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

Good morning, everyone. Welcome to the Oppenheimer Technology Conference. Ken Wong here. I think most of you guys know me, your software analyst. Happy to have with us the team from Roper. I've got Jason Conley, EVP and CFO; Zack Moxcey, VP of Investor Relations. Good morning, guys. Welcome aboard.

Good morning. Good to see you, Ken.

Great to see you guys also. [Operator Instructions] So with that, Jason, welcome aboard. Look, I think a lot of folks now, especially in the tech world, are generally very much aware of Roper. You guys have made a fantastic transformation from an industrial company to a software company. But even still, I think it'd be great to provide the audience with a kind of a quick background on Roper, and then we can dive into the formal fireside.

Sure, love to. So yes, Roper is a vertical market software and technology company. And -- we're focused on sustainably compounding free cash flow per share in the mid-teens over a long period of time. We are kind of an N of 1 in the software space because we have this sustainable M&A motion, so we have a lot of M&A optionality. With that, we own 29 businesses, they're leaders in their niche vertical markets. And typically, we choose fairly smaller TAMs. We think they're attractive because of their protective nature and with our market leadership and especially with AI, this provides multiple paths to growth. So today, I think organically, we're sort of mid-single-digit plus, and that converts to sort of high single-digit cash flow just because of the margin and the low CapEx and working capital intensity is very low. So we take that cash flow and then we just use a little bit of investment-grade leverage to acquire first call on capital is bolt-ons for our businesses because they just have such great returns or, of course, buying the next great vertical leader. And so with this, you get this sort of continuous growth flywheel. And then obviously, in the last 3 quarters, we've been much more active on the share repurchase front, just given we think are really attractive valuations at Roper and I'd say, I'd call it a somewhat paralyzed private equity market for the last several years and increasingly over the last 6 months because of everything that's happened with the public market. We have a proven track record of acquiring great businesses for reasonable valuations, and we make them better over time. And I think we're increasingly harnessing the collective learnings and value of those learnings and best practice methods across the portfolio, anything from AI product acceleration to what we call the product operating model and deploying that to continuous improvement methods and even into commercial excellence. So I think we're still getting going on how we think we can increase the organic growth across the portfolio and also just capturing more value from M&A. And so that's sort of Roper in a nutshell.

Fantastic. And actually, Jason, I'd love to start on that last point you made, the increasing organic growth. I think when you guys went down this journey, you guys were buying more mature software companies. You guys were probably sitting, let's say, more like low mid-single-digit organic growth software companies. And now you guys have leaned into perhaps earlier-stage software companies. Perhaps just give us a sense of why that shift kind of where we are on that journey. I would love to get an update on that particular pivot.

Yes, sure. I'd love to. And so -- about 3 years ago, we decidedly said it's an opportunity for us to look at businesses that were maybe think of first-turn private equity that had sort of a faster kind of growth that we could capture and help professionalize and mature that business under our ownership, build a bigger platform, right, put on bolt-ons that make strategic sense for that business because we have a permanent ownership versus maybe buying later cycle where some bolt-ons were done, maybe they weren't great for the long term and so you inherit that and you sort of have to work through that. So buying businesses that have faster growth currents and that we can help them continue to grow and then capture margin opportunity as they scale, not cost takeout, but just kind of scaling as the business grows. And so in the last couple of years, we've acquired CentralReach and Subsplash. We've done some interesting bolt-ons for our DAT business in a business called Convoy and also Alco. And we really -- we put together a much tighter governance structure around that. We have a value creation thesis when we're looking at a deal and then a value creation plan. And I'm happy to report that the platform deals of CentralReach and Subsplash have performed against our VCP in the first year. They're tracking against our forecast on revenue and EBITDA. It's just been great to have this tighter governance, coupled with greater collaboration with our management teams. And so we built on the lessons of some of the earlier deals that we did and especially with Procare. And so these are tracking quite well. And then the bolt-ons are continuing to be a motion for us. So we've invested in a team here to go and source deals for -- help source our deals for our businesses and collaborate with our businesses to be much more proactive and do more reach outs. And so some of the product of that is like our DAT business where we've now acquired a technology called Convoy. We bought that, it was owned by a broker at some point and then ultimately came into our hands. And so we're essentially automating the freight -- spot freight market instead of it being 10 calls between a broker and a carrier, we're trying to reduce that down to an automatic freight match ultimately. And so we're pleased with that. We've also bought a factoring technology business. And both of those are tracking well. It's going to take time. You're developing a new market. So it's a little bit of a wider range of outcomes in terms of timing, but we really like the dynamic kind of work that the DAT business is doing to create demand generation to build that network and then be sort of iterative on the tech. And so they're moving a pace. It's going to help our organic growth a little bit in the second half as that rolls organic. So I'd just say broadly, like the buying faster growth businesses is obviously good for organic growth, but also allows us to just capture more value for shareholders.

Understood. Maybe shifting gears from the broader strategy to more recent results. You guys recently delivered your -- a very positive second quarter, improved your outlook for the year. I guess, as you look back on the first half, how would you say that progressed relative to your expectations at the start of the year? And what were some of the underlying factors that drove that improved outlook?

Yes, sure. Yes. So we started the year, our initial guidance was $21.30 to $21.55 and now we're at $22.15 to $22.30, so we had the -- obviously, the buyback was a component of that. So that plus better operating performance has enabled a 4% raise at the midpoint. I think operationally, we've been very pleased with the first half progression. Growth is particularly in our Neptune business, we sort of had a more sort of took a cautious approach given where that business was in its cycle relative to kind of COVID demand and how that was turning through. But they've actually executed very well in the first half. So they helped drive some of the outperformance at our Technology Enabled Products segment. And it's just been better than expected. So this allowed us to raise our organic growth from 5% to 6% to now 6%. Also, I'd say software has performed well, in line with expectations and a little bit better at our DAT business. So we're finally starting to see improvement after 3- to 4-year freight recession. So what you're seeing is carriers are -- or freight -- spot freight rates are better. Carriers are now coming into the market. So we're steadily seeing truckers come back into the market. And of course, there are subscribers entering our network. So that's been good. Our Deltek business, on the private sector side, we think architect, engineering, construction, that's been going well for the last several years, but our GovCon, our government contracting business has been slow. I would say second quarter, we saw a little -- some signs of life with a large license deal that got through that we didn't have in our forecast, but actually made it in. And the pipeline for Deltek looks strong. But we're not really ready to call a recovery yet just because we're sort of second- and third-order demand derivative in government contracting spend. So indications look good, pipelines, appropriations and the like, but we're just going to kind of take a wait-and-see approach on Deltek. But overall, feel good about sort of how we finished the first half and then how we roll into the second half as well.

Got it. And in the back half, you have baked in an acceleration in organic growth. I guess how -- what are some of the factors that are driving that? How much of that is within your control? How much of that requires further execution to potentially hit those marks?

Yes. I would say mechanics play a key role in the second half acceleration. So I mentioned CentralReach and Subsplash. CentralReach is in our Application Software segment that turns organic in the third quarter. Like I said, it's growing north of 20%. It's in line with our value creation plan. A lot of that's recurring. So we feel good about the security of that. And then our Subsplash business is in our Network segment, and that turns organic in the fourth quarter and again, growing above the segment average, so that will add to organic. And then in our TEP segment, our product segment, we forecasted that to grow high single digits in the second half, and that's especially -- and it will be higher than that in the third quarter. Our Neptune business was challenged last year with some tariff and some copper headwinds that we are comping against. So I feel good about the comp there, but also just some of the fundamentals that are happening in Neptune with a little bit more service work that's in backlog and just some of the mix of more static versus mechanical meters. So that's going well. And then I'd say just lastly, kind of a little less mechanic, but also a little mechanic, which is our DAT first half performance should continue in the second half. So just think of like a June exit sort of rate, how that carries into the second half. We're not assuming, right now, we're not assuming carrier counts get much better, but just that will sort of just the natural June rate carrying into the second half helps us with that acceleration as well.

Got it. And shifting gears again. I think as you guys are aware, I feel like everyone in the audience is aware, if AI has been a kind of -- for good or bad, a big topic within the software ecosystem, would love to hear what Roper is seeing out there? What is Roper doing to address this ridiculously fast pace of innovation. And yes, we'll start there and there's a few branches to...

Yes, of course, all those many branches. Look, so again, we really were thinking about AI as far as 2 years ago. We really took this as a real opportunity for Roper. And so it all started with kind of the journeys of learning and sharing of best practices, which we've always done, bringing in thought leadership and really just getting at the mindset was kind of the first part of this and the urgency, which I think Neil did a good job of cascading that through all constituents, presidents to the Board members, to all of us. And so that really got the compounding of learning starting early. And part of that was that every business had to kind of reimagine what their markets and their business would look like in an AI world, and that was as far as 1.5 years ago. So we really got the -- I'd say, the juices flowing on that and the experimentation going earlier than most. We got agreements across all the frontier models 1.5 years ago. So we've been at that for a while in terms of experimentation. And then we really leaned in, in the third quarter of last year and hired some leaders to lead our AI function and that's been a real, I'd say, turbocharge to the learnings and also to the actual product development. So we're up to 20 people now, as we sit kind of halfway through the year. We plan to continue to add -- and we've been -- it's just been very successful. The interesting part is the folks who are attracted to Roper because they -- we're allowing -- there's not a lot of politics. There's not a lot of boundaries that we put up in blockers. So these folks are getting to ship products. They're like addicted to shipping products, and they get to context switch, right? So they go from Vertafore to PowerPlan to these other just smaller businesses where they can make a real impact. So we've had a lot of success with that opportunity and to work with a really high-impact team. And the chemistry, I think, between that the team -- the AI team and our businesses has been good. Obviously, you have bumps along the road because you're moving at such a faster pace, but I'd say overall, like early days, the experiment that we've done there has worked incredibly well.

Got it. And can you talk about kind of which verticals you're starting to see some early successes as far as adoption. And I realize everyone wants to put the monetization cart before the horse, but any color you can give as far as kind of that particular journey and your -- kind of how we should think about that path to revenue?

Yes. Well, I'll kind of break it up. One is our -- we acquired CentralReach in the second quarter of last year, and they were in the really early -- I would say, really early stages, but fairly early stage of bringing products to market. And so we had about, call it, I don't know, 4 or 5 months of actual revenue when we bought the business of AI revenue. And what we observed there, there's a lot of learnings we observed there in terms of how you deploy products into the market, how you observe what the uptake is, how you sort of do a freemium model that then cuts off and turns into something you can charge and that's been a nice learning across the portfolio in terms of how to think about it. So they've been really successful in being able to charge in addition to the core enterprise health record just because it's a demonstrable value in terms of what they do for therapists and what they're able to do in terms of claims accuracy. And so -- and that's in a market where you think about the -- we've talked about the dynamics. It's in the autism space where the demand is so much higher than the supply. And so you're trying to get therapists to be as productive as possible. And also to actually enjoy their jobs, they're not doing a lot of administrative work because the turnover is really high. It's a really tough job at the front line there. And so that's what our solutions do. And so when you have that sort of -- that real need and you're able to fit it into the workflow, you get immediate uptake. I'd say in other areas like I mentioned DAT, what we're doing is trying to automate the spot freight market. Well, if you think about a broker, there's an art in their mind for -- in terms of how you negotiate different lanes for a load. And so -- but there's always going to be a subsector of that -- or a subsection of those loads that are going to be much more sort of homogeneous and those need to be automated. So you have to go through the change of management with those customers and that there's a journey that goes along with that. So adoption is relatively lower there than let's say, a CentralReach. And then there's all kinds of -- you can paint a broad brush in between depending on the kind of the use case and the industry that they're in and the urgency that's needed at the time. But I'd say, over time, the solutions that we are creating are going to make the competitive intensity higher in terms of productivity in those industries. And once you get some of the first users then the other customers will say, "I got to do that too" to remain competitive. So we think it is going to happen. It's just, as you know, it's -- you're changing the entire way of working, and that just takes -- that takes time. And so we're -- part of the learning too is how you sort of redeploy some of your historical implementation folks to sit side-by-side with customers and help sort of increase that adoption.

Understood. And a common question I get from folks is like you guys run a decentralized portfolio. Is that -- do you find that to be an advantage? Is that an issue as far as kind of getting everybody on the same page? What processes have you guys put in place to make sure that all your 29 businesses view this as a strategic initiative?

Yes. And I think it's more than an initiative. I'd say it's a strategic pivot in terms of -- and not pivoting from being a market leader and being intimate with the customer, but in terms of how you develop software, like that is -- we've done a student body right on full Agentic coding. Now it takes time to move that through the portfolio, but every single business is committed to doing that by the end of the year. And that's sort of not facilitated but ensured through our group executives who make that commitment. And again, it's all about sort of materiality, it's all about impact. So you don't have to boil the ocean all at once. We kind of look at the opportunity and then the risk around AI and then we can sort of -- we can phase these things in. But I actually think because we see so many different use cases, we see so many failures that happen in various ways to develop software and this didn't work, we learn from this, don't do that. We actually -- it's an advantage for us because we are part of our job is to harness, like I said, when I started today, we're really focused on harnessing the learnings and best practices and methods. And we're much more intentional about proliferating that out to the portfolio in a very structured way. So I do think it's actually an advantage, especially when you're dealing with something so nascent as AI, I think it gives us an advantage.

Got it. And then one more AI question here, and then I'll shift back to some other topics. The competitive landscape, I think there is, again, a lot of fear out in the market that software is being disrupted. I think there's a perception that you guys buy like strong verticals, which should be a little insulated but a little more niche. So is it easier to attack. So I would love to understand whether or not you've seen any shift in the competitive environment from AI native start-ups, kind of where do you guys feel you may or may not need to kind of fortify the walls, the moat, whatever -- what have you?

Yes. I mean we really have -- I mean we haven't seen anything of like significant threat at all. And we've got not just us. Obviously, our businesses are keenly aware of this. They're -- think about it, they're the leader in their markets, they're close to their customers, their customers provide them feedback if they're seeing anything. So we have had a couple of instances where point solutions have come in, not part of the full workflow, but something that our business didn't do. And we were able to replicate that in a matter of weeks and kind of shut out that competitor or that potential startup just because we're so embedded in the workflow. So I think that's still holding true. And there's -- the only area that we have one business that repackages public company information, and it's a data business, and it's part of one of our businesses. We have seen some AI native start-ups there, but they're really nipping at the low end of the customers. They've always had that sort of risk even before AI. So I think if you have a solution that is just pulling public information, you've got more risk there, but it's a super small part of our exposure. So yes, we're not -- and I think the starts are kind of going after obviously bigger TAMs now. And so we're working like heck to box that out. I think -- to me, I think the work we're doing on AI is as much defensive as offensive. If you think about what Vertafore has done and putting out several agents already, like the customer going, okay, I'd rather stick with one vendor as long as you're delighting me and doing the things that the startup can do. And we've got all of that proprietary data and sort of the entropy, the uniqueness of each one of those customers, we can create solutions that are unique to their workflow, which I think is sort of hard to replicate.

Understood. Makes a ton of sense. And perhaps shifting over to sort of the other half of what you have to do besides kind of making sure all these businesses are operating in a very strong fashion. There's the kind of -- the pipeline of acquisitions. You mentioned earlier that perhaps the market was paralyzed, but you also more recently have indicated seeing a looser M&A environment. Would love to dig into that comment. What are you seeing out there? What gives you confidence that perhaps things are starting to pick up on the M&A side?