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

Excellent. So we'll get started. Thank you, everyone, for joining us. My name is Keith Weiss. I run the U.S. software research franchise here at Morgan Stanley and very pleased to be hosting from Roper Technologies, both President and CEO, Neil Hunn, as well as Jason Conley, EVP and CFO. So thank you, gentlemen, for joining me. Roper to me is a fascinating company in that you, guys, really lean into what -- throughout my career, like I look at as some of the strongest attributes of software companies, right, the stickiness of the software companies, the ability to continually sort of innovate against sort of those process improvements, and yield really good margins on the back of it, really creating the flywheel. And you created a whole company that really leverages that flywheel leans into that flywheel. Maybe just a good starting point for investors that might be a little bit newer to the story. It's not your typical software story. So Neil, can you walk us through maybe a little bit of like the Roper 101. What's the kind of principle that you organize this company around? What's the -- what's this based on?

Sure. And thanks for having us and enjoyed our time last year. I appreciate the opportunity to be here. Yes, I think the Roper 101, if you had to put a moniker on it, we're a software compounder. Our whole mindset is how do we compound our cash flows over a long arc of time in the mid-teens and hopefully higher. And we do that sort of 3 ways. We have this portfolio that you just talked about there's 28 companies, 75% are software, 25% are technology-enabled products. It's a portfolio of businesses that -- while there are different end markets, they have remarkably similar characteristics. Small markets, leaders in small markets, compete on intimacy, have -- because of we're mission-critical to our customers. There's high value delivery to our customers so we have high gross margins that translates all the way down through the P&L to cash flow, competitive intensity is durable, generally lower and not a lot of disruptive forces. That's the nature of the portfolio. We operate a highly decentralized structure, like super decentralized, 19,000 or so people in the organization, there's less than 100 in the corporate office. Because we compete on this intimacy, so we organize on a speed coefficient. But we're not passive owners. So the second thing is we have the methodology of how to make these businesses better over a long arc of time. And then finally, all these businesses are blessed business models, and they generate a tremendous amount of cash flow and then what do you do with it? So we then run a very centralized capital deployment engine where we take all but a small dividend payment and redeploy it into buying the 29th and 30th company and continue the cash flow compounding flywheel going.

Got it. It's -- going a little bit off script already, but one of the things -- when I first came into this business 20 years ago, I came from a software company. And working in the finest department of a software company, you start to understand that flywheel and the durability of the cash flows. And coming into a role on Wall Street, it always -- it surprised me at the time how little private equity there was in this space, given how durable the free cash flows were on a go-forward basis, which is exactly what you, guys, are taking advantage of. I would say, over the past 10 years, we've seen private equity come into this space in a big way. Does that create a kind of a competitive dynamic for Roper and sort of the strategy that you, guys, are trying to pursue?

I actually don't think so. I mean there's so much innovation that happens, right? Really, the private equity is the sourcing engine, the farm system, If you will, that sort of identifies great -- good or great founder-driven businesses, matures the business model, extends the business model and then we get to pick from the very best of those. And so yes, it is -- in any given transaction, we're competing against a handful of sponsors for sure. But it wasn't for the community, we wouldn't have the things to look at. So I think on that, it's a good feeding system, good feed system.

Got it. So given the dynamics of what you guys are aiming for, it sounds like you're coming off of another solid year, 15% revenue growth, 8% organic, driving 16% EBITDA growth and sustaining that really high 32% free cash flow margin. You're doing this in a spending backdrop that a lot of the companies have been struggling with, particularly in enterprise software. What is it about the Roper portfolio that enables your company to exhibit what I would call almost like an anticyclical type of characteristic?

Well, we -- the long -- the recent history of Roper is organized around this principle of becoming as uncyclical or anti-cyclical as possible, not to be countercyclical, but just take the cyclicality out of the portfolio. We divested 40% of our 2018 businesses and revenue that was highly cyclical, highly industrial. So what's left is this very stable set of companies, very durable, but there are sort of 3 attributes that sort of mute the cyclicality, if you will. The first is that the customers we serve are generally in less cyclical end markets. Health care, education, insurance, both life and property and casualty, government contracting, legal, they're generally insulated end markets. The second is that we're deeply mission critical. Like our customers run their business on what we do. And so as long as they're in business, if you will, it's not a discretionary item. And third, the vast majority, not all of, but the vast majority of our revenue stream is subscription-based not volume-based, right? So there's sort of 3 layers of insulation between cyclicality and the end markets and what actually manifests on our P&L. Jason, you want to add to that?

Got it. And maybe from the other side of the equation, a weaker overall spending environment, I can see how that could actually help on the expense side of the equation. Because the other thing we've heard is hiring has gotten easier. Is that something that you, guys, have witness through your portfolio?

For sure. I mean, it was the last summer-ish. It was almost like a light switch in terms of our companies struggling to fully staff and then going to how do we then top grade or upgrade talent.

Got it. So the business model, you throw out the free cash flow, some of it goes through dividends, some of it from a pool of capital to be redeployed. Can you talk us through that use of M&A to build the company? And what are the attributes you're looking through? Or you're looking for? And then what's the competitive advantage you bring to equation that enables you to do the M&A so effectively?

Well, Jason, I'll take this one again. Let me start. So it's -- so first of all, unlike a lot of companies, I mean, we -- M&A for us, capital deployment is a motion. It's a highly-engineered process. It has telemetry we meet. It's not dissimilar to that of a private equity firm. I mean we have our investment committee, we meet every Monday for multiple hours. We sort of have a funnel that we're prosecuting and a whole process to mature things through the pipeline. So it's a thing -- it's part of what we do. It's in the growth algorithm of Roper. The profile we'll look for is we're business pickers, right? We're not thematic pickers. We're not trying to find the fastest growing markets and get there before everybody else -- if you're being wrong, we found over 20 years -- the attributes of the business I talked about earlier, small markets leaders, not cyclical, compete on intimacy, competitive intensity lower. That formula leads to have high gross retention, higher -- modest to high net retention, very stable platform to build upon. So that's what we focus on. And then we have our whole valuation methodologies around that. What would you like to add?

Nothing, just adding to that, I think competitive advantage against private equity is our cost of capital, just over a long arc of time, and that's especially true right now. And then also just the way we look at businesses, we have a forever home for them. So we just actually talking to a sponsor partner last night about, hey, if you're looking at deals that you might not have an edge in 3 to 5 years, but you can see 7 to 10 years. That's 7 to 10 years and beyond that, that's where we're going to look at the business and modeling out and we'll tend to have an advantage because we're going to invest for the long term in that business whereas they have a shorter cycle to -- shorter window to sort of create value.

One thing if I may add is we have a pretty unique story to the -- for a management team that we're recruiting through an M&A process. If you -- if they want to roll to a sponsor and sort of invest in a [indiscernible] or invest for a couple of years and have to harvest that, which they've done for a couple of cycles, they can do that. They generally get a little tired of that after a couple of cycles. So we offer something where you get the long arc of time, but also you're not being [ capitalized ] integrated. So what the company is, the identity will remain intact, and so we have this pretty unique swim lane where we have the best of the strategics and the best of the sponsor world, and oftentimes, we're able to win management in the process. And if you win management, the tide is going to go to where management wants to go from a valuation point of view. So that happens more often than not in the businesses that we acquire.

Got it. And there's also a dynamic within the business. Some of the acquired companies are now filling in functionality with acquisitions of their own. I'm assuming that's a different process than sort of the core process that you are running, where you're bringing in the portfolio companies there.

Yes. Just to step back on bolt-ons, right? So historically, it's been a vast minority of what our capital deployment is. About 10% of our capital deployment. We've taken the strategic decision 1.5 or 2 years ago, where we wanted to increase our allocation of our available capital to do bolt-on activities. Why? It's in pursuit of one and one reason only, it's to improve the organic growth rate of the underlying portfolio of businesses. So finding adjacency where we have a right to win. So after a year, it becomes organic. So that's why we want to pursue a little bit more bolt-on activity. That said, all capital deployment decisions are made at the -- in the corporate office by a very small group of -- 5 of us, right, CFO, General Counsel, Head of M&A, myself, Head of FP&A, like that's the investment committee. At Roper, obviously, we go to the Board for every transaction. So the Board has the ultimate approval and authority of that. But -- so we go -- the process is very similar. We do shoulder to shoulder on diligence, but we do not sort of abdicate or allocate capital for a business to deploy, and then they just give us a report card. We do not do that. It's always going to be central-led.

Got it. So in Deltek wants to make a bolt-on acquisition. Do they propose the idea? Or do you suggest it to them? And then it goes through your same centralized process?

It's a little bit of both. They have -- for instance, they have a partnerships executive, who has always had his antenna and radar up for partners that want to partner to the Deltek ecosystem and some of those partners might be good acquisition candidates, for instance. So we could get ideas from that. Also, we have Janet Glazer, who looks after all of our investment strategy and M&A efforts. Her and her team sort of are also talking with sponsors all the time and identifying opportunities that way. It's a little bit of meet in the middle. In a go-forward way, our company's strategies, the 28 Roper companies will have -- today, they have an organic strategy. They will add over the course of 2 to 3 years as we work through the portfolio an inorganic strategy, and once we have that all mapped out, then it gives Jan and her team like this is sort of what's been pre-identified as strategically important going -- be very specific to that.

Okay. That makes sense. I want to talk about kind of recent events. You deployed another $2.1 billion on capital this year, the biggest acquisition being Procare, $1.75 billion for early childhood education solutions. Can you talk to us a little bit about what was interesting in this asset and what makes this a good fit for Roper?

So I'll go through it, but you might hear a bit of repetition, but that's what we are, right? If anything, we're boring, that we know what we want to do and we stay focused and dedicated to that. So Procare is early childhood education, think 0 to 4 years old. The industry itself is -- again, our TAMs are small. This is about a $750 million TAM. So a small TAM. But the TAM is growing about 10% a year as young parents who are both working, want to have higher educational content in the 0- to 4-year-old versus just sort of taking care of the child. And as a result, tuition is increasing to -- the amount that families are willing to invest in this period of time is increasing, tuition is increasing and as a result, the market is growing a little bit faster. So it's a double-digit growing market. In Procare's case, it is the leader so it has 1.5x all the market share from -- to the next closest. Really in a space that is -- has I'll call it, 2.5 -- including Procare, 2.5 competitors. So it's -- as we talked about the basis of competition is somewhat -- is known and limited compared to other end markets. I mean this business is growing in the mid-teens area, has gross retention in the mid-90s net retention sort of including the payment stream and the 110-plus range. So a good fundamental healthy dynamics and it competes on intimacy, right? It solves a very specific problem for what it takes to run one of these early child education centers, from recruiting parents to onboarding and recruiting staff, to paying staff to curriculum management, to communicating with the parents to processing invoices and ultimately, the payments attached to it.

Got it. Got it. So as we head into 2024. How does the M&A pipeline look in terms of the expectations of multiples from the potential acquirees and the willingness of them to sell? And how are you feeling about your firepower heading into the year in terms of what you have in capital?

We feel good about the pipeline. I mean, this is -- we talked about the last few quarters, it's incrementally got better. And then I think we're just seeing -- Neil's talked about this just sort of this air pocket right now where sponsors need to need to provide liquidity back to their LPs, and they need that to be able to raise funds. And so a lot is coming to market. We've got a good balance sheet, relative to the competition. And we still have $4 billion or more of M&A that we can do over the foreseeable future. Obviously, we're committed to solid investment grade. If we ever did spike up, we would delever as we have with some large deals like Deltek and Vertafore over the last 5 or 6 years or so but I think we're in a good position.

Got it. So does the current interest rate environment that actually -- that help you competitively like in terms of the M&A strategy?

I think so. I think it's -- at the margin, it's certainly helpful. That plus just this dynamic of more net sellers than buyers is probably the biggest current tailwind. But yes, over a long arc of time, certainly cost of capital is an advantage for us.

Yes. And I think in a higher rate environment, it's more of an advantage, right? Our -- better credits have lower relative interest rates versus more riskier credits in a higher rate environment for sure.

Got it. Got it. Shifting gears a little bit. I want to talk a little bit about generative AI. I feel like I'm contractually obligated to talk about AI in every presentation this week. But in your case, I do think there's an interesting debate that investors are having on sort of vertical software versus horizontal software where generative AI could be more impactful. And there is like -- the argument goes that everybody is talking how the depth of data sets and sort of how broad the business process you're automating, is what's going to drive more value in the generative AI solution. Then you think about just your description of Procare, right? It does everything from sort of soup to nuts for them. And it has probably more sort of data about how you run one of these early education centers than any kind of core horizontal solution. It seems like vertical software would be a great area to apply some of these innovations.

We agree. I mean I think it's not just the data, it's and the depth and the longitude and the history of the data that you have in a vertical software business. But it's also what problem -- what's the specificity of the problem trying to solve, right? I think generative AI, at least in our world, we're solving very specific problems. In our legal software business, like how do you get a highly -- a perfectly compliant invoice to your clients on the first pass. That is a remarkably complicated thing to do. It's not -- it doesn't -- unheard of. And so with generative AI, we can now -- we know what's this case, for instance, the lawyer is typing, reviewing what the e-mail traffic is, what the Zoom call content is, what the Team called content is. And all of a sudden, we know what that attorney did, and we can create based on the rules that are preestablished from all the clients. Google has rules that are different than Roper's rules that are different than Amazon's rules on how you can present a bill. And so we can be interpreting all of that in context of how to create what did this attorney just do for the last hour, and it's perfectly compliant in concept. It is horizontal -- any body is not thinking in that level of specificity that are nuanced to this application. So it's not just the content, it's the problem that's trying to be solved.

Got it. So where are you in terms of identifying these potential use cases and in kind of rolling out these innovations into the company?

Yes. So -- so we're -- on the grand scheme of things, we're still early. We spent a lot of time in the last 9 months or so educating our 28 businesses and the leaders. A year ago, talking about what this is to now get increasingly more specific on both internal productivity uses and then how it can -- how these tools and technology can make their way into the product stack, ultimately be monetized with our customers. So we're early days. like, I think in any sort of new technology, the early hype is way ahead of the reality and we're just catching up with the potential. But this is going to be, I believe, a very meaningful tailwind for us, but for years to come, not quarters to come.

Got it. Here's another kind of interesting question about the decentralized operating structure within Roper. It seems like there would be some like puts and takes in terms of the ability to create like centers of excellence and push out innovations. Like how do you look to sort of become more of a force multiplier, with something like an innovation cycle like this, there's an innovation cycle coming on. What could you do with that centralized hub to help all the portfolio companies coordinate and perhaps act a little bit more efficiently against these cycles.

So we're definitely maturing in this regard. As I mentioned, in the very opening, we have this portfolio that's solid and durable, but then we had this methodology and view of how to make the businesses better. So that's where this really sits about how we do that, right? So -- and something like gen AI, we just have now -- we've evolved from the corporate centers and some outside experts explaining what gen AI is and the application potential to now our companies are teaching it to each other, right? But we structure the forum and the forums and we have them on a calendar basically every 2 or 3 weeks for the next 6 months, whatever it is and everybody is up on a very -- with a slightly different nuance topic. And we found that when business unit leaders talk to themselves, it sticks as opposed to being an outside person or somebody from the center sort of professing to them. They'll listen to us. But if it's like super applied, like this is how we're using it at our shop. And here's the mistakes we made or the inefficiencies we're identifying or the problem we solved then it has a better stick sort of attribute to it. So that's the way we approach a lot of this stuff. You want to add anything to that?

No, I'd just add that like there was one last Friday, on product management, one of the CTOs led it. And it was -- the presentation was one thing, but the Q&A back and forth was where you got the real rich dialogue that will probably span out to new work groups on specific things that they're trying to solve because it is so nuanced. But that's what we're trying to foster is just that community where they can learn from each other.

All right.

And I have to just put a wrapper on that. We have to -- we choose to honor this high-trust autonomy, right? So we have to -- we actively choose to lean into this autonomous structure because we need the businesses to act quickly and nimbly to compete and win in the marketplace without sort of looking to the center or corporate for permission or what do I do? So as a result, things like gen AI or when we want to introduce a new concept, it takes a little longer for us to get it in. But once it's in, it's in, it sticks because it's -- everybody is acting in their own self-interest. And so that's an active trade-off we make in our culture.

One of the interesting things about gen AI from -- as a software analyst, is that -- there's a lot of focus on the top line implications, but it's like there's like big bottom-line implications or productivity implications for software companies overall. So Jason, maybe a question for you. Have you started to sort of push that into your organization? Or do you see those kind of Roper efficiencies up, cogeneration tools or doing customer service more efficiently, like that could actually drive higher -- kind of leverage higher margins within the businesses?

Yes. I mean, I think where we're seeing it first is in customer support. It's just more mature, probably second order would be product -- product development. And I think with all of these though, as you can appreciate, it's all about the change of management and the pacing of that. So there's tools out there, folks are certainly experimenting and getting some good pilots, but then how do you extrapolate that to the population is a real question. So I'm not pushing any agenda on that. I've talked to an expert this morning where he's got a bunch of financial sponsor clients that are really trying to jam initiatives down and they're really spinning their wheels so we're trying to take a more pragmatic, measured approach to that.

I would also say just the guidance, to the extent we given you, a loose guidance. To the extent we can generate near-term productivity works and we have 30% or whatever increase in cogeneration productivity or customer support or turning the portals to the customers where they do a lot of the Tier 1 themselves. We're going to try to take as much of that productivity savings to the product road map as we can, right, to extend our advantage. So we run at 40% EBITDA margins, 31%, 32% -- 30% to 32% cash flow margins. So this is about how do we continue to accelerate the growth rate of the enterprise. Over time, if we -- maybe some of that will leak into the bottom line, but the short term is how do we take the productivity gains and extend competitive advantage.

Got it. Yes. So that's actually a great segue into talking about that cost structure. And really, the question is in both directions. One, what's the key to sort of -- amongst 28 portfolio companies maintaining that strict efficiency. 40% EBIT margins are super impressive, right? 32% free cash flow margins are super impressive. And two, is there any flexibility in that? Is there any point in time where you'd say, "Hey, listen, the opportunities are more robust, so we're going to take down margins a little bit and invest more aggressively" or perhaps the other way around? Or is it just like 40% is the target number, you had to have some rules in mind?

It's not a target. I mean, 40% is more of a byproduct of the portfolio composition. It's not like we've said we want to be at 40%. The 40% is a very natural number for us, right? So I think it first starts with -- what we even talked about, Procare. I mean all of our businesses are the leader in the small market. So we have a relative market share advantage and the classic RMS, ROS sort of trade-off or curve we experience, right? So we just have structurally -- because we're larger, we have structurally better margins than our competitors across the portfolio. That's the first thing. The second thing is to appreciate what our incentive system is, right? So we incent all of our leaders and all of our companies for one and one thing only, it's to grow organic EBITDA, right? So over a long arc of time. There's both 1-year and 3-year metrics on that. So they have to sort of throttle both the near term and the medium term for compensation. So if you're focused on organic EBITDA growth over a long period of time, you're making the right tradeoffs and investments to do that. Then to the last point, maybe the third thing is from time to time, there will be a situation where you could surge -- go-to-market, you could surge R&D. And yes, if it makes sense to do that, if there's an opportunity in the marketplace where there's a gap for us to sort of exploit then we're certainly going to make that investment. And sort of figure out a way to deal with that in our incentive system. We've done that. In the portfolio of 28 companies, there's, I don't know, 2 or 3 of those in any given year? That we're working through.

One thing I'd add to that, we pay based on organic EBITDA growth, but we screen for leaders that are builders over a long period of time. So they're going to do it the right way. And that's what -- and we test for that. We have group executives to make sure they're not lighting the furniture on fire. We don't ever see that. And they're also paid in Roper stock. So we know that if they do anything that's going to be short term, they may get a short0term payout, but it's ultimately going to impact the share price.

That's right. Importantly, like the commitment we made to them is we pay them on a organic growth curve. And as they improve their organic growth rate, we're not going to move the curve up on them. And so if you can structurally improve your organic growth rate from x to x times -- 1.5x whatever then that leadership team is going to make a lot of money into perpetuity as long as they sustain that organic growth rate.

Yes. So it sounds like that incentive structure is pretty key in having all the boats because there's 28 boats, like all rowing in the same direction.

Absolutely.

Yes. It's also -- yes, period, but the exclamation point is that it's more about cultural thing than it is an incentive thing. So companies that -- in our view, that pay based on budget attainment. If we did that, we would give an incentive to all 28 leaderships to lie to us, and then we would have a filter not to believe a thing they say. And in that -- and that's for 12 months a year. So if we're paying in that system, if it's June and there's a company that says, "Oh, I've got a problem." Then we think immediately, "Oh, they're looking for a bonus relief or a compensation relief." But that happens now, it's like, okay, there's a real problem. How does everybody pitch in and try to solve that problem, right? It allows -- our compensation system allows bad news to travel faster than good news. It allows for authenticity and vulnerability of problems. It allows for leaders when they get to our leadership summit to talk about major mistakes they made in their organization and then how they corrected them, right? And so as much of a cultural thing or more of a cultural thing than an incentive thing.

Got it. Got it. I have a couple more questions, but I want to make sure we take any questions from the audience. If there's any questions from the audience?

Just on the free cash flow, the mid-teens kind of plus free cash flow growth profile. I get the higher rates are a competitive advantage, but it's hard to believe that higher cost of capital doesn't put some sort of a headwind on that kind of a growth profile, just cost more to use money. So can you speak to why that profile would stay the same in a higher rate environment?

Yes, the counterbalance of that is the asset prices come down, right? So we're able to buy more cash flow on a relative basis at a lower price on an unlevered basis. So it's a teeter-totter effect between low cost of capital, high asset prices and higher cost of capital and lower asset prices. And that's just being to normalize now.

Okay. So is there a period where -- in other portfolio areas I focus on, it's -- there's been a severe lag in terms of private valuations coming down -- has that been your experience as well...

Completely. The last 18 months was on the slower side. So we really had to work hard to the plus or minus $4 billion of capital deployment. A big bolt-on into one of business is called Syntellis, so we're able to sort of solve this value gap because we brought a lot of synergies to the table. So that sort of worked. And then with the Procare deal, it's the first sort of pin in the map where there's been a more normalization of valuations on a straight-up basis. Anything you want to add to that?

I mean is there any flexibility in sort of the model that you're using or sort of the aperture of what you'd look to in terms of M&A? Do you ever get more aggressive or less aggressive in terms of what types of multiples you're willing to pay? Or like what stage of company? Or do you keep that very strict?

So we have -- we've always been very -- we're extraordinarily analytical and mathematic in our approach to buying companies. It's all about continuing the cash flow compounding. And at the end of the day, if we have to pay a price that's too high to keep the cash flow file moving, then we just will wait until we can find a higher quality asset or a lower price. That's essentially what we did for the last 18 months. So yes, on that one. In terms of the profile, we have made a strategic decision 1.5 years or so ago, where we're going to deploy our capital increasingly in the future into 3 archetypes that are slightly modified to where we can capture a little bit more value to capital deployment. One is bolt-ons. The second one is we're calling a maturing leader, which is the Procare case. This is a business that is -- the industry itself is growing a little bit faster. The company has the maturing leader persona, has staked its claim as a leader, but there's still a long way to go between SAM and TAM. There's still -- the SAM is chewing up the TAM. And then the third archetype is a profit upsider and this is a business where the prior owners have just run at a structurally lower margin profile than what we think we can run it at. We've not executed this third one. We have executed 3 bolt-ons since we changed the strategy in Syntellis, Replicon and ProPricer and then the one maturing leader in Procare.

Got it.

Clarification on the free cash flow growth also. Is that true on a per share basis? Or are you using equity in some cases to do deals?

There's -- it's the same as if you look historically, it's maybe $700,000, $800,000 of share [indiscernible] year that's in the base model when you think about compounding.

You've not used equity in the past for acquisitions?

There's been a bunch of -- so prior to the current software downturn, there was a bunch of IPOs of private equity-backed companies. One was just in this room before you, guys, that had a large shareholders, that can't get out, there's low flow they're kind of stranded it or trapped public companies. Some of them are trading multiples below it. You're buying private companies that have attributes that look a lot like -- have you started to kind of sift through that group of companies?

We've always looked at the cohort of vertical software businesses in the public and the private. We continue to look at the public ones. We're certainly aware of the cohort that you're aware of that are essentially private companies in a public chassis given their ownership profile and the sponsors. And it's just -- it just boils down to value. There's still relatively better values in the private market, right? So as public markets have come down, so have the private. And so it's just where is the best value opportunity. So we look at them all, for sure.

So I guess, just kind of to build on that point. I think if you just look across the last 5 years, you have tons of these public software companies that are maybe $10 billion to $20 billion that are just -- only been focused on revenue growth. And now they're kind of having to pivot to being more mature and have to focus on efficiency, they don't have any Boards that are set up for that. Do you think there's opportunities to maybe look at larger deals that might have to be equity funded but could really benefit from your focus on efficiency and capital allocation and these businesses don't have the executive teams or anyone there to do that.

Let me take the size out of it for a second. So -- but the intent of your question, that really is this third archetype, this product -- this profit up upside -- upsider case. So an example might be maybe there's a company who's natural growth rate is 15%. But the current leadership team or Board or owners are going to run at 30%. And you've got to put 20 or 30 points of revenue in the go-to-market to make that happen where you could pair that back and structure the higher margins. So that concept of reverting that 30% hypothetical grower to 15% and taking margins higher at is the definition of this profit upsider that sort of -- persona that we're considering.

So I thought maybe we could just wrap up on a little bit into 2 of the larger units within Roper, Deltek and Vertafore. Maybe just a brief update on how those 2 assets have been performing over the last year.

Yes. So Deltek, for those that are newer to the story, it's one of our largest -- our largest software business. It serves 2 constituents, U.S. federal government contractors and then other professional services end markets, think, architects, engineers, building contractors, marketing services firms, some consulting firms. The core of this is it's they're project-based business. So the bill of materials is project based versus a BOM -- if you will, a product BOM. The company has continued to -- it's very good -- it's a very good business. All the attributes, the growth rates improve, the recurring revenue percentage of total revenues improved, the margins improved, the gross retention improve over the last 6 or 8 -- over our ownership period, sort of 8 or so years. Last year, specifically, we talked about on our earnings call, Deltek struggled up a little bit, still grew, but struggled a little bit, grew below its normalized growth rate because of the enterprise segment, the very, very largest customers in the government contracting part of the business. Pretty obvious why so much government spending uncertainty throughout of all last year. It just became very cautious. Q4 was a bit better, but 1 data point doesn't make a trend, and so we need to see how that performs this year. We've assumed that continues to be slower -- enterprise segment slower this year so we'll see. Vertafore software for property and casualty insurance agencies, the duopoly essentially splits to market, one competitor. Again, it's a mid-single to mid-single-digit plus organic growth business, 85% or so or north of recurring revenue. Mid- to high 40% EBITDA margins, structurally in line with its competitor in that regard. And it's been a -- the team, there has done a great -- it's been slightly different since we've owned it, there's been an evolution in the market where the customers have consolidated. So we used to just have extra large, large, medium and small customers. Now it's like an extra large customer. And so how Vertafore sort of delivers the firm to this very large customer. It's been a strategic and operational sort of pivot, but they've adjusted well to that.

Got it. Excellent. Maybe I'll take the last 2 minutes to do a little bit of a channel check. I know your business are meant to sort of plough through any kind of macro environment. But how are you feeling just overall about the software spending environment right now as we head into 2024?

We get this question a lot. We're unfortunately not the best barometer because we're in all these nooks and crannies, right? So government contracting and legal doesn't really apply and what's happening in P&C, property and casualty insurance doesn't really is -- it's more spend across. What I would say we said last quarterly call and sort of summarize last year, what we thought was going to happen last year heading into an expected, an anticipated slowdown or at least behavioral changes in anticipation of slowdown. We thought our gross retention to be higher because there's going to be less activity than it was. And we thought net retention would be a little bit lower than our normal because there's not as much activity in the expansion with our customers. That pretty much panned out exactly as we anticipated. And then just expand on the Deltek point, at the enterprise level across Deltek are a small health care IT business and our education business, the enterprise class customers were just slower last year. And that's we hope will correct this year. Customer activity pipeline build looks very encouraging, but pipeline build isn't revenue and bookings, as you know. So need to see how that plays out this year. Anything you want to add to that?

Just I think our presidents coming into our planning cycle, we're feeling -- just again, it was informed by pipeline, it was informed by activity. We're feeling better coming into this year, just from a bookings perspective. Obviously, that won't have as much of a P&L impact this year. But as momentum-wise, it felt a little better than a year ago.

That's right.

Outstanding. Neil, Jason, thank you so much for joining us.

Yes. Thank you for having us. That was great.