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

Good morning, everybody. My name is Joe Ritchie. I cover the industrial conglomerates. I've actually run our Industrials and Materials business unit for Goldman. I'm really happy today to have Roper Technologies with us. We've got Neil Hunn, President and CEO; as well as Jason Conley, the CFO I will open it up to questions as we go through the session. But just to maybe kick things off, Neil, why don't you tell us just a little bit about what makes Roper special. We'll talk about the -- just for folks that are new to the story here, help folks understand how the business model compounds cash over time.

Yes. I appreciate the opportunity. Thanks for having us. Roper is a bit of a unique story for this conference. We have our industrial heritage. We've shed that part of our business. We're now 75% vertical market software and 25% technology-enabled products. And the lens that we filter our strategy through and our operating methods and our governance through is what is the stability of our long-term durable sort of multigenerational cash flow compounding. We have an algorithm today that spits out sort of mid-teens cash flow compounding durably over decades, and we're working, and I'm sure we'll talk about it today, how we can improve that over time by a little bit. We're about a $7 billion business. We're comprised of 28 independent operating businesses. We run a very decentralized operating structure, which I'm sure will come on to why and some of the intricacies of that. At the same time, we run a very centralized capital deployment. So about half to 60% of our cash flow compounding is organic. The balance is through our capital deployment lens. The vast majority of our capital deployment is our capital allocation is through M&A and capital deployment, we pay a small but growing dividend. And create a lot of value on both sides of that flywheel, both the organic and the inorganic side. So I'm sure we'll get into that...

Yes. So a lot of jumping off points there, Neil, but why don't we just talk about that decentralized strategy? Why is that the right strategy for your business model? And just maybe give some examples on how that's been successful for you in the past.

Delighted to do. I think it starts with the nature of our companies, right, because really our org structure and our strategy follows and governance follows from that. So the 28 businesses, well, if you look at our website, you'll see an eclectic mix of end markets from health care, IT to media entertainment, insurance tech, the gov tech to ad tech, a large number to transportation tech and the end markets are collective. The core attributes of all 28 businesses are identical. So all of our businesses are leaders. So the number -- the principal thing all 28 of our businesses do, we are the demonstrable leader in our market, number one. Number two, we prefer and are highly attracted to smaller TAMs. They're wildly protective, right? So it's very rare we have a new entrant. But also, we love the small TAMs because when you're the leader, you compete on this notion that we call customer intimacy. Our customers want us to win, they need us to win, we're mission critical to their operation. Our customers cannot do what they do without our software. And so we compete on this intimacy quotient. That gets to our org structure. So while we're the largest in small markets, the one thing we know, definitionally is all of our competitors are smaller players, and they have one thing for sure, which is a speed coefficient. So we have to have an organizational structure that allows our companies to operate at or above that speed coefficient. So we're wildly decentralized, roughly 18,000 or 19,000 people in the organization about 100 at the corporate center. And we have 28 of everything, we have 28 leadership teams, strategies, operating strategies, ERPs, for instance. And so the final thing about our org structure that is super powerful is there's single-point accountability. There's nowhere to hide in the organization. If one of our companies is doing well, they can look in the mirror and sort of be proud of them and themselves and the team, but they're not doing well, they can't point their fingers except in the mirror. There's not a dollar allocated above EBITDA to any of our businesses. So it's clean P&Ls and balance sheets every month. So that single point accountability is super impactful. I think, examples of where it works. I mean it's almost like pick a company and pick a quarter, a couple -- probably the best example of our org structure just doing what it needs to do and acting nimbly goes back to COVID. When the world was shutting down, nobody is looking to the corporate office for a direction, they're sort of listening to their customers, they're listening to their employees, they're making decisions on what to do and then letting us know and then we're seeing pattern recognition and sort of accelerating that. It could be simple things like a couple of our companies where it's Northern Digital or Foundry, so medical products business or media entertainment. They, on their own strategy, make very hard choice to stop doing something so they can have the resources to fund what is the most important growth driver, or in Aderant's case, our legal software business, they had done a great job of going from 30% to 50% or 55% market share organically. And then they're the ones say, "Okay, how do I continue my growth over a long arc of time", and they're working on their strategy about how you change the nature of the strategy from a ground game and landgrab game to now, how do I really drive my innovation engine for cross-selling, upselling. And it's -- there's 28 examples of that. But it's, I think, the sort of the secret weapon of Roper's competitive advantage is the org structure and the autonomy and the accountability that comes with it is -- and we're committed to this structure.

So Neil, that was super helpful. And you touched on some of the businesses. I recall when I first started covering Roper over a decade ago that the business and the portfolio has evolved with the time. So maybe just talk about some of the changes that have been made and where you think the portfolio is going from here.

Sure. So I think it's important to -- when we talk about the change, I think we should talk about what's not changing as well. And what's not changing is a lot of way just covered, right? And so the nature and the profile of the businesses and the assets that we have in the portfolio, and we target to acquire all the same, leaders, small markets, compete on intimacy, high recurring revenues, high gross net retention, very asset-light, we're able to importantly capture value in the products that we sell. So we have high gross margins, which enable sort of the ability to invest in the business and drive increased operating margins over time and high cash flow margins. Those have been durable for 25 years. What's changed is a couple of things, 3, 2.5 years ago, 2 years or so ago, we made a decision to exit the cyclical part of our portfolio. As I mentioned at the onset, about 40% of our 2018 revenue, we decided it was deeply cyclical, it was industrial in nature or project in nature, and so we divested those businesses and redeployed that into slightly higher growth but meaningfully lower cyclicality. I think, and Jason have to fact check me, in 2016-ish, about 50% of our revenue is cyclical. Today, we'd argue none, essentially none of it. So we really beat the cyclicality out. There are other side benefits that occurred when we did that, it became more growthy, it become more recurring and it became more asset light. And so the quality of the enterprise improved dramatically. So that was a portfolio change. And then what we've sort of worked on in the last handful of years is two things. I mean, we're focused on just a small number of things that are high impact at the enterprise level, that's two things. This one, how do we drive more organic growth into the portfolio. And we've done a decent job of that over the last 5 years. This portfolio was a 5.5% or 6% organic growth portfolio. We believe today it's in the 7%, 7.5% range sort of current course and speed over a longer time and are the possibles in the mid-8s for this portfolio. And so we can get into that to the extent about what we're doing in the methods of means. That's durable organic growth rates. And the second thing is capture more value from a capital deployment. And so we've demonstrated pivoted our capital deployment to do more bolt-on activity. So we can drive more organic growth into the portfolio once the thing we acquire becomes organic and buy things that are a little bit more growthy. And so ProCare is an example of that, where it's -- I'm sure, we can come on to that later. So our growth profile will increase, but also the returns on our capital deployment are in the neighborhood of 30-plus percent better when we do bolt-ons or buy things a little bit more growthy versus our prior sort of capital deployment strategy.

Yes. We'll dig into the organic growth in a second. But just on the portfolio evolution, you still have about 1/4 of your business that is still product-centric tied to medical and water products. What's the future of that piece of your portfolio? Could that be something that you look to divest in the -- over the medium to long term?

Yes, I would just take you back to the guiding principle when we went through our strategy work and our Board discussions was to get a portfolio that did not exhibit cyclicality in this revenue stream. And so that's the guiding principle and that's our strategy, and this portfolio has performed well in that regard. We decided not to make that -- we decision -- we choose not to do a handful of year, 3 or 4 years ago, as we become a software-only company. And so we have -- our strategy so far has worked, there has been a portfolio -- a modest portfolio rerate on the valuation based on beating the cyclicality out of the business. And so this is the portfolio. Now ultimately, over time, I mean, it takes -- when we studied other companies that have done portfolio transformations akin to the one we have done, there's at least two very good examples in the marketplace we could learn from. It takes a handful of years for the investors to sort of say, it's not on the promise that the quality is better, it's on the actual delivery that the quality is better. So we need to see and let this portfolio season before we sort of make another decision.

Okay. Makes sense. So you talked a little bit about everybody being, those 28 leaders being accountable. The governance process, I think, is something that is unique to Roper. Just talk about a little bit how that governance process works and what you're essentially incentivizing each of your leaders to achieve everything.

Sure. So I think this has been a pretty demonstrable step forward for us in the last 5 or 6 years in terms of the way we select our leaders to run the 28 businesses and the way we govern and incent, and let me sort of unpack those 2 or 3 things. First, on the leadership selection process, I think it's important, if you step back, 6 years ago, where I became CEO, and believe it or not, the mandate to our operating leaders from my predecessor was just protect your business, don't go backwards and give us all the capital, so kind of redeploy it to the best and highest use. So that actually gets translated by most of the leaders says, "Okay, I'll do that, but I don't have to grow." Having grown up on the operating side of this business, I mean every business I had responsibility for, there was lots of opportunity to grow. And so the first thing, we needed to do was get very profile the leaders that we're growing and get a very common set of attributes that worked within -- behavioral attributes that worked well within the Roper context because we knew we're going to have to do a fair amount of changing of the leadership to get more growth oriented. So it came down to four things. One is, our best leaders are hyper competitive. They're ridiculously, insanely competitive. They want to win. Second is they are -- they have an enormous quotient of growth mindset or intellectual curiosity. So I think a lethal combination as you're competitive and curious, you're always wanting to get better. It is a lethal combination in terms of innate attributes of leaders. The third in our case, is we needed -- we call it strategic operators. And so in smaller businesses, and our meat of our portfolio is $250 million business, plus or minus, in smaller businesses, what happens is the tiering of the urgent tends to overwhelm the management teams. So what we mean by that is if you have an employee quit or a bad product release or a customer is griping about something and then you get consumed in that short-termism. And the very best leaders that could grow can sort of filter that out, allow the daily work, if you will, that set of activity to be done by the team that is committed to solving the daily work. And the leadership teams can take the long-term strategy and make it the execution against that urgent today. So we call that a strategic operator. And then finally, in the Roper context, we have an enormous advantage over most of our competitors, which is we have duration advantage. We own businesses forever, and we very much need to take advantage of the duration advantage. And so we need leaders who are authentically geeked up to build their businesses, like build the underlying processes for repeatability. It takes years to do this. And so a lot of leadership teams can put heat and light on something and drive improvement. We must improve our pipeline. We must have improved booking conversion and put heat and light on that for a year and it happens. But as soon as you take the heat and light off of that and you go do something else, this sort of degrades. And so we're not a heat and light -- we don't want heat and light managers. We want managers who are like, okay, where are the underlying root causes, while we don't have enough pipeline and let's attack those root causes, problem solve them and build repeatability. So then when that problem is solved, if you go into the next one, this one continues to improve and get better. So there's four attributes, competitor, learner, long-term thinker, short-term operator and builder. So that's our profile of our leader. And about half of our leaders, we had to change out from the non-growthy era of Roper to the bit more growth era of Roper.

That's super interesting. That's a good segue into the previous statement you made earlier about a 6% organic growth business in 2024.

That's right.

So getting to 7%, 7.5%, 8%. So what are going -- what are the steps that make you confident that you're going to get to 8%...

Yes. So let me round it out also to the prior question. I think the incentives are part of it, right? And so we incent everybody the same way, which is to grow organic -- to grow EBITDA organically. We don't pay on budgets, and we don't play based on plans. This is a very unique thing in order of corporate governance and compensation in our view. So if we did end up paying people based on a budget or plan, then we would give all 28 of our companies an incentive to lie to us, and we would have a filter not to believe anything they say because the budget process is just a negotiation for compensation. In our case, our businesses have growth hurdles. They have a low growth and a high growth hurdle. Those -- once those goalposts are established, they do not move. So as the company is able to increase its growth rate from 5% to 6% to 7% to 10% they make more money, and if let's say, they stay at 10%, they're making a lot of money into perpetuity. We're not saying, "Oh, your 10% growth business, we're going to shift your goalpost." So there's this inherent trust. We're totally aligned with our shareholders, everybody in the organization is aligned, paid on growth, but more so, it's a cultural commentary. So now in April, when Jason gets a phone call or I get a phone call, something is not going well, where if it was a budget-based compensation process, all of us are going, okay, it's just they're calling them to get budget relief so they can get paid. Now it's like there's an authentic problem. Let's figure out how we can swarm the problem and help solve it because we're all sort of incented for growth. So it's -- this combination of the profile leaders, the incentive system and the single point accountability and autonomous structure. The combination of that is why we sort of able to drive this growth rate higher. Now to your question you just asked, the way that we sort of go from where we are 7%, 7.5% to mid-8s, and this is -- there's no quick fix here. I mean it is -- because we're building and repeatability. There's no quick way to get there. It's over the course of a few years, is it really comes down to each business uniquely sort of dealing with where they are. And so we have a methodology of how we like to see the business is built. The first part of the methodology is every business has to do strategy well. And small businesses didn't grow up by doing strategy well. They did -- they grew up because they had a great product market fit and just exploiting that product market fit. So now as we're asking our businesses to grow even further, they have to find adjacencies that are logical. They have to think about different methods and means of go-to-market or product strategies. And so we work deeply with them on two questions, where to play and how to win. And then optimizing on the notion of right to win. So we -- all of our businesses we want them to invest our resources at the highest right-to-win option they have. That's the first thing. The second thing is we have deep operating capabilities about the repeatability of how you implement strategy. That goes to the, what I just talked about the heat and light versus the building and increasingly a continuous improvement mindset. And then finally, very, very, very few companies have a true talent, long-term competitive advantage to run a talent offense. Like I can think of like two. Every company says they want to do it very few can because it's just incredibly hard. How do you hire A talent and not settle for B talent? How do you really have a talent B player, you say, there's so much opportunity cost for the B talent that's getting the job done, but if I get an A-plus talent, then it goes to the next level. How do you sort of get the employees engaged, not happy per se, engaged. And if they're engaged, they're going to like their job, they're going to be happy with how do you get their incremental mind share. And ultimately, how do you create career paths and development opportunities and you run an authentic talent offense. So between strategy, strategy enablement and team and talent, that's sort of the methods but it's all wrapped and again, the single-point accountability, the mindset and capabilities of our leaders in this incentive system.

Yes. That's great. I'm going to open it up to questions in a second. We do -- we've been talking a lot about your business model, governance, organic growth profile. We haven't talked about M&A. I would imagine for a lot of technology-focused investors, your M&A principles are unique. So maybe just talk through the process that you go in identifying candidates? How do you view the pipeline today? And then how do you think about that long-term growth algorithm to help you compound.

Okay. So M&A for us is an innate capability. It's something we've honed and we continue to improve on very much a learning organization in this regard over 20 years. What starts with is we're -- and it's super liberating for Jason, myself and the leadership team that's on the Roper ownership committee in terms of making our allocation decisions and investment ownership decisions is we're not trying to build the biggest fill in the blank company, the biggest tech business -- or excuse me, transportation tech business, our health care, IT business. And so we are dispassionate about each individual investment opportunity that presents itself. But -- which enables us to be insanely disciplined to our criteria and the criteria, the ones we've already talked about, small market, leaders, compete on intimacy, I won't go through them all. But that is the profile of the asset. We are -- that's just what we do. It's unlike most other software companies, it is a remarkably instrumented process for us, where our process is much more akin to that of private equity. We have people that go out and develop relationships with sellers. We have people that develop relationships with the companies themselves. We meet on Mondays for several hours going through the pipeline, the near-term deals going through the in-process deals, it's not uncommon for us to have 15 or 20 things and some degree in flight, not like detailed like end-stage diligence on 20 things, but it's always a lot of activity going on, being somewhat of a prolific vertical market software acquired $25 billion or so over the last decade. We see most things. We also invest in the relationships. And so it's very much -- it's not an ad hoc thing. It's very -- we're very patient. We're very disciplined to our criteria and we just aren't going to stray from it because we understand as a company and leadership team are only as good as the last deal. It's not a portfolio approach like 2 work, 5 are average and 2 don't work, it's like everyone has to work. And so that's why we stay so instrumented and disciplined. Would you like to add?

Yes. I'd just add that some of the changes over the years has been to expand our appetite for bolt-ons, as Neil mentioned. So historically, we would do maybe 10% of our capital employed would be in bolt-ons. It's been a lot higher the last couple of years, and we'd love for it to be about 1/3 of our capital employed just because it typically -- it will increase the organic growth rate of the platform that it's going to be bolted on to because it's usually a product add that we can put through our distribution channel, or we're going to get some synergies out of it. So it's our best returning deals. And to that end, we've made some investments with some investment partners, what we're calling them and they are going to be cultivating relationships, helping our platform businesses, think about their inorganic strategy and really just reaching in further into the market a little earlier so that we can get those earlier looks at bolt-ons. And Neil made the point too is on looking at businesses that are a little growth here. Well, part of that is a little earlier in their life cycle is what I would call it. And these are businesses that maybe 10, 15 years ago, we would get the books on, right? And it was -- now it's -- there's more probably competition around that. So we're being more proactive and reaching into that market through mid-market bankers, mid-market sponsors. And so that's been a bit of a shift for us, but we're excited about sort of the momentum there.

And look, I know you guys have closed a couple of big deals this year, good size deals this year. What's the pipeline look for you look like today? What's the environment like from an M&A perspective?

Yes, we are super bullish on the next -- the coming period. It's hard to put an end date on 12, 18 months. Simple reason is there was -- with interest rates going up, if you're -- most of what we are -- where we buy things from is from the private equity sort of ecosystem. We've looked at public companies, we'll continue to look there if the right valuation lines up and as Jason said, increasingly for bolt-ons, more middle market and founder type stuff. But the substance, the meat of our capital deployment comes from private equity. And if you're -- with interest rates go up and valuations go down in the public markets, the private markets lag because there's just option [indiscernible]. And these companies generate a lot of cash flow, you don't have to raise money to sort of fund operations. And so that for the last, I don't know, 1.5 years, there's been very few transactions. I would say up a year -- mid-'22 to early -- late '23, that 1.5 years got very, very busy in the first half of this year, had a normal summer slowdown. [indiscernible] vacation is now picking back up. Essentially, if there's like a simple phrase, we think there's going to be about 3.5 or 4 years, a deals get compressed in 2 years because the real fact that's happened is the GPs -- or the LP, excuse me, have pressure on the GPs at this stage. So they want DPI, they need capital back. Also, all the private equity firms know it's not a secret. The very best returning vintage for private equity are the ones after an economic slowdown. So they all need to return money to raise a fund right now so they can sort of get like the post-economic slowdown sort of vintage because those are the ones that are like once-in-a-decade type return. So there's a lot of pressure for DPI at the moment, that's what's going to, I think, drive this activity for the next couple of years.

That's awesome. So I'll open it up to the audience. Any questions from the audience? Right here in the fourth row. Just wait 1 second for the mic.

So in the last 3 years, you guys have grown 8%, 9%, 8% organic, so kind of in line with your plans to accelerate? And what's hard for investors maybe is that in the short term, we're seeing growth slow. I think in Application Software where some of the higher multiples businesses that you bought, faster growing. I think that segment grew 5% last quarter. So can you talk about the things you can see kind of under the surface of, kind of trailing revenue and the forward bookings moment that give you confidence...

Jason will take that one.

Yes, sure. So yes, the last -- just to reiterate the last 3 years were 8%, 9% and 8% growth. This year, we're guiding to 6%. And so just kind of unpacking that a little bit, we had some COVID rebound in those 8%, 9% and 8% periods, of course. That's both on the software and to a certain extent, the product side. We also had, specifically last year, a lot of -- in our product business is the supply chain sort of liberated. And so we had -- you can see in our TEP segment just really high growth rates. And so we're comping a lot of that supply chain this year. And then the other component that you hit on was enterprise bookings have been -- they've been fine. They've been sort of muted, I would say, the last -- primarily in 2023, sort of low single-digit sort of enterprise bookings growth. And things got a little bit better in the second quarter. So we'll see how the second half plays out. But you got to remember, these are -- this is mission-critical software, pipelines look good. We don't feel like -- we feel like we're in a good spot in each one of our businesses. And so as things pick back up, we're confident that, that will inflect up. And then we just had some episodic things that we've talked about for the last couple of years, our DAT business. It's a freight matching business. So I think getting into the spot freight market, truckers and brokers, they provide sort of a dating service. And so with the supply chain dynamics that have happened over the last couple of years, a bunch of carriers came into the market because the rates were so attractive. And we've seen that sort of a drift down and normalize throughout '23 and then in '24, we're sort of facing that headwind. So we're cycling along the bottom there. We expect that to inflect up once the market sort of recovers because we are sort of the market there, primarily. And then our Foundry business is another business in our network software segment that plays in the media and entertainment space and obviously, with the strikes that happened over the last couple of years. Recurring revenue was stable, but new -- sort of new bookings were pretty soft. And so again, once that -- we start to see some green shoots there, production is happening again and we'll obviously capture the market back with that flex up as well.

Question on the left-hand side here.

How much have you been able to get through price rises in this period of slightly higher inflation.

Yes. So price for us in our software businesses for a very long time, even pre-acquisition period, pricing has been a very important lever. But I think if you put it in context, if we have -- for our non-SMB software businesses, sort of call it, 95% gross retention and 105% or 106% sort of net retention, so you have 10 or 11 points of gap. There'll be about 4 points of price in that. So 40% of the gap we sort of grow to each year is price. Some companies are a touch higher, some are touch lower. There was not -- and that's been very steady. We're very -- again, with our long-term owning businesses wherever, we're careful not to get too aggressive with price. Some of the sponsors who own business is temporarily getting very aggressive with price, and that's just not a lever we tend to pull. On the product businesses that we have -- they did a much better job at capturing price based on the input costs and capturing both the price and the margin. And then from -- but generally speaking, prior to that, we capture price on new product release because of the value of the new products. Do you got anything to add?

No.

Any other questions from the audience? All right. Let's continue on, so you did a couple of deals this year, a couple of medium-sized, I'd say, deals for you guys. Can we just maybe just talk about the Transact deal that you just closed. So talk to us a little bit about what that acquisition brings to the table on the campus offering and the synergies between that and Seaboard.

Yes. So we have a business -- actually, our first stand-alone software business we bought in 2008, was Seaboard. Seaboard is a 2-part business, right? It's got a sort of a menu management for institutions and universities in the whole, if you will, the ERP or the workflow software for feeding people in those institutions. And then they have the connected campus piece. Transact has connected campus piece and a payments business with [indiscernible]. So the strategic rationale for this business was the opportunity to have a more scaled connected campus. Both of the businesses are great -- are fine. They're good businesses. They're going to continue to grow, they'll get all the capital and focus they need, but the short term synergy value comes from the overlap of those two. The thing that we like about it is we all know that the trends of university enrollment are flat to declining and like what's the value of a 4-year degree. What connected campus does is it is something that all the universities are doing to make the on-campus experience better and more enriching for the students. So it's helping the universities compete in the face of that sort of macro trend, right? So in short, it's like, your card that you get into your dorm room with unlocks all the academic buildings, your dorm room, it's your student ID, it's allows you to go do the swipes for Chick-fil-A whatever it is. It also allows you to get the lift to go to uptown and go to the subway or whatever it is, it's that connected sort of campus and the software that both Transact and Seaboard have will -- there'll be an integration pathway for that and very excited about that. The trends in that uptake are quite interesting and compelling for the next -- for as far as the eye can see in that regard because, like I said, the strategic implication for universities to become better experiences for the students.

And in the context of that organic growth number, the ambition we were talking about earlier today, like how do you see this business growing in the coming years?

Yes. So Transact is a high single-digit growth business. Seaboard lagged that a little bit. we would hope that the combined business would rerate to be a high single-digit growth business.

Yes. I'd be remiss if at a tech conference, I didn't bring up AI. So maybe at a high level, just talk to us about what the opportunity for gen AI brings to your portfolio?

So there's the relatively high level answer that everybody gets, right? There's the opportunities in our products, and there's the opportunities in productivity. I will say that being a vertical market software player across 20 plus or minus micro verticals. It is -- we're in an advantaged position for two reasons. One, obviously, we have the data that's very specific, like we have whatever vertical it is, we have super specific data. But I think what gets lost oftentimes is the vertical market players also know the very bespoke and nuanced question in which to apply the data to, like that's where the power of AI and gen AI really gets unlocked. Like, probably one of the more advanced examples we have that's partially in the field and still -- and there's a fair amount of product to be released with our legal software business, right? The generic problem is how do you create a professional services bill, a compliant bill, right? The very nuanced is how does law firm, A create a compliant first pass bill for client Z, right? That is in clients Zs rules for paying are different than client Xs rules, and it's remarkably complicated, how a law firm has to build and paid compliantly. So our software is basically the listening agent using gen AI to create a compliant time report the first time through that's going to get paid the first pass through. It's remarkably nuanced. DAT, the business that Jason just mentioned, there's a huge issue in the spot and the freight market is generally about fraud. And double brokering and just fraudsters like stealing sort of loads of whatever it is and selling them in an off market. So we have gen AI and computational AI algorithms to detect fraud, and we're really leading the industry, like 100% leading the industry and getting industry accolades for that. In our Foundry business, the media and entertainment business, this is a business that software is used to take in, like Game of Thrones, the animated dragon and the live-action shot and it's called compositing those two things together on a frame. And so you have to do that for thousands of frames on end. And so it's a creative process. The IP is such that each film is -- in each product has a unique set of IP, you can't use IP from other projects. And so -- but once you sort of composite one frame to do this, and you've got 10 more frames that are just whatever flapping the wings of the dragon, we're using AI tools that carry the IP forward in that, for instance. And so it's -- there's lots of examples. And then on the productivity side, increasingly, we're seeing 25% and 30%, sometimes higher developer productivity that's going to be standard play already is. And may be more exciting or equally exciting is how do we sort of take customer service and not just have level 1 agents become level 2 or 3 agents overnight because the data is being served to them or the agent sort of listening to the conversation, serving up recommendations real time. But ultimately turning that to be customer-facing. So Aderant will make that customer-facing application beginning in 2025. So essentially level 1 support will be done by the clients versus sort of Aderant people. So lots of opportunities in terms of AI. Final thing I'd say is to be curious on other people if you're hearing this in a conference. There's definitely the hype and there's a little bit of a -- we're in this stage and then it will sort of take-off from there in terms of just use cases, but it's good can allows us to digest what we're doing.

And I would just say, even though we're decentralized, this has been an area of focus for the corporate office and teaching the companies what it means and then ultimately enabling them to have sort of work groups. So we've got a work group for software development, customer success. They've already kind of taken a life of their own, and it's been great to have the ability to learn across the portfolio, especially around the mistakes that people make. And so that's been helpful.

So we'll end on this last question. I asked you this question last year, but I think it's helpful for anybody that didn't listen to the presentation last year because we get the question every once in a while as well, just given the fact that you've been so focused on vertical software, there's a concern that some of the horizontal software players can come in and encroach on your business. How likely do you view that concern? And have you experienced any type of that encroachment across pieces of your portfolio?

So when we're doing our diligence because we're so risk adverse. If we see a 0 in the Monte Carlo for any reason, horizontal encroaching or the technology algorithm is changing every 3 years, and you can lose that product. Whatever is if there's 0 in the Monte Carlo, we're out, like we're just fundamentally out. We're so risk averse to that. I think it's extraordinarily unlikely that a horizontal player disrupts any meaningful way any of our verticals, simply because of the size of the prize. That's one of the protective nature of the being in small markets. Like if you want to -- is one thing. Second is our markets are very well served. I mean, it's not as though we're delivering a bad experience, our competitors are delivering a bad experience. It's very well served. And we experienced it once about a decade ago in the health care, IT, laboratory application have learned from that experience have meaningfully tweaked the way we do our diligence to identify that trend, and we haven't experienced it since.

Great to have you guys here today. Thank you for coming to the conference. It's great to see you again.

Thank you for having us. Thank you so much. It's great. Thank you for your questions.