Roper Technologies, Inc. (ROP) Earnings Call Transcript & Summary

Okay. Another big question I get as we try to tell your story, which is a great story, but it's also complex, which is you own one stock, but you own 28 companies. So like they come to me and they're like, "Well, how do you do work in 28 companies." I'm like, "We can. "

Yes.

So let's focus on the stars, like there's -- I know there's a lot -- you like all your children equally, but let's talk about the core stars in that 28. Who are the couple that you'd like to focus on? And maybe tell us a little bit more about what they do, why they're doing so well and what...

Sure. Yes. I mean that's -- I think that's the benefit of owning Roper as you can own great companies that you otherwise couldn't invest in, in the public markets, right? And we provide -- in my opinion, we provide a place for them to grow over a long period of time, right? So -- and some of our bigger investors or those that are doing work on us, will sometimes do their own channel checks to get that. We can say everything we want, but that's -- the proof is in that. So -- but anyway, just getting into that, I think when you look across our portfolio, our Aderant business is doing exceptionally well there. Think of them as the ERP for large law firms. And it's a -- they've had a tremendous success over the past few years in terms of share gains. But additionally, the bolt-ons, and this is, again, back to why bolt-ons, we think could unlock more organic growth for us down the road, but just being able to sell point solutions in through their chassis and attach it to their ERP system, their LPM system has had -- has provided tremendous growth for them, whether it's through billing solutions, HR solutions, the like. So that cross-sell motion is really strong. And they've actually -- so they had sort of this jump ball situation with another competitor as their competitor wanted to move all their customers to the cloud. So there was kind of a time stamp on that. Well, since that date has passed, there's been a couple of good indications we might actually convert some of those that have committed to the cloud version of their customer solution. So anyway, just lots of momentum in that business. Just kind of pivoting over to one of our product businesses, a business called Verathon, so they basically provide 2 solutions. One is -- well, it's 3 solutions, but I'll talk about the bladder scan business, it basically allows any nurse practitioner to scan the content in your bladder. And it's a pretty mature, I'd say, product category, but we've had just a really tremendous product releases over the last 3 or 4 years that's allowed us to gain quite a bit of share. And again, it's a smaller part of Verathon, but something we don't talk about much, but they've done a great job on that side of the business. And then the other side is our visualization side of the business, which is our GlideScope product. So if you have to intubate a patient, open up the airway passage, we have -- we benefited tremendously in that through COVID. So we had this sort of spike in '20 and '21. The business came down for a while, but it's now a standard of care. So any time you intubate a patient, you're going to use a video monitor to enable that. And probably the most exciting part, and this is why Verathon has been a multiyear success story as they've invested in their product capability over time and have released a new bronchoscope product a few years ago that is quickly becoming one of the leaders in its category. So it's basically able to take the same -- it's using the same screen to look down into the lungs with a different, what's called a bronchoscope so not intubation. So just taking an intention of what they did and developing new products. So we feel really good about that business going from kind of low single-digit growth to now low double-digit growth for a sustainable period of time. There's new products in that chassis. So lots that -- I could probably talk about more businesses, but that's just a couple to name off.

One we get is -- you're in the water business. And so everyone is interested, like I think over 75% of your assets are vertically aligned SaaS, I believe.

Yes.

And then -- but the water asset, I don't believe, belongs there, correct? That's...

Right. So 75% software, 25% product. And of product, our Neptune business, which is a water meter business -- water meter and water meter technology, I should say, business is a big part of it.

WaaS, water as a service?

Water as a service. I like it.

You heard it [ going ] here first.

We do have software in that business, by the way, if you...

That's what we want to talk about -- so just -- I get a lot of questions, so I just want to make sure I understand it too. So walk us through quickly, Neptune, what it does, like what -- why it's so important?

Yes. So we've owned Neptune for 21 years now. And what it is, it's what it sounds like. It's providing meter-reading technology for municipalities all across primarily North America. And it's basically a very understood market. There's 3 players in the market. We play in the sort of small-to-midsized municipality market, which is super attractive because we can understand the dynamic needs of different municipalities and really kind of adjust our product offering to go up and down the stack, depending on what they need. So that's what's, I think, differentiated Neptune over many years. The first inning of Neptune was all about automatic meter-reading technology, where instead of going -- having somebody go right to the meter and write it down, they could just drive through a neighborhood and pick up all the signals from the meter through our technology. Increasingly, it's now moved to fixed networks. So you're mounting things on different areas and not having to have anyone drive around. So that's been sort of the next advance. And now it's through cellular versus proprietary communication. So growing through a cellular sort of algorithm. And then lastly, I'd say, is now moving from mechanical meter, which degrades over time, you think about moving parts in a meter, to now moving to an ultrasonic solid-state meter. So that has been in the last 2 or 3 years, a big growth driver for Neptune. And so we like that direction of travel. Any time you have a new technology that's introduced, it's going to be 10, 15 years for that to roll out, and it's coming at a higher ASP. So we like the direction of travel for that business. It's really for us about -- like I said, it's a very understood market, but just introducing new technologies into that marketplace. And lastly, talking about software, they -- if you think about how is the municipality going to read all of the meter data and process that into a billing application. We have something called a meter data management solution, and that's the part of software we do today. We've had a move from on-prem to cloud over the last few years that's resulted in double-digit growth for that business. And the business actually has deferred revenue, which is pretty cool. So they've got deferred revenue through their cellular product offering, service offering and then through the meter data management solution. So we basically use that to fund their CapEx. That's how we think about it. Pretty cool.

Is -- and the margin profile of that business?

It's good. It's good, yes.

Yes. Great.

I mean the segment overall is like mid-30s EBITDA margin, right? So...

Water, we got to have it.

Yes.

No, that's great. All right, financial profile, high single-digit growth, organic, so okay?

So mid-single-digit plus. Our ultimate goal is, again, because we're in these niches, we're never going to be a 15% grower, but if we're high single digit, we deploy the free cash flow, continue to buy businesses that grow faster than the fleet average, mid-teens free cash flow is sort of the ultimate destination. And Neil will say with -- the target to be high teens, but I was -- he and I have that debate all the time. But he's high teens, I'm mid-teens, but I'll take high teens if we can...

And 40% plus margins, you feel like that's an altitude you can keep?

I do. I mean if you think about our margin profile, our gross margins, especially for software is 70%, 80%. So it still gives a lot of room left in the P&L to reinvest. And so -- but if we were to grow, let's say, 9% organic, those incremental margins might be in the 40s. If we're more at 7-ish percent, we'll probably be more like 45%. So that trade-off for higher organic growth we would make.

Software is in the funk right now, Workday back office, funky; Salesforce front office, funky, something's going on, right? So is it too much cloud ware, if you will, we're digesting what we bought the pandemic, is AI taking away or higher rates or -- there's a bunch of different factors, we're like trying to piece it all together. So what -- if those companies are all seeing it, and there's been like 1 or 2 companies at this conference to say they're not seeing it, but everyone else is seeing it. What's your sense? Are your businesses in more stable, steady markets where you don't really feel the sensitivity of these -- what we're seeing in some of the others or...

I think that's right. I mean we typically have a narrow range of outcomes than some of these other companies you're listing. So and that -- we talked about last year on the enterprise software businesses have had a sort of a -- not a slowdown but just not an acceleration of bookings last year, if you look at our bookings -- enterprise software bookings, they were up maybe low single digits, '23 versus '22, and we expect it to be better this year, but we haven't seen like a budget flush or anything like that happened last year for some of these other businesses. It's been kind of steady as she goes for us. The one area we've talked about has been our Deltek business. So Deltek is our largest business, 60% of that is government contractor software. And a good portion of that is a large -- kind of large enterprise customers. And because of everything that's been going on with the deficit and just sort of debt ceilings, they've had a lot of belt-tightening there. And so we don't -- we haven't expected that to get better this year. If it does, it will be upside. But that's been probably the biggest weak spot in terms of CTOs not making decision on software.

Best thing that we don't know about you guys that you see every day as you go to work that we can't small [ breathe ] here.

Yes, that's a good question. I think -- and so I've been with the company a long time, and I think just the quality of the people that we are putting into the companies is just demonstrably better in the last 3 or 4 years than they were at any time in the past because we've increased the expectation level for our leaders in our business. And as a result of that, we expect them to deliver excellence. And so I think we're seeing -- it takes a long time to do that, right? You got to hire somebody, they've got to assess their team. They've got to work on processes, but I really like kind of what we like what we're seeing from that perspective. And we didn't -- we hired with a sort of a very intentional lens. We used a lot of profiling. We've used different hiring assessments to do this. So we've been very scientific in the type of leaders we want to bring on board. And I think you're just -- I can -- it's intangible for you, but it's very tangible for us in terms of the quality of the strategic plans, the sort of the rigor around the execution -- to execute against those plans. We see that in our planning cycle, and so I'm very encouraged by that.

Awesome. Thank you, Jason, for coming. Appreciate your time.

Thank you.