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

Good morning. The Roper Technologies Conference Call will now begin. Today's call is being recorded. [Operator Instructions] I would now like to turn the call over to Zack Moxcey, Vice President and Investor Relations. Please go ahead.

Good morning, and thank you all for joining us as we discuss the third 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, Senior 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. And now if you 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. Today, we will discuss our results primarily on adjusted non-GAAP and continuing operations basis. For the third quarter, the difference between our GAAP results and adjusted results consists of the following items: amortization of acquisition-related intangible assets, the financial impacts associated with minority investments; and lastly, transaction and restructuring-related expenses associated with the completed acquisition of Transact Campus. Reconciliations can be found in our press release and in the appendix of this presentation on our website. And now please turn to Page 4. I'll hand the call over to Neil. After our prepared remarks, we will take questions from our telephone participants. Neil?

Thank you, Zack, and thanks to everyone for joining our call. We're looking forward to sharing our third quarter results with you this morning. As we turn to Page 4, we'll see the topics we'll cover today. I'll start by highlighting our third quarter financial performance. Jason will then go through our financial results in greater detail, review our balance sheet, including our M&A capacity, and discuss our very strong cash flow performance. Then I'll walk everyone through a summary of our most recent acquisition, Transact Campus, then discuss our segment highlights and review our increased guidance for the full year. After our closing remarks, we'll open the call for your questions. So let's go ahead and get started. Next slide, please. As we turn to Page 5, the 4 key takeaways for today's call are, first, we again delivered another solid quarter results and expect an acceleration in sequential organic revenue growth heading into Q4. Second, we completed the Transact Campus acquisition, a very attractive business at a very attractive net purchase price. Third, we're raising our full year guidance to the high end of our range. And fourth, we continue to be very well positioned relative to executing on our capital deployment strategy. Now digging a bit deeper into these 4 key takeaways. We grew total revenue by 13%, organic revenue by 4% and EBITDA by 10%. Importantly, we grew free cash flow by 15% in the quarter and by 20% on a TTM basis. Operationally, in the quarter, Neptune performed slightly better than our expectations as a result of last quarter's mechanical meter production challenges. And also importantly, we're encouraged to see strong organic enterprise software bookings momentum continue this quarter, growing in the double-digit area, up from last quarter's high single-digits bookings growth. Also in the quarter, we completed the acquisition of Transact Campus. Our CBORD business is being combined with Transact, and the integration activities are well underway. This is yet another very compelling value-creation opportunity for our shareholders, which we'll discuss in a bit. Based on strong enterprise margin performance, we're increasing our full year 2024 DEPS guidance to the high end of our range. In addition, we're increasing our outlook for total revenue growth to be 13% plus given the addition of our most recent acquisition, Transact Campus. Finally, we're maintaining our approximate 6% organic revenue outlook for the year. If we step back a bit, we recognize we just posted back-to-back 4% organic growth quarters, although not unexpected, without question, unsatisfying. That said, we do see quarterly organic growth momentum improving and expect our Q4 organic growth to sequentially improve given back-to-back quarters of strong enterprise bookings growth; stabilizing freight market conditions, albeit at the bottom; a resolved Neptune operational issue; and NDI returning to growth in Q4. So with this mostly behind us, we're confident we're seeing a reacceleration of our growth. And finally, we continue to be very active on the M&A market, an environment that continues to improve and one where we have a very large pipeline of highly attractive opportunities. We continue to be quite bullish about our ability to be active on the M&A front. So with that, Jason, let me turn the call over to you so you can walk through our quarterly and full year financial results as well as our very strong financial position. Jason?

Thanks, Neil, and good morning, everyone. Let's take a look at Slide 6. Revenue was $1.76 billion and up 13% over prior year. Acquisitions contributed 9% led by Procare and Transact Campus, and organic growth was 4%. Just unpacking organic growth a bit. In Application Software, revenue grew over 5%, with recurring and reoccurring growth in the high single-digit area. Nonrecurring revenue was down low single digits, led by declines in new license sales. New business activity for enterprise software continues to lean towards SaaS, which ultimately creates higher customer lifetime value while yielding a slight drag on near-term nonrecurring revenue. In Network Software, recurring revenue growth of 1% includes temporary headwinds at DAT, Link and Foundry. The balance of the segment saw growth in the mid-single-digit area. As Neil will discuss later, we see stabilization in freight markets and expect some improvement in Q4. TEP organic growth of 4% was underpinned by strength at Verathon and prior year comp challenges at NDI, Inovonics and rf IDEAS. As we discussed last quarter, NDI had a very significant customer program in 2023 that created year-to-date comparison challenges. However, we expect a return to growth in Q4. Separately and importantly, Neptune rapidly resolved its mechanical meter production challenges in the quarter. EBITDA of $717 million was 10% over prior year. And EBITDA margin came in at 40.7%. On DEPS, we posted $4.62, which was above our guidance range of $4.50 to $4.54. Of note, the Transact acquisition contributed $0.03 in the stub period as the third quarter is seasonally the highest driven by fees from annual tuition payments and annual renewals of term licenses. Excluding Transact, our guidance beat came from strong, over-margin performance in our Application Software segment. Turning to free cash flow. We had our highest-ever quarter, with free cash flow of $719 million, up 15% over prior year. Transact was cash accretive in the stub period of ownership and off to a fast start, with Q3 being, once again, seasonally strong for this business. We also had simply great execution across our software and tech product businesses. Of note, net working capital as a percent of revenue, excluding acquisitions, was negative 19%, a new Q3 record. A special thanks to our world-class finance teams across the Roper family, who are laser-focused on cash returns and cash flow growth, tremendous job. The bottom-right chart provides a trailing 12-month view of free cash flow over a 4-year period. The CAGR from the corresponding 2021 period is 12%. We adjust for the Section 174 that went into effect in 2022, we've compounded cash flow in the mid-teens area. The strong Q3 results places our year-to-date cash flow at 31% as a percentage of revenue. And with renewal season at many of our software businesses in Q4, we expect free cash flow margin to be north of 30% for the year. Turning to Slide 7, I'll now discuss our balance sheet. So net debt of $8.1 billion on trailing EBITDA of $2.75 billion yields leverage of 3x at the end of the quarter and a bit lower if we pro forma for the recent acquisitions. In the quarter, we entered the bond market and issued $2 billion across 5-, 7- and 10-year tenors for a blended rate of 4.8%. This was used to fund the Transact deal and partially pay down the revolver, which has a quarter end balance of $925 million. As we move forward, our strong cash flow and use of investment-grade leverage provides us with $4 billion or more of capacity to deploy towards high-quality acquisitions. With that end, I'll turn it over to Neil to talk about the Transact deal and its compelling combination with our CBORD business. Neil?

Thanks, Jason. Let's turn to our most recent acquisition overview. Transact Campus is another fantastic addition to the Roper portfolio. Let's start with the investment highlights. We paid $1.5 billion net of a $100 million tax benefit for the business. We expect Transact to deliver about $325 million of revenue and $105 million of EBITDA next year, which means we paid about 14x EBITDA. We expect this business to contribute next year. Transact is adjusted DEPS breakeven this year, be accretive to our adjusted DEPS next year and is immediately cash flow accretive. And we will report Transact as combined with CBORD at our Application Software segment. On a stand-alone basis, Transact meets all our long-standing acquisition criteria: leader in the niche market; delivers mission-critical, verticalized software solutions; competes based on customer intimacy; operates an asset-light business model; and is led by a skilled, passionate leadership team. Let's talk about what the company does. Transact is a leading provider of mission-critical and purpose-built software and integrated payments to higher education institutions in 2 focused areas: first, in campus identity management; and second, related to tuition management. The market itself is quite attractive and in the midst of the long-term secular tailwind of universities working to improve the on-campus experience required to attract and retain the next generation of students. We estimate the combined market size to be in the $1.5 billion range and growing 6% to 8% per annum. As previously mentioned, we're integrating our CBORD business with Transact. CBORD will combine its university campus ID business with that of Transact's, creating a leading provider of these solutions. We expect a long-term organic growth rate of the combined business to be in the high single-digit area. The go-forward leadership team has been announced, the 2025 $20 million cost synergy plan is well underway, and the initial set of customer feedback has been quite positive. As you can see, Transact is a highly compelling value creation opportunity for Roper and our shareholders. As we turn to Page 10, let's review our Application Software segment results. Revenue here grew by 23% in total, and organic revenue grew by 5.5%. EBITDA margins were 43.6%, and core margins improved 20 basis points in the quarter. Before getting into the business-specific details, I would like to share a few macro trends we're seeing across this segment. First, we continue to see improving organic enterprise bookings performance, growing in the double-digit area in the quarter following HSD growth in Q2. Importantly, the enterprise-class customer sluggishness we saw during 2023 and the first quarter of this year appears to be waning. Finally, we continue to see strong growth in recurring and reoccurring revenue in this segment growing in the high single-digit area in the quarter. Turning to our business unit-specific commentary, we'll start with Aderant, our software business focused on the needs of large law firms. Aderant continues to perform incredibly well in the market and had another great quarter. Over the past few quarters, we have highlighted Aderant's improved product development velocity and, in particular, with GenAI-powered features. Now this innovation activity is adding to their already strong bookings momentum, including very nice new customer additions and continued progress in adding new and expanded products within their existing customer base. Deltek, our software business serving government contracting, architecture, engineering and construction markets, was strong in the quarter as well. In particular, Deltek's enterprise-class government contracting customer activity improved in the quarter, which is encouraging to see. Also, and as a reminder, Deltek continued their ongoing cloud-based software momentum and expanded their GenAI-embedded functionality. PowerPlan, our financial planning and tax software business serving heavy fixed asset industries, continues to impress with their operating and financial results. PowerPlan has done a tremendous job over the last 3 or 4 years on improving their customer experience, accelerating their software innovation velocity and improving upsell, cross-sell activity. Great job by Joe and his team in Atlanta. Frontline continues to perform nicely and had strong renewal activity and delivered excellent seasonally high cash flow. Of note, we're excited to announce Matt Strazza as Frontline's new CEO. As some of you may recall, Matt joined Roper as Deltek's go-to market leader, then was promoted to be the CEO of ConstructConnect. Matt did a wonderful job at ConstructConnect, and we're excited about having this growth-oriented leader at the helm at Frontline. Also of note, we promoted Buck Brody, ConstructConnect's CFO, to assume the CEO role. Buck has been on the Roper ecosystem mostly as a CFO over the past 13 years. This is one of the first, though certainly not the last, time we'll promote leaders across and within Roper. We continue to remain quite bullish about the future for Frontline. Our health care IT businesses led by Strata and Data Innovations were also strong in the quarter and delivered excellent growth. Finally, Procare continues to execute well. Importantly, as part of our evolving governance processes tied to faster growth or maturing leader nature of our portfolio, Procare is working to improve its go-to-market capabilities from lead generation to deal execution as well as go-to-market leadership. We really like what we're seeing here, although it's early days. As it relates to the guidance for the final quarter of the year, we expect to see mid-single-digit organic revenue growth. Please turn to Page 11. Organic revenue in our Network Software segment grew 1% in the quarter and was impacted by the fact we continue to experience pressure with our Freight Matching businesses and work through the impact on Foundry from the recent actors' and writers' strikes. Excluding our Freight Matching businesses and Foundry, the segment grew in the mid-singles area, which demonstrates the underlying quality of this group of businesses. EBITDA margins continue to be strong at 56.2%. Let's dig into the details and start with our Freight Matching businesses, DAT & Loadlink, which declined slightly as expected due to the continuing challenging freight market conditions that adversely impact both businesses. That said, we continue to see further signs of market stabilization for both carriers and brokers. During this softer period, DAT continues to invest to accelerate new product development velocity. Now let's turn to Foundry, our postproduction media and entertainment software business. Foundry continued to roll out innovative product updates and ML-powered functionality this quarter, meaningfully enhancing the creative process for high-quality postproduction visual effects. Given the continued impacts related to the recent industry strikes, Foundry declined in the quarter as expected. We now expect the hangover from the strikes to carry into next year as Foundry's customers continue to navigate through tight economic conditions until their creative pipelines matriculate to the postproduction phase, which we expect to be sometime during 2025. As mentioned, the balance of this segment grew mid-singles organically in the quarter, with solid execution across this portfolio. In particular, ConstructConnect continued its solid march of improved financial results and bookings momentum. In addition, ConstructConnect continues to lead the market with their GenAI-powered takeoff and estimating solutions. Finally, our alternate site health care businesses performed well, led by our software solutions at MHA, SoftWriters and SHP, and further benefited from improved senior care occupancy. Turning to the final quarter of the year, we expect organic revenue to improve a bit but remain in the low single-digit area as we continue to experience stable but muted freight market conditions. Now please turn to Page 12 and let's review our TEP segment's results. Revenue here grew 4% in total and on organic basis, and EBITDA margins came in at 35.4%. We'll start with Neptune. Neptune rapidly resolved their mechanical meter production issue within the quarter, performing slightly better than we anticipated. Importantly, during the short-term bespoke manufacturing challenge, Neptune was able to deliver on all their customer commitments. In addition, Neptune continues to see solid demand for both mechanical and static meters, positioning Neptune very well for the foreseeable future. Next, we'll turn to Verathon. Verathon continues to perform exceptionally well, with solid growth across our GlideScope and BFlex product offerings. Of particular note, we're pleased to report that Verathon is the market share leader in the U.S. for single-use bronchoscopes. 5 years ago, we entered this market with a strong belief that we had a high right to win given our incumbent GlideScope position, and now we have claimed the market share leadership position, and Verathon is not done. Great job by Team Verathon. Northern Digital, or NDI, declined as we expected in the quarter based on customer program timing that led to a very difficult comp. That said, OEM order activity remained strong in the quarter. Finally, Inovonics and rf IDEAS each declined against difficult prior year comps. As a reminder, these businesses started recovering from supply chain challenges last year. For the fourth quarter, we expect to improve to high single-digit growth given Neptune is back on track operationally and NDI's customer program timing began to normalize. With that, please turn us to Page 14. Now let's review our full year 2024 guidance and discuss our fourth quarter outlook. Based on strong application segment margin performance and the addition of Transact Campus, we're increasing our total year growth outlook to be north of 13%, and we expect full year organic growth to remain consistent in the 6% area. In addition, we're raising our full year guidance to be in the range of $18.21 and $18.25, the high end of our previous range, an increase of $0.06 at the midpoint. Please note, we expect Transact to be DEPS neutral for the full year. Our guidance continues to assume a full year effective tax rate in the 21% to 22% range. For the fourth quarter, we expect adjusted DEPS to be between $4.70 and $4.74. Please note, our newest acquisition, Transact, will be about $0.03 dilutive in the quarter. Also, as a reminder, the impact of our $20 million synergy plan meaningfully skews to 2025. Now please turn us to Page 15, and then we'll open it up for your questions. We'll conclude with the same key takeaways with which we started. First, we delivered a solid quarter of financial results and expect an acceleration in sequential organic revenue growth heading into Q4. Second, we completed the acquisition of Transact Campus and commenced the integration with CBORD. Third, we're increasing our outlook for the full year. And finally, we are fairly well positioned relative to our capital deployment strategy. For the quarter, we delivered 13% total revenue and 4% organic revenue growth while increasing our EBITDA 10%. Of note, we grew our enterprise software bookings in a double-digit area and continue to see high single-digit ARR growth. Importantly, free cash flow was impressive, growing 15% in the quarter and 20% on a TTM basis. Next, we completed a compelling acquisition of Transact Campus. The combination with CBORD creates a leading software and integrated payments business that helps universities solve the pressing issue of making the student campus experience more compelling. The cost synergy execution risk here is quite low, most of which has already been actioned, leading to a very attractive shareholder return. Next, we're increasing our full year outlook for total revenue to be north of 13% and maintaining our approximate 6% organic revenue growth outlook. In addition, we're increasing our full year DEPS outlook to the high end of our prior guidance. Finally, we continue to maintain a strong financial position, with over $4 billion of capacity for capital deployment. The M&A markets continue to be very active. We have a robust pipeline of attractive acquisition opportunities that we're excited to pursue with our unbiased and disciplined approach. We remain quite bullish about our ability to execute this part of our strategy. Now as we turn to your questions, and if you could flip to the final slide, our strategic compounding flywheel. We'd like to remind everyone that what we do at Roper is simple. We compound cash flow over a long arc of time by operating a portfolio of market-leading, application-specific and vertically oriented businesses. Once a company is part of Roper, we operate a decentralized environment, so our businesses can compete and win based on customer intimacy. We coach our businesses on how to structurally improve their long-term and sustained organic growth rates and underlying business quality. Finally, we run a centralized process-driven capital deployment strategy that focuses in a deliberate and disciplined manner on finding the next great business to add to our cash flow compounding flywheel. Taken together, we compound our cash flow over a long arc of time in the mid-teens area. With that, we'd like to thank you for your continued interest and support and open the floor for your questions. Please go ahead, operator.

[Operator Instructions] Your first question comes from Deane Dray with RBC.

Maybe we can start with the strategy around Transact Campus, and I note that CBORD is being combined with the business right way. And historically, Roper really never clustered the Application Software businesses, preferring more stand-alone, siloed businesses. You never talked about scale, and I don't think I've seen a cost synergy estimate coming out of a transaction in a long time. Does this -- is this more of an opportunistic acquisition? You've done it before. You've combined medical purchasing. You've done some insurance business, back-office clustering. So we've seen this before, but this is right off of the -- out of the blocks. It's being combined, and the synergies look obvious. But just maybe is there a subtle difference here, more willingness to look at these attractive growth areas? Maybe start there.

Yes. I appreciate the opportunity to talk about that, Deane. The short answer is yes. So even going back to our Investor Day 18 months or so ago, we outlined, I think, there a modest evolution of our capital deployment strategy to focus on a bit more of what we call bolt-on activity and then also businesses that are a bit faster-growing, call it, matured leaders. And so since then -- if you look at our acquisitions we've done since then, we've done Strata, Syntellis -- or Syntellis and combined it with Strata. That was an archetype that is very similar to Transact. We bought Procare, which was our first maturing leader, slightly faster-growing business and then Transact. If you go back to 2019, I think we've done 26-ish acquisitions, and there'd be a handful of platforms out of that. So we have leaned into a fair number of bolt-ons. I would say on the bolt-ons, the driving -- the principal driving reason for that is to buy businesses where we have a high right to win and adjacencies that are close to ours that we think increases the likelihood for accelerated organic growth once the bolt-on turns organic. So yes, it's very much part of our strategy, and we've tooled up the capital deployment team that Janet has. We've got folks that are focused on partnering with our businesses and doing a lot of the development work in the marketplace. So yes, it's a strategic intent, and we've started the execution pathway.

That's great to hear. And maybe for Jason, and I appreciate you guys putting the spotlight on the free cash flow compounding flywheel because it seems like that's what you got this quarter with free cash flow up 15% and DEPS up 7%. So just talk about that spread. And was there any sort of seasonal contribution to free cash flow this quarter? Frontline typically has -- that's a higher contribution in the third quarter. Just any dynamics there.

Yes. So I mean Q3 is now our strongest cash flow quarter. I mean since we acquired Frontline a couple of years ago and now with the addition of Transact, it's definitely our strongest quarter. Transact [ thumps ] a little bit, maybe a couple of points of growth in the quarter. It's, as I mentioned, seasonally strong for them. But aside from that, we just had tremendous execution through the renewal seasons, which is Q3 and Q4 for us. So Q4 is expected to be strong as well. And I would just say DSO improved almost across the board for a number of our businesses. And so just good old-fashioned execution, I think, is what that drove that outsized growth relative to DEPS.

Your next question comes from Brent Thill with Jefferies.

Neil, you mentioned some of these macro headwinds seem like they're turning a bit. I'm curious if you can just dig into what you're seeing in some of the tone in some of the buyers. And then just maybe for Jason, just -- if you can just speak to Neptune and how confident that you think we're through some of the challenges that we saw. And what are the reasons why you're confident in that recovery?

Sure. So I'll just -- I'll take the first one. Jason will certainly take the second one. So first, and just to remind everybody, we worked hard over the last handful of years to really beat a lot of the cyclicality and macro out of what we do. If you think about end markets we serve, there's education, there's legal, there's government contracting, there's health care, insurance. And what we sell and what we deliver is mission-critical software. So we're generally not turned on and off based on the macro. And then most of our pricing is subscription oriented versus transactional. So there's sort of 3 levels of muting in that regard. But still, we're not immune to the macro, but we muted it. I would highlight a couple that we've been talking about really since the beginning of last year. First, we're talking this time or even, call it, 6 quarters ago, it was about the interest rates and economic slowdown. It was, I think, the most anticipated economic slowdown in modern history, and the psychology of that just slowed down, to some extent, the enterprise-class buying activity across software. We're cautiously optimistic based on the last couple of quarters of enterprise software bookings activity last quarter in the high single-digit area growth, this quarter, in the double-digit area growth. Pipelines look very robust heading into the end of the year. So we need to execute that -- on those pipelines. So we're encouraged by that. The second macro factor certainly that takes the headline for us is the transportation macro with our DAT & Loadlink businesses. They're subscription oriented on both sides of the network, both the carrier and the broker, but the number of carriers in the market loosely follows the amount of tonnage that flows over the roads. And so as the tonnage has come down, so as a number of carriers that are participants in the network, which could put pressure on that. We've just seen -- there's probably been 20 to 25 weeks of negative brokerage loads compared to prior year. That actually, in the last handful of weeks, is more normalized to last year. So we're very much seeing a stabilizing in the freight market. So those would be the macros that have impacted our business. Jason?

Yes. And just to talk about Neptune a little bit. So if you recall, we stood up the ultrasonic or static line last quarter, the second line. And so we had some constraints in our mechanical meter production. And so happy to report that the root causes were identified, corrective actions implemented. We had some yield issues on plastic molding that got corrected. Some of the machines were creating some constraints as well. That's been remedied. We really like the trends we saw through September, and those trends pretty much inform the production output for the fourth quarter and beyond. So we feel good about -- demand is really strong there, so it's really just getting through this mechanical meter production issue, and we feel good based on what we saw in Q3 and the confidence the teams have in Q4.

Only thing I'd add to Jason on Neptune, as I said in the prepared remarks, Neptune is able to deliver 100% on a customer commitment. So this was -- there's no issue there. The kaizens continue to improve and gain -- get even further improvements, and Don and the team did a great job just going again on the shop floor and getting to root cause.

Your next question comes from Julian Mitchell with Barclays.

Maybe just one to follow up on the sort of the macro context as it pertains to Network Software specifically. As we're thinking out sort of beyond this quarter trying to gauge how you're thinking about the recovery slope at Network Software, you cautioned that Foundry, in aggregate, next year may not see much growth because of the ongoing sort of strikes hangover. Just wondered on sort of DAT & Loadlink, that portion, what the expectation is. Do you think it's plausible we could just keep moving sideways sort of sequentially for some time? And maybe just frame as you see it now, how much are Foundry and the Freight Match businesses down in 2024?

So I'll take the first part. So on DAT & Loadlink, it was intentional that we changed our word choice this call to be stabilizing. So it was very much a stabilized market. We anticipate for -- until we see anything other than stabilized, 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 so we'll have, like I said, some modest growth at DAT next year that we have a pretty high degree of confidence heading into our AOP sessions that come -- that will occur next month. And then on Foundry, it's just the waiting for the postproduction employment to return to its historical levels. I think we're about 15% below prepandemic or prestrike, I should say, employment levels of postproduction, and we just need -- the content is being produced. This is then matriculated through the pipeline, so that will be sometime in 2025. So it's definitely taken a few quarters longer than we anticipated earlier in the year. Jason?

Yes. So Freight Match is down sort of low singles for this year. I think we definitely think for NS, in general, that Q3 is the low point for us. And that will start to trend up, as Neil said, for the fourth quarter and then into next year, and the pacing is just dependent on sort of the market momentum there. On Foundry, it's been down double digits this year, and that's been pretty consistent throughout the year. So we expected a little bit of more of a recovery in the second half of this year. But as Neil said, it's taken a little bit longer. So as we think about the trends for next year, I think the first quarter, just to remind you, we had -- we called out an MHA sort of onetime item this year. So beyond that, though, we expect steady growth in the next year for the segment.

And then just my follow-up, switching back maybe to the EBITDA margins at TEP. So those have been sort of down year-on-year for a few quarters. You've mentioned the production issues, and there are clearly supply chain inefficiencies sort of moving around. As we look ahead at TEP, kind of what's the confidence maybe that margins can return to year-on-year expansion in the coming quarters?

Yes. No, you're, right. I mean the second and third quarter, we had -- if you recall, last year, we had some big supply chain liberation for our med product businesses and our product businesses. This year, we're down a little bit. NDI is down, had a little bit of negative mix, and we're obviously investing for growth there just because it's always been a consistent double-digit grower for us. So we're continuing to invest in NDI. But I think for the year, just thinking broadly, we're going to be flat EBITDA margin. And so it should inflect back up in the fourth quarter.

Your next question comes from Terry Tillman with Truist Securities.

My primary question is actually on the enterprise software bookings. I think you said double digits, up from high single digits. I don't know what you could share in terms of what kind of budget flush you're looking for, for Q4. I assume there is some of that. So if you can make either a comment on that. Or just more importantly, if the bookings are picking up, do you think there's potentially an inflection in the first half next year or second half, just depending on how some of that activates to revenue? And then I have a follow-up.

Yes. To 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. You mentioned that Deltek, GovCon enterprise got a little bit better. So if you think about what happened from Q2 to Q3, that was a little bit of the delta. Also, Vertafore 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. So it's good to see that they're continuing to win in the market with new logos. And then we think about the -- the fourth quarter is going to be important, as I mentioned, in terms of how that plays into next year and sort of how that will matriculate into revenue, but we're encouraged with what we saw in the last couple of quarters.

Yes. We are -- obviously, we continue to have enterprise bookings momentum that will matriculate into revenue in next year, the timing of which depends on implementation time frames and customer go-lives. But yes, I mean, it's definitely a trend that we're watching carefully.

That's good to hear. And just my secondary question, Neil, you commented earlier when you get into kind of business-level commentary and kind of talent management moves you make. I think you talked about Procare and Frontline. I guess kind of what drove kind of some changes there, and I think you said go-to-market is the idea that, hey, they're doing well, but they could be doing even better or just maybe you could double-click a little bit into Procare and Frontline and what to expect with some of those leadership changes.

Sure. So there are 2 different things. I'll start with Procare. So Procare, we identified in our diligence process that there's an opportunity to improve, modernize, whatever word choice you want to pick, the go-to-market function. And so within a couple of months of ownership -- by the way, we shared those diligence finding and value-creation lever with the leadership team at Procare. They agreed with that. We made a leadership change. Like what's happening there, obviously, with the leadership change in go-to-market for Procare, which, by the way, is an internal promote to somebody from within the company. Then you can start attacking the underlying opportunities, which was there's some lead generation opportunity. There's a way they actually staff the calls between inbound, outbound, between business development and closures. There's a compensation angle. There's call scripts around attach rates and upselling. So all that is happening. And we're -- it's very early days, but starting to gain some encouragement and starting to yield some fruit. So again, a diligence finding where we thought there was a value-creation lever attached to it, and the team sort of attacked it pretty quickly. Frontline is [ completely ] different. So our existing leader retired or indicated he wanted to retire. So we had an opportunity with Matt Strazza that we have a long history with, as I mentioned, hired and came into the organization as a go-to-market leader at Deltek, did a wonderful job there. Then his first CEO opportunity was at ConstructConnect. Just did a terrific job in terms of the way the business is run, which is very much run in a Roper style, and he's a very growth-oriented leader. And so given that Frontline is one of our more attractive growth assets, we want a growth leader there. And it's very early days. I mean he's 2 months into the job or something like that at Frontline. And then the knock-on effect of that is the CFO of ConstructConnect, Buck Brody, became the CEO of ConstructConnect and then the Head of FP&A became the CFO of ConstructConnect. So from an enterprise risk perspective, we're able to sort of promote and rotate leaders inside of Roper. Essentially, the outside hire is an FP&A leader at the business versus the CEO of one of our larger businesses. So it's a win-win for the organization and the individuals.

Your next question comes from Scott Davis with Melius Research.

Wanted just to -- it's a little bit of a high-level question, but there was a lot of price in the last couple of years, not just you guys, pretty much everybody out there. But have you found any harder to get price incrementally? Are we back to kind of more normal -- when we walk into 2025, for example, would be back to kind of the more normal price increase cadence, particularly in software, obviously? But just high-level picture, what do you see there?

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 have always had a pricing mechanism in the ARR snowball, right? As a general matter, we attrit it. We have 95-or-so percent gross retention. So we're going to attrit 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. Then obviously a cross-sell and upsell 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. That, I would say, it's a muscle that is very well understood and built. We obviously get better, an example we've gotten better with that over the last few years is PowerPlan. Like, they didn't have that muscle built. Now it is built. But I would say we did get outsized pricing in software and so -- in the past, and so it's just reverting to normal. On the TEP 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 or 18 months or so opportunity to pass, the regular way, inflation across.