a little different. Most of the businesses would take price when they launch a new product. Now there's just a more normalized inflationary every year for 18 months or so opportunity to pass the regular wave of inflation across.

Q: Hi, good morning. Just on the -- following up on Julian's question, on the NSS business for next year...

A: So, I think, Steve, I think we want to stop short of even implying any guidance in the next year. What I would say just broadly across the enterprise is we like the momentum we're seeing in enterprise software bookings and the fact that it is normalized, a pretty normalized 2024 year from which to grow. You see the reacceleration heading into Q4. We expect those Q4 trends to carry into '25, but I think we want to just sort of stop there short of issuing guidance next quarter.

Q: Hey guys, good morning. So on Neptune, it's good to hear the production issues have been fixed. Just curious, like we've been hearing some, like kind of mixed, I guess, about order patterns in that business...

A: I would say, it's very much what we expect and what you just described. So during the pandemic, I mean pre - pandemic, this was a four to eight - week lead time business, very much a book - and - ship type business. During COVID, we got -- our lead times gapped out to maybe 12 or 14 weeks, but we had 12 to 18 months of backlog ordered -- the order activity and now the order duration is compressing, but the number, the order volume, if you will, the repeat orders are not. So we're not -- it's just a -- instead of booking a year out, they're booking whatever six -- the customer booking six or nine months out. So that order of duration is coming in as expected. But nothing again for repetitive purposes, nothing from a number of meters that are being shipped to an account - by - account basis, that is all healthy.

Q: Yeah, thanks. Was going to ask also about the deal dynamics out there...

A: In terms of the competitive intensity on a per deal basis, if that's the question, it's hard to ultimately know. I mean, I would call out that we did the Transact deal on a proprietary basis. I would say that our M&A teams are engaged in -- engaging in more proprietary or quasi - proprietary opportunities and I can recall quite some time. And -- but -- and I think it's -- so we know those are facts. I think where I would speculate a little bit with so many opportunities that are going to be coming out of the pipeline, I think all buyers are going to be a little more discerning early in processes, which might lead to a little bit lower competitive intensity, but hard to know that to be an absolute case.