Honeywell International Inc. (HON) Earnings Call Transcript & Summary

All right. Rolling along here this afternoon with Honeywell and CEO, Darius Adamczyk. Darius, thank you so much for joining us this afternoon. I'm not quite sure if you want to give a bit of a preamble here. If not, I'll jump into Q&A, but I'll leave it to you first for maybe a couple of opening remarks. I think you guys have a bit of a slide presentation. So thanks for joining us and fire away.

Yes. No. Thank you, Steve, and thanks for the invitation to present. I mean I wouldn't want to take away any -- from your Q&A session, but maybe a couple of words I want to say upfront is, I think last year, when we had our session with you really in Q4 that really laid out the kind of value creation framework for Honeywell, which really -- and I'll just go over this quickly, the domain expertise, innovation, global reach, operational rigor, financial discipline, capital deployment, ESG were the major drivers. And I think those are all very much valid. But I think I missed a big one and maybe the one that I think is -- that I want to maybe focus on a little bit today because when you invest in Honeywell, hopefully, by now, investors trust us to deliver both in good economic times and in bad. And I think we've kind of seen both sides of that coin in the last few years. And certainly, last year was not a great economic environment, yet we delivered again. And you get good delivery in all economic cycles; you get innovation; you get productivity, you get capital deployment, which has exceeded our cash flow generation. But something else that I think maybe our investors don't appreciate it as much and it's -- that's on us in doing a full job in communicating, which is just the option value of a lot of what we call breakthrough or these initiatives, which are nonorganic in nature, when they take off. And I'm not saying that every one of them will take off, but I'm confident some of them will. And it's just very clear examples of that, which would be our quantum computing platform, our sustainable technology solutions, our UAM, UAV opportunities. Our brand-new filtrations that we just came up with, which is -- eliminates greater than 98% of our pathogens, and that's been proven by an independent lab. Our Healthy Building Solutions, which are really incremental growth drivers to what we're doing. Our Aclar Edge, which is a whole new growth platform for health care packaging, which is going to at least take market share away from glass and opens up whole new potential. These are billion to multibillion dollar kind of growth opportunities. And I'm not saying that every one of them is going to take off, but I'm confident some of them will. And I think that's the incremental value you get in investing in Honeywell as you get the option value of not just performing like we have been for years, but really a substantial acceleration when one of these breakthroughs takes off. And I think in the last, let's call it, 2 quarters, you've seen a little bit of a shift in us being much more active in the acquisition world. We've done 5 or 6 acquisitions granted. Sparta was the only one that we view as larger, but every one of those were technology differentiation, strong double-digit growth aligned with megatrends. And investors should feel confident. When I invest in some of these smaller companies because, to some extent, I don't want to because they take a lot of work, but every one of them is poised to grow double digit and really offer us something that's complementary to enhance the growth of Honeywell. And then on a similar note, in the divestiture side, we are going to become much more technology oriented. We are going to become much more aligned to megatrends. And frankly, although we loved our retail business, shoes, both recreational shoes don't really fit the future Honeywell profile. And I think the way I'd like to really think about Honeywell in the future is that it's a technology company that provides solutions for the industrial segment. And I think that's what we are today. Maybe not everybody understands that yet, but I think it's how we're trying to position the portfolio and our performance. Kind of our proof of value creation, whether you look at the consistency versus the XLI or the S&P that we've beat the -- each of those I believe 10 out of the last 11 years. And whether you look at our value creation framework, short term, midterm or long term, it's a very, very consistent set of returns, which I want Honeywell to be kind of to buy-and-forget kind of a stock. And I think there may still be some attempt at timing the value. But over time, we've proven that it's a good stock to own no matter what the economic cycle is and trying to guess the timing is not necessary because you're going to do well if you just hold it. And we've proven that over the last 15 years or so. And then lastly, and I just want to reinforce our guidance. Both for Q1 and the year, actually, business looks good. I think the economics looks -- really actually look favorable. And I'm optimistic both about 2021 and 2022 and '23. I actually like what I'm seeing. And I think the painful year of 2020 is behind us. And I think we'll see many, many more tailwinds than I do headwinds going forward. So I'll leave it at that, Steve, and turn it over to you.

Sure. So when you think about these, you kind of led with these breakthroughs and what you have going on in the pipeline, I mean a lot of companies in the past have -- I think Danaher is a good example of one that 20 years used to talk about breakthrough initiatives and how they had all these revenues coming from these ideas, the organic growth rate there was fine, but it was never really above and beyond on a total portfolio basis. It was somewhere in kind of the -- anywhere from the 3% to 5% range, which is about in line with the group. They obviously grew their businesses differently with acquisitions and execution. Are these secular kind of forces that you're talking about that are a function of your returns on your investment? Are these something that can sustainably drive an organic growth rate that we can say in total is truly differentiated? Can we put a flag in the ground and say, Honeywell -- the starting point here is a differentiated top line growth rate? As we look into '22, '23, '24, can you think are meaningful at a company level is I guess my point.

Yes. I mean I think some of them can. Most of them are still, I would say, early in their innovation cycle. I mean let's take Quantum as one. I mean that's not going to be -- for a company that's $35 billion like we are, I can't tell you that that's going to be needle-moving in terms of revenue generation for a few years, right? I mean when I take -- talk about healthy buildings, do I think that, that could be several hundred million this year? Yes, it can be. So I think it depends. And we're also thinking about frameworks and value capture and how we unlock some of the values things are trapped and maybe don't fit in as Honeywell and so on. So all those kinds of equity structures are on the table. And things don't necessarily even have to be hundreds or billions of dollars to necessarily create a lot of value. I mean we see companies that are $100 million, $200 million and they're valued at $30 billion these days. So I think some of these technologies, we're thinking through all kinds of framework in terms of how we unlock that value.

So that -- so it's a little bit more of kind of like a value driver as opposed to something that may significantly move the needle in the near term on a revenue basis?

It's both. It's both. I think, certainly, for some of it, it's going to augment our growth rates; and some of it, maybe just sort of a option value of equity that could become adjacency or unlock some value for our current shareholders. So I think our shareholders should think about this as an option value that both can enhance organic growth as well as potentially having some other vehicles and being invested in Honeywell that you'll have access to because we might do something different.

How can we look at Honeywell or how do you look at Honeywell kind of cyclically? Obviously, there are short-cycle names that have already actually began -- they already began to bounce back in the second half of '20, finished the year almost flat with the prior year. You guys were one of the -- saw amongst the most sharp declines in revenue last year. Can we think about -- cyclically, do we think about '21 as kind of a normal bounce back year? Or do you think cyclically, as you look at things, your markets can kind of accelerate given the late cycle nature of your portfolio? I know you're a good balance on that front. So how do we think about kind of the out years and the cycles we're in and when they can back -- get back to peak I guess is the simple question?

I think the short-cycle stuff is going to start coming back strong this year. I'm pretty confident in that. We're -- like you said, we already saw it in Q4, and we like what we see so far in Q1, and we think that that's going to continue throughout the year. The longer-cycle stuff, which is some elements of aerospace and PMT, we're looking a little bit more at second half to '22 and '23. But as I look forward here for the next 2 to 3 years, I actually see some very attractive growth markets that we participate in. The good news and the bad news for us here, Steve, is as I look at our portfolio in 2020, it is not a portfolio that was designed for epidemic and COVID-19. I mean you think -- if you think about aerospace, if you think about sort of PMT, I mean those are elements that have got hit disproportionately hard in the COVID-19 era. That's the bad news. The good news is that when those things start springing back, I also expect us to start generating a lot of momentum quickly, particularly on a fixed cost base that's been permanently reduced by $1 billion. I think that that's -- the magic of the margin expansion there can be pretty appealing.

So is this -- I mean I guess on that front, there are kind of many who think that you're at kind of a peak margin levels, if you will. Is there another step-up you can take and kind of bring this thing more to kind of the mid-20s over an extended period of time? I mean is there further runway because of that cost out?

Yes. I'll tell you, I'll be -- I have no doubt in my mind that we can become a mid-20s business. Zero. And it isn't just because of better economic conditions. It's also because we've been investing in things like Honeywell Digital and driving automation both in manufacturing and the office space. It's because we're driving ISC transformation. We've reduced our footprint by about 11% in a year plus, and we probably have more than 2x to go. So to get to the mid-20s, I have no doubt in my mind we will get there both through economic improvement, which will be nice, but even through self-help of the stuff that we've been working on. So I see a very clear path to mid-20s. And I think something else that's important to remember, Steve, is if you look at 2019, right, our EPS I think was $8.15 or $8.16. If you look at the upper end of our range for this year, we're at $8. And I think that's certainly what we're aiming for. So sort of through all this pandemic that we had, we basically took a 1-year break in our journey. I mean so that's pretty good. And I think we're going to accelerate from here.

So just delving into the businesses, and then I'll kind of step back to those initiatives after the businesses. The non -- your kind of HBT business is one that is -- I think people are kind of beginning to learn more about it. It was one that was a little kind of tough to put your finger on what the drivers are. You mentioned that you have the healthy buildings pipeline that's kind of building this year, but still, commercial buildings and investment in commercial buildings are a bit more of a later-cycle market. Should we think about this year as kind of like, hey, you're going to trend with the indicators this year, which is still reasonably subdued, maybe a little bit of benefit from those healthy buildings initiatives, but that '22 and '23 are kind of more meaningful growth years as building owners really kind of now then lock themselves into investing for post-pandemic dynamics?

Well, I certainly expect a further acceleration in '22, '23. But I actually think that this year is going to be strong as well. I mean, one, is we're seeing good demand on our Healthy Building Solutions. We're seeing a strong pickup in some of our short-cycle businesses just on a product level. And then I think the stimulus bill is going to help us. There's money in there for particularly educational facilities to invest in clean and healthy air and so on, and we're dissecting the stimulus package to make sure that we participate in that as well. So I actually think HPT is going to have a pretty strong year this year as people start returning to the offices. And we kind of have to think about this both in the different geographies. When the U.S. and the U.K., I think that's probably going to look a little bit better. As we look at mainly in Europe, it's probably going to be a bit slower. I mean there's a bit of a struggle in terms of administering the vaccines and Italy is back in a lockdown mode. So it's not uniform. It's going to be inconsistent. But as we get into 2022 and beyond, it's going to be a bit more consistent in terms of the return to the buildings.

So you think this year can kind of like maybe decouple a little bit because these businesses -- again, it's been tough to kind of put your finger on what's going to drive growth in this business. And so relative to U.S. non-res indicators, you're expecting to -- it looks like you're expecting to outperform that significantly this year. They're still down for the most part.

Yes. I mean energy and the clean and healthy air are the 2 big drivers we're really aiming for, and that's what we're trying to get as. And I think I'll stand by that. I think that the opportunities are there. So far, the quarter looks very reasonable versus our expectations or maybe even a little bit better than that. And I think we're trying to position to make sure we capture a lot of that stimulus dollars that are going to be available to really reconfigure, especially our educational facilities at really all levels.

Right. What kind of a margin entitlement do you see for this business? Again, it kind of -- we broke it out of the -- you broke the segment apart, some pretty good margins here to begin with. Is this one that would be kind of at that average over the long term, kind of the mid-20s? Or is it one that would be below that if we look kind of forward longer term?

I think it has a potential to be kind of approaching the mid-20s. I think that as we get more of the connected buildings and I think for us, this business is going to be less about selling products, but really much more about selling software and the experiences and what owners really want to see, which is healthy buildings, energy savings, clean energy and so on. And the software is really going to lead that. Now yes, we have products that are going to kind of fill in those solutions. But you got to remember, healthy -- connected buildings was one of our fastest-growing business units in Honeywell last year. So even in a depressed nonresi market, it actually did quite well. So I'm pretty optimistic about what's possible here in the future.

And that's really the -- kind of plays into the Forge construct. And how do you differentiate that versus guys that are maybe coming at it with -- JCI has products that -- they have a whole integrated kind of suite of products, including HVAC. Do you see kind of -- are you bumping up against those types of companies more and fighting a bit more of an integrated portfolio from those guys trained, talks a lot about their approach? Do you guys need to add on more functionality, more products to perpetuate this initiative to kind of drive this initiative?

No. Because we don't -- as you know, we don't play in HVAC at all, but we play in building controls. So sort of that's the angle we're coming in from. And if you're playing building controls, then you're connected to everything, including HVAC. So we can actually have a much more comprehensive offering, which incorporates security, video analytics, occupant -- really utilization, occupant experience, all these things are incorporated in our solutions where the HVAC stuff is compelling, but it's focused more on energy and clean air, which is also part of our offering. And frankly, we integrate some of those HVAC solutions as part of our offering to have a broader scale offering. So we don't think it's even necessarily competitive. I think it's complementary to what we do.

Do you think there's going to be a need for a more kind of stringent standard around this stuff to have it really take off and gain acceptance? And where are we kind of in that process? What defines a healthy building for an office? I don't think everybody is just going to go immediately to hospital-type clean air with the highest filter possible. Do we need that before we see these things really take off? Or are you already kind of seeing it today?

I don't think we need it because the demand is out there today, but I think it can be an accelerant that -- if we get there. And by the way, that's part of our solution, too, is you literally get -- as an occupant of a building or an owner and operator, you'll literally get a healthy air index in our solution. So you'll exactly know the quality of the air you're breathing. And I think that's going to be really important as people start returning back to the office. What is it that they're breathing? What's the quality of the air they're breathing? And they're going to be very concerned about it. So there's a natural demand for that. But I think if we create that index, which, by the way, we're doing, it can further enhance that.

Right. Okay. Moving on to aerospace, obviously a hot topic. Can you maybe talk about how you see kind of -- what are your guys -- everybody is giving a year of recovery when they get back to 2019 in their commercial, large commercial businesses. I mean how do you see kind of the shape and pace of this recovery? And what are the various kind of puts and takes both cyclically, but also what are you doing differently to grow at or above your markets?

Yes. Well, first of all, I'll say that so far this quarter, we're progressing pretty much exactly like we thought. So we're not off our models in terms of air transport being down, business aviation being down a little bit, much less than air transport, air -- defense and space being up. So more or less, the models are kind of holding versus what we expected. What's encouraging, especially in places like the U.S. and U.K. and a few other countries, is the rate of vaccinations and the amount of air travel is accelerating. And if you start looking forward around the booking rates for the summer, we're actually very optimistic. So we think that the air transport might bounce back even faster, at least domestically, than we anticipated. So we're cautiously optimistic that this is going to be a very, very good bounce back. In terms of defense and space, low to mid-single digit, that's kind of the framework we expected, that's kind of how we're tracking. We're curious to see what's going to happen in defense budgets. We're kind of -- assume it's going to be kind of a flattish defense budget, that's sort of our best guess. It's anybody -- it's too early to really tell. But we're on the right platform, Steve. With that kind of a profile, we think that we're going to do better than that in terms of growth. But overall, we feel pretty good about our aerospace business. We've seen the bottom, and we see continued progress from here forward in terms of Q-over-Q progress.

Do you think the revenues there can be back to peak? I mean, I don't know, by like mid-'22, mid-'23, how do we...

I think the international travel component is going to take a little bit longer. It's sort of going to be individual based on how successful the countries were in vaccinating their populations. So that could lag a little bit. So second half '22, '23, that's probably not a crazy guess. But for us, the other thing is it's not just the top line growth, and we're going to see growth in that business going forward. But we got to remember, we also are much more efficient and effective in that business or margin rates should look much better than they have in the past. So that's why I'm very, very confident that opportunities are very possible in the aerospace business and not...

Upper 20s in aero?

Yes.

Right. Anything exciting when it comes to new products? I know you've done a couple of recent acquisitions, anything here that plays into the future of flight, if you will?

Yes. But probably a couple of things I'm not allowed to talk about yet. I mean I will tell you, UAS/UAM, we're making -- we're getting a lot of wins in that segment. Some of those I can't announce yet, but that's been in segment. We're announcing -- we're investing in a couple of area -- which, areas which I think are going to be future-proofing the business, some kind of, what I call, investing ahead of demand, and we're getting some great feedback from our customers in those couple of areas. And even this year, we're going to be increasing our R&D spend in aero to make sure that we're not just well positioned for the short term, but also the long term. And what I'm particularly proud of in the aerospace business that we've achieved and we're getting great feedback from customers is that the whole customer experience is dramatically better than where it was even 5 years ago. And that's going to win us a lot of business. And that's a pretty consistent theme in every customer says, "You guys have really focused and made a difference in terms of how well you treat your customers." And that's important because that's the best predictor of future business. So on the technology side, I feel very good. And just as important, made a lot of progress in terms of things like delivery performance, customer service. And you know on the OE space, OE used to be bottom quartile in terms of customer experience and customer service. Now we're in the top 30%. That's quite a change. And I'm confident it's going to win us more business in the future.

So when we think about aerospace playing out, as you kind of expected this year but one that probably a more meaningful recovery ensues, '22 should be defenses decelerates a bit, but obviously, the snap back on the commercial front more than offsets. So '22 should be another kind of accelerated year?

Yes. And keep in mind, the portion of the business -- and you saw our margins in Q4, for us, for the business in aerospace that we lost was some of the most profitable portion of the business.

Right. Right.

So -- and we printed a mid-20s margin profile.

Right.

We're talking about high degree of confidence in terms of what that business is going to do in the future.

And you should pretty much track flight hours. I mean there's probably maybe a quarter of delay.

Yes. That's right. There's some leading lag and debate which direction it's going to be, but there's going to be a general correlation in flight hours.

Yes. Okay. On PMT, a business you know well, obviously, some consternation around oil and gas CapEx. This year, you guys have guided I think appropriately subdued. Oil is at $65, all of a sudden or $60. Does this open up any possibility here in the near term? And I would think that if oil prices stay where they are, then it just means that '22 and '23 are more meaningful recovery years. And how maybe is this cycle a bit different versus last?

Yes. It's -- I mean the one thing in the PMT business that's true is that there's a fairly substantial constrained CapEx, OpEx environment because you are on the wrong side of the investment profile. The world, frankly, didn't need a lot of energy and gasoline and diesel and jet fuel and all those kinds of things. And a lot of our customers really turn the crank hard down on OpEx, CapEx. And frankly, they did the same in terms of budget setting for 2021. But that's not sustainable. You just can't sustain your operations. You can't sustain your profile. So I actually think the business with the biggest spring back in '22 could be PMT because a lot of that is going to return. And we saw that movie before and after the '15, '16 time frame where that CapEx OpEx return. But what's very different and I think really exciting for Honeywell is not only are we going to capture a lot of what I call the traditional OpEx, CapEx investments. But our sustainability solutions that we have for fuel cells, energy storage, for recyclable plastics, for ecofining, for carbon capture, these are all technologies that we have in the UOP business. And we're going to get more and more and a bigger share of our business coming from some of those technologies as many of these oil and gas players transform. Now it's not going to happen overnight, but I see the percentage of that business coming from those kinds of solutions growing. But I can tell you that in ecofining, by the way, we're one of the inventors of ecofining. We couldn't get a lot of people's attentions for many years. And I can tell you that the pipeline for that business today is the highest we've seen in 2 decades.

You guys have Experion, a good software product. I think it's called Experion Energy Control Systems. Not something everybody kind of talks about, maybe that came along with as part of Elster. But we don't think of you guys typically as kind of a grid player. You're just one of the kind of the -- to use Dave Cote's terms, a bit of a seed that you guys have planted. And is it a meaningful opportunity here?

Yes. I think that certainly is a seed, and it's a meaningful opportunity and one that we're pursuing. The other one, which is -- and this is also in the HPS business, and it relates to wind farms, solar farms and so on, we're becoming actually a pretty big controls player in those kinds of energy opportunities. And that's pretty exciting because those are pretty large projects. And we think that, that has a lot of potential tailwinds for us for the future. So we're kind of embracing the new future of energy and really making investments and reposition the business to capture that as well as kind of the, what I call, more traditional business.

And I think on the advanced materials side, you guys also have a data center cooling product that seemed pretty interesting. Some of the recent technology days that you had. Advanced materials, in general, is that -- that's probably more of a short-cycle grower that does pretty well this year and then kind of normalized with the economy next year or can that also sustain a nice acceleration to '22?

We think it's going to sustain a nice acceleration '22 because we have some real nice irons in the fire when it comes to this health care packaging, which I'm really high on in terms of our business. I mean...

That's kind of -- that's the one you brought up a couple of times. That seems like one of the bigger ones.

Yes. That's certainly one of the bigger ones. And a lot of this stuff is in tests and trials. And it's painful because it's -- those trials run for many months. But once they get approved, you can get a fairly quick acceleration. And having a real alternative to glass is I think the most -- something most companies want. So that's an opportunity. We're working hard on an alternative to -- not an alternative, but really much more environmentally friendly HFOs. For stationary air conditioning, that's going to become much more reality. I mean California is looking to phase out HFCs by mid decade. So we think that's a huge opportunity. And we think that other states are going to follow. It's a huge opportunity for our floorings business. So a lot of good things going on in AM. And you're right. I mean it's looking really good this year. The automotive segment and the HFOs for that segment are -- have been strong and are going to continue to be. So I don't think it's just a 1-year flash in the pan. I think it's going to continue to '22 as well and beyond. And if health care packaging takes off, we think that's at least $1 billion new segment.

Over how long of a period of time?

Let's call it within 5 years. That's what I gave the team is, make this into $1 billion within 5 years.

Annual run rate of revenue?

That's correct.

Okay. That's a pretty decent size. On SP&S, I think the one that is least heavily debated when it comes to the growth rates, given your backlog, PP&E has been good. Is the growth on the warehouse side and on some of the handhelds that have now kind of bounced back and normalized a little bit more than enough to offset the PP&E front going forward? And how should we think about that trajectory on PP&E? Is it a little bit like defense where it goes from growing to flat? Or are you kind of -- do you see a bit of a falloff in that part of the portfolio?

Yes. I mean we've -- certainly, in PP&E, we're -- we saw double-digit growth last year. We're going to see that again this year. But we don't expect a major drop off because we're shifting our customer base to more of the medical industry, and that's sort of how we're transitioning. The federal government is going to have less of a need, but the health care industry is going to continue to have it. The -- our productivity products business had a terrific year. We took share. That business, as you know, Steve, got a lot of attention in 2019. Nobody wants to talk about it anymore because I guess we've taken share. So it's a boring story now. But...

I would talk about it -- if we could go to these conventions where we always get to line them up with each other, I'd be talking about it, but we can't really do anything like that. So we're kind of stuck just having to kind of hear what the company say. That's the problem.

I think you can look at the numbers of our competitors. And look, I quote those numbers, so I'm not going...

Right.

So that business, Intelligrated, it's a nice problem to have, but it's a problem. We are trying to expand capacity as quickly as we humanly possibly can. That's the kind of -- that's all I can tell you about the demand. I mean it's -- the demand -- we are putting -- we are sparing no amount of dollars and resources to expand capacity expansion. We've been in that mode now for 8 or 9 months, and it's just continuing. So that will give you a profile of what's going on in the Intelligrated business. And our Sensing and Control business is also coming back stronger. So I see a lot of green lights through account for SPS and virtually across the board and every business.

Yes. It doesn't really sound like -- I mean there are businesses that may be slowing, if you will, but there's just sounds like a lot of things that are going to accelerate and be better. When it comes to the initiatives, I mean the one that stands out the most to me, and I'm not a huge believer in stuff that's down the road. But quantum to me, in the work we've done and the people we've talked to even here at JPMorgan, it seems like you guys are leading when it comes to kind of the most robust technology. How do we think about the trajectory of this and what it means to value at Honeywell over the next, call it, 3 to 5 years? Because I just -- I think most people kind of brush it aside. They'd rather invest in I guess other things than something like this that seems very promising.

It is promising. And we get the same feedback you do, Steve, which is we really believe we have a growth-leading quantum computer based on a number of effective qubits that we've demonstrated we could do. And it's not us just being arrogant, but it's a lot of our customers tell us that because they work with a lot of the other players. And I mean, literally, I think within a decade, the value of our quantum computing solution could be worth the value of Honeywell today. I mean that's how big I think this can be. So if you think about us being $150 billion, that's what quantum could be. I mean it's sort of the next evolution of computing. And as we continue to lead, that this is something that can be that exciting. It's that much of a leap because it's sort of next wave, the next generation of technology. And I'm a little bit of a skeptic like you, Steve. I got to see it to believe it, but the business is generating revenue today. And it's not -- you're right, it's not going to move the needle for Honeywell. It's not going to be even hundreds of millions of dollars. But it is real customers. Think about the bluest of the blue-chip companies in the world are -- really using our equipment, and we're getting great feedback, which -- and we're doing that while continuing to invest in the next and the next and the next generation integration for Quantum computing. So I'm getting more and more excited about what's possible.

Is that like -- I don't know, is that like 20x a certain revenue number? I mean how do you come up with $150 billion? Is that 15 times $10 billion in revenue? I mean I don't know how to do this kind of stuff.

Valuations these days for a lot of assets are kind of interesting. Let's just leave it at that. So I'm probably using aggressive math, but if you come up with a true breakthrough technology that's market leading and it's ahead of others, there's a lot of appetite for investing in these kinds of things.

Right. And I think what's important is, given your controls, legacy, you guys kind of have an entitlement to play here, like this is not just something you created because you just read in a magazine, you're going to now kind of market it. I mean this is something that you guys have had entitlement to play over your legacy of being able to control these factors that make up this type of machine.

That's right. We've been in -- this is not a new venture that started last year. We've been working on this thing close to a decade. So this is sort of progress that we're making. And it's at a stage where I'm getting pretty excited. And I think how do you value this? I don't know. But I mean I see a lot of other technologies, quantum technology is kind of becoming quasi public, and I see the kind of valuation they're getting. And I know we're ahead. So it's a pretty exciting place to be, and we're going to continue to invest in it and see what happens.

We're running out of time here, but I had one more question for you because we didn't touch on the M&A pipeline. I think there's concern out there that you guys, once again, kind of this concern continues to pop up, you're going to do some big 10x revenue software deal. The -- when you look at your pipeline today, how much is kind of more traditional, if you will, kind of hybrid technology M&A versus kind of 10x revenue type of software deals?

We -- I mean we have some of each. I mean, to be honest, we have some software companies and we have some technology companies. We don't have anything that's sort of commodity. I mean having said, I don't think we're going to acquire anything that we're going to pay 5x EBITDA. It's just -- I wish.

I'm not talking about that. I'm talking about hybrid technology like an Intelligrated yet maybe a little more software, like something that's definitely growthy, but not necessarily just software.

Yes. So I think that there's, I would say, 50%, 60% of our pipeline is in that kind of area. And then there are some very strategic software assets also. I think obviously, Sparta was in our traditional acquisition, but we have a lot of -- and by the way, Sparta is off to a terrific start, just a quick update on that. We're exceeding our internal targets on it just so it's already exceeding what we targeted for it for the first quarter. So it's going very well. Growth rates are exceeding our targets. It's going to be a good one. It's going to be a good one. And you can imagine, to buy a company like that, I have had to -- I have had to have had a lot of conviction about the growth profile. And I love the space. Life sciences is a good place to be and getting a market leader in that space is I think pretty important. So no, we're going to be balanced. We're going to do some things that are kind of hybrids and we'll probably look at some software assets. But it's unlikely that we're going to do something enormous. That's sort of not that highly probable.

Sorry, one last one, quick follow-up here. The couple of hundred million of revenues you mentioned for Quantum, I mean is that something that can be like front and center over the intermediate term? And when can you get to $1 billion on that front?

Well, $1 billion is several, several years away. I mean that's not -- you can't -- I don't -- quantum is not that scalable. It's not a product. It's not like you're here to -- I think we're pretty far away from a personal quantum computer that we're -- and it's probably never going to be really necessary, right, because it's to be used for very unique applications. But I do think that when you create -- when you can solve some of the world's most challenging problems like molecular research, like route optimization, cryptography, I mean these are big, big problems and challenges and you have a creative market model to get that. It's not necessarily the top line growth, but really even kind of getting a share of some of those problems being solved can drive pretty dramatic valuations.

Right. Perfect. I know we're a few minutes over. So I thank you for your -- the extra 3 minutes of time and hope you have a good day and best of luck over the course of the next few weeks. We'll talk to you in April.

Sounds good. Thanks, Steve.

Thanks, Darius.