Q3 2019 Earnings Call

October 24, 2019

The Roper technologies third quarter 2019 financial results Conference call will now begin if he would like to ask a question. Please press star one on your telephone keypad.

As a reminder, this call is being recorded and I would like to turn the call over to dock Moxi. Please go ahead.

Good morning. Thank you all for joining US we discussed the third quarter financial results for Roper technologies. Joining me on the call. This morning are new Johan President and Chief Executive Officer, Preachy, Executive Vice President and Chief Financial Officer decent calmly, Vice President controller, and Shannon O'callaghan, Vice President Finance.

Earlier. This morning, we issued a press release announcing our financial result, the press release also includes replay information for today's call.

We have prepared slides to accompany todays call, which are available through the webcast and are also available on our website.

Now if you'll please turn to slide two we began with our safe Harbor statement. During the course of today's call will make forward looking statements, which are subject to risks and uncertainties. As described on this page in our press release and in our SEC filings you should listen to today's call in the context of that information.

Now please turn to slide three.

Today, we will discuss our results for the quarter, primarily on adjusted non-GAAP .

Reconciliations between GAAP and adjusted measures can be found in our press release enemy Appendixes. This presentation on our website.

For the third quarter the difference between our GAAP results and adjusted results consist of the following items amortization of acquisition related intangible asset purchase accounting adjustments to acquire deferred revenue.

Transaction related expenses for our completed acquisition any announced divestiture behalf and lastly tax expense adjustment related to our divestitures and now if you'll please turn to slide four I'll hand, the call over to meal. After our prepared remarks, we'll take questions from our telephone participants Neil.

Thanks, and good morning, everyone.

As usual, we'll start with our third quarter highlights.

I'll, then turn the call over to Rob to discuss our financial results, then I'll walk us through the segment details and outlook.

Followed by our Q4 and remaining 2019 guidance.

I'll then wrap up my prepared comments with a summary of our third quarter activities and share. Some of early thoughts for 2020, then well open it up for two and a.

Next slide please.

We had another really strong core here at Roper revenue grew to 1.36 billion.

The margin execution was tremendous really fantastic and free cash flow came in at 387 million or 29% revenue in the quarter.

Gross margins expanded 80 basis points in the quarter broadly across the enterprise.

And we always like to see the leverage down the piano with organic revenue plus 2%.

EBITDA up 5% and Deps growing 6%.

We saw broad based growth across our software businesses in both our application and network segment.

Our medical product franchises remains very strong as well as our RF product businesses.

Neptune had a nice quarter coming off strong double digit comp from year ago, but they did experience. Some short term supply chain capacity constraints, which will double click into later on this call.

Our process technology segments continue do I really impressive job executing through the expected declines in oil and gas markets with tremendous margin improvements in the quarter.

Also we announced in closed two acquisitions by pipeline and computer easy for a total of approximately $1.8 billion.

Our capital appointment capability continues to operate at a high level, we'll talk much more about these acquisitions later in the call.

Further we successfully executed a 1.2 billion dollar very attractive bond offering in the quarter.

And we also agreed to divest get tend to AMETEK for 925 million, which is a great outcome for rubber and our shareholders.

Finally, as we look towards 2020 were encouraged by many factors not the least of which is transcore as recent contract award to deploy and maintain New York cities congestion pricing tolling initiative.

At the end of the call will further impact some of our views are 2020.

I'll now turn the call over to our CFO to walk you through our consolidated quarterly results Rob.

Thanks, Neil Good morning, everyone turning to the next slide on the Q3 income statement metrics covers some of the numbers for the quarter.

Revenue was 1.358 billion, which was a 3% increase over prior year organic plus two that organic growth was led by our two segments that are primarily software our application software segment of plus 5% organic and our network software and systems at plus 4% organic growth.

Margins at Neal mentioned, we're really spectacular great execution by our business leadership teams across the enterprise, we had gross margin up 80 basis points, 64.6%.

EBITDA margin up 90 basis points at 36.7% to EBITDA for the quarter of 498 million, which was 5% growth.

We benefited a little bit in the quarters, we looked down to the depth line from a from some favorable timing perpetual license wins or where we where we recognize that I would say a few sense of earning.

In the in the quarter in Q3 that we had expected originally in Q4 around timing of those wins, primarily at or in deltak.

And that gave us at the bottom line deficit $3.29, which was well above our guidance range of 316 to Threetwenty next slide.

Next slide or asset light business model always one of our favorite slides as many of you know the big part of the Roper governance model is our focus on the balance sheet working capital efficiency.

As part of our annual review process will be meeting with every business over the next couple of months as we look forward to the next three years of course that number one focus on that is going to be around our long term growth opportunities in strategic.

A deployment for all the businesses, but we're also spend some time focusing on do we have the right business model or are we doing a great job in terms of collecting receivables and managing our working capital. So we can continue to compound or cash flow and if you look at the numbers on this slide once again, great performance negative working capital minus 3.1% for the enterprise.

Yeah.

Inventory, 4.4% down quite a bit over six years ago receivables better than six years ago, and then of course, the big increase in deferred revenue as we move more and more towards high recurring revenue model across the enterprise and the deferred revenue of 13.5% is definitely excellent. We expect that number to only continue to rise.

Moving forward next line.

On the compound in cash flow. So again consistent strong cash flow conversion for the company operating cash flow of 404 million.

In the quarter represent 30% of revenue free cash flow of 387 million represented 29% of revenue.

78% conversion of free cash flow to EBITDA.

If you look at our TTM free cash flow very nice double digit growth at 12% versus prior year and if you look to the right to the bars were at a 15% CAGR on TTM free cash flow over the past two years, though again consistent cash flow compounding at Roper, which we certainly expect to continue next slide.

So turning to the next slide on our strong financial position. Soon after we were successful in the pipeline process. In August we saw what was happening with the overall rate environment and one of our principles around the balance sheet is always be opportunistic if we can lock in what we view as good long term rates that we went ahead and.

We're able to access the bond market in August right before the summer slowdown was really an excellent job by that pull Roper team at all of our advisors to get ready and hit the Mark and have a really successful outcome. We're able to do a 1.2 billion bond offering split between 500 million a five year notes at 2.35% and seven.

Hundred million of 10 year notes at 2.95% at the time I believe it was the lowest year to date coupon for any company had our rating levels. So really great execution by the broader team. Furthermore, they can hand divestiture as Neal mentioned, we expect to close later this month that will further enhance.

Our ability to deploy capital. We ended Q3 right around 3.0 times gross debt to EBITDA and then when we add in the expected 700 million or sale proceeds from get Tan will be well under three times and as you know every month, we generate high level cash that goes first and foremost to pay down our revolver when there's a balance and.

We always have ample ability to deploy capital and we'll end the quarter here and really a great position to continue deploying capital moving forward in taking advantage of our high quality pipeline at acquisition opportunities.

So with that I'll turn it back over to Neil.

Thanks, Rob, let's turn to our application software segment.

Revenue came in at 405 million, which represented increase of 5% on an organic basis EBITDA was 168 million an increase of 7% versus the prior year EBITDA margins were 41.4%.

Deltek, we saw the continuation of a few trends that we've discussed over the past several quarters, specifically deltek grew high single digits in the quarter following the difficult Twoq comp.

Additionally, we continue to see a good balance of perpetual software transactions and a continued acceleration in recurring revenues as a result increased mix of business towards Deltek SaaS offerings.

Also the business continued to see nice balance of activity across their two macro end markets professional services and government contracting.

Techs team continues to execute exceptionally well.

Also in the quarter, we acquired computer use for $185 million computer is a leading enterprise software solution provider for construction firms with particular emphasis on the smaller into the market.

They have over 6000 customers in North America, and deliver the software on either an on premise basis or in the cloud.

The solution is very specific to the needs of building contractors, including job costing construction accounting project management asset management as well as payroll.

This business fits nicely with Deltex leadership position and the architecture and engineering vertical. This is a great additions adults ex hdc platform.

Matter and experienced yet again double digit growth as result of continued share gains within the large log vertical and the adoption of their newer SaaS solutions targeting smaller law firms and cross selling new products to the larger firms.

As you May note, we've highlighted at or it's it's competitive strength for several past quarters and are proud of the long term market share gains by the at our team.

Strata logged another great quarter based on very strong new logo ads continued strong renewal activity and the adoption of their new bolt on products for their cost accounting and decision support SaaS products targeted to the hospital market.

Data innovations and Clinisys performed quite well in the quarter each up high single digits.

Data innovations, our global clinical laboratory middleware or connectivity software business continued nice share gains for their core connectivity products.

And Clinisys, our European Hospital Laboratory ERP business continues to benefit from market consolidation in most of the western European markets.

In particular Clinisys products are essentially the only hospital laboratory ERP products proven to scale to meet the needs of the larger consolidating customers were quite bullish that this trend will continue for many years to come.

And before we turn to the outlook Seaboard did very well in the quarter on increases into recurring subscription revenue.

Of importance, we announced a partnership with Apple whereby the students and faculty security and payments credentials can be onboarded into the Apple wallet.

Six universities Clemson University of San Francisco University of Tennessee, Knoxville University of Vermont, MIT and University in Kentucky have or are adopting this technology for this fiscal year.

Our seaboard this opens up a new recurring revenue stream as each credential is activated.

Though very early this could prove to be nice long term growth driver for seaboard.

And finally, and we have to highlight the tremendous just excellent cash performance in the quarter from seaboard, great job and congrats to Jim Rob in the entire team there.

As we turn to the outlook, we want to highlight that Delta can address where benefited by the acceleration of a few high margin perpetual transactions. These transactions work and the sales funnel at the end of last quarter, but the Tommy a which is always difficult to pinpoint. So we assumed they would close in Q4, but they were executed.

In Q3.

Notwithstanding we continue to expect mid single digit organic increases for the segment in Q4.

Next slide please.

Turning to our network segment revenue in our network software and systems segment for a quarter were $394 million, an increase of 4% on an organic basis.

EBITDA was $176 million, increasing 15% versus the prior year and EBITDA margins were 44.7%.

During the quarter, we acquired I pipeline for 1.6 to 5 billion I pipeline were reported in this segment and we'll discuss I pipeline in detail on the following slide.

The quarter was highlighted by continued growth and our de 80 or North American freight mats business in particular, we saw strength and demand for our rates data offering which helped drive increased ARPU in the quarter.

Foundry also started strong with double digit revenue growth and our first full quarter as part of Rover.

In particular, there was nice growth across both their media and entertainment core vertical and their emerging digital design business.

Also in the quarter Jodi and the team delivered major releases to both our new and catan of product offerings.

Hi, trade grew double digits in the quarter based on strong renewal activity and new customer ads.

EMEA Chase performance in a quarter was highlighted by several strong trends to remind everyone MHS a largest group purchasing network for the non hospital market with leadership positions and long term care pharmacies long term care facilities and home infusion marketplaces.

The team continues to when the market share game relative to Onboarding, new and startup pharmacies.

Importantly in the quarter. It makes it continued to see the benefits of increased customer purchasing volumes due to several new pharmaceutical products being all contracts.

Also it's worth reminding everyone about the favorable end market conditions, essentially the aging of America and the increasing demands. This aging demographic puts on the health care system. This trend benefits MHS.

Finally, the president of image, Hey, Mike Sicilian announced his intention to retire from the business.

Mike has been the Amici president since our acquisition in 2013 and has done a terrific job growing MHK and providing leadership to both Softwriters Ns HP.

As a result in each case leadership succession plan has been seamless, which is a testament to Mike and I and working together in pursuit of this transition for several quarters.

The total contract value was approximately $507 million and we expect to recognize approximately 200 million of revenue associated with this contract next year.

The recurring revenue operations and maintenance portion of the contract will commence in early 2020 run and run for a minimum of six years.

As we turn to the outlook, we continue to expect mid single digit organic growth RIS segment in the final quarter of the year.

Next slide please.

Hi pipeline is a wonderful addition to our growing stable of software businesses.

Pipeline is a leader in cloud based software solutions for the life insurance industry.

Specifically I pipeline provides a necessary workflow automation solutions needed to quote apply underwrite and manage life insurance products.

The purchase price was $1.6 billion to $5 billion and is immediately cash accretive.

We expect the business to grow into high single digit range and this is based on the company's long history of revenue EBITDA and cash flow growth.

We're 2020, we expect pipeline to deliver approximately 200 million revenue have roughly 40% EBITDA margins and generate approximately $70 million of after tax unlevered free cash flow.

Importantly, I pipeline is a roper style softer business.

They have very strong cash flow characteristics and is very asset light and facts negative net working capital.

The management team led by Larry Baron Exemplify, what we look for in our leaders long term commitment to solving customer problems with solutions that have recurring revenue streams teams that love to build great businesses.

They are the clear leader and this knits vertical and as a result have very deep domain knowledge and given this they have very high levels of recurring revenue and their customer intimacy provides clear opportunities to continue will enhance the products and solutions to continue to grow over the long term.

We've been tracking this business for several years and are excited to welcome the team to Rover.

Next slide please.

EBITDA was $137 million decrease of 6% versus the prior year EBITDA margins were 34.4%.

Marathon had a strong quarter. This growth was led by increases in their glides two of consumables recurring revenue.

In addition, the marathon team has done a nice job launching their new single use bronchoscope product line well on path to becoming a meaningful product for various on within the first year of launch.

India I had another great quarter.

This quarter strength was rooted in India is electromagnetic and optical measurement systems used by several Oems and surgical applications, great job again by the MD team.

Neptune operating and supply chain teams are working aggressively to boost production, which we expect to see the benefit of as we head into 2020.

And consistent with our expectations heading into Q3.

The business is started taking cost actions in Q3 and will continue into Q4 to best position. These businesses for 2020.

Importantly, this group did a tremendous job managing margins in the quarter.

We expect the sale to close at the end of this month.

We expect most of these delayed shipments to occur after the closing of the divestiture.

We see our medical product business is growing mid single digit plus for the final quarter of the year.

We expect Neptune to grow low single digits as they are working to expand their static meter supply chain capacity and we expect our short cycle industrial businesses to be down high single digits. Finally, as we mentioned before we expected divestiture of do tend to close later in this month.

And finally revenue for our process technology segment for the quarter were $160 million, a decrease of 5% on an organic basis.

Relative to CCC, we continue to see strengthened their LNG project pipeline and we are the contracted vendor and essentially all new projects coming online over the next several years.

For family.

Turning to our outlook, we do see and expect a weekend outlook for upstream oil and gas businesses as we head into Q4, given this we're guiding to mid single digit organic revenue declines in this segment for Q4.

Excellent please.

A range of 12 98, the 13 or two compared to our prior guidance of 12 94 to 13 of six.

Also for establishing Q4, adjusted Deps guidance to be in the range of 332.

336.

Finally, we expect our tax rate to be approximately 22% in the quarter.

Next slide please.

As we turn to our final slide before today, we continue to see strength and our niche market strategy and governance model that promotes nimble local execute.

This led to strong performance in the quarter across the enterprise.

EBITDA margins were up 90 basis points to 36.7%.

Yes grew 6% to $3.29 and TTM free cash flow increased by 12%.

Also and importantly, we successfully deployed $1.8 billion for two terrific.

Roper like software businesses in the quarter computer East and I'd pipeline.

Finally in the quarter, we're able to reach an agreement AMETEK to divest get tamper 925 million and complete a $1.2 billion bond offering is very attractive long term rates.

Great execution across the entire enterprise and the quarter.

As we look towards 2020, we see several encouraging trends.

Next our balance sheet remains very strong and will only be strengthened by the gets hand divestiture proceeds.

Approximately 200 million for the enterprise beginning in 2020.

Now as we turn to questions, we want to remind everyone that what we do is very simple.

We incent our management teams based on growth.

We have a culture of mutual trust and transparency and finally, we take our excess free cash flow and deploy it to buy businesses that have better cash returns than our existing company. These simple ideas deliver powerful results.

Now, let's turn the call over to your questions.

Thank you we will now go to the question and answer portion of the call. If you would like to ask a question you may do so by pressing the starts now by the digit one on your Touchtone telephone.

We have said.

Our callers limit their questions to one main question and one follow up question.

We will begin with Deane dray RBC capital markets.

Yes, I was probably closer to three maybe four cents.

Larger deals and so we'll tend to take more consultancy, our conservative posture on the timing and they just they just came in a little bit earlier than we thought.

Got it and then on the congestion tolling when so congratulations on that everyone's been watching this is the as the contract.

Where the first major city in the US will take on this technology. So you already have Stockholm, you already have London are there other us cities at year end negotiations with and you had the capacity to roll out more of these systems.

City, how the funding works out goes.

Got it and then just last one from me just can you clarify on Neptune and this high quite high quality problem of demand on year ultrasonic smart meters are you, losing any business or any customers getting turned away because you can't supply them over the near term or is this going into backlog.

In terms of capacity on our side, but it's not that's all positive from our point of view.

Got it thank you congratulations.

Yep.

And Robert Mccarthy with Stephens has next question.

Good morning, everyone. Congratulations on a great quarter.

Thanks, a lot of really good things to talk about.

But I think all rather than talk about the good things I'll be more of the Fox Hedgehog.

The catan divestiture.

I think you guys were in print.

Got a year ago, when you announced sale to thermo.

$150 million in sales and then I think the most recent press release suggested a $180 million, but now I think you cite cited for the full your expectation of.

Some disappointment there so what is the updated expectation for 2019 revenues for contained in the context of what you've already disclosed.

So.

Okay, Alright fair enough I'll, I guess I'll take care of some of that offline.

And I am more positive light, obviously no longer to more on Neptune.

In attending some industry conferences recently around the smart grid in general and grid automation in general across a variety of whether it be electricity water et cetera, with utilities, there seems to be kind of a rising wave that cannot be of of the internet of things and data as really.

Nice secular growth story here and could be the bleeding edge of Aiotv over the near term are you seeing from what Youre seeing neptunes markets and the software opportunities there.

From a capital deployment perspective are you seeing a sea change in that market does that becoming more attractive to you and perhaps history would suggest any color. There in terms of what the secular organic dynamics are with respect to that general vertical.

So.

Our experience with in this water industry as I don't think any theres no seachange, it's sorta tectonically changing it slow and pace than conservative that said for many years.

At least three or four that I can think going through the Neptune strategic plans. They have focused a number of resources on what they call network as a service and then also.

The data that comes out of their water meter to be able to do more.

More leak detection and more reporting to the customers on sort of their utilization patterns et cetera. So it is certainly attractive Neptune opened in R&D Center, and a software development center and the Atlanta market the sort of how some of these resources that said it is a small part at Neptune today I mean Neptune is.

Is and is the leader will continue to be the leader both in the mechanical meters and emerging on the sort of static ultrasonic meters and as you know that technology that we place on top of the meter has been a long term differentiated advantage for us as you don't have to test the meter.

As the reading technology changes from sort of mobile the fixed so thats our views on there and happy to the spent more time of that if you like.

I'll leave it there. Thank you for your time congrats.

That will take a question from Christopher Glynn with Oppenheimer.

Thanks, Good morning busy quarter tied just listen to you.

Curious.

With that on the heels of the efficient reprocessing of the Greek attend transaction, just wondering how you're viewing the market overall for strategic buyers of manufacturing assets in your kind of view of that that whole.

Dynamic around your portfolio mix.

I don't know that the trick question, but we the businesses you know that we have that are on the product side are great businesses they've been in the portfolio for long time are amazing amazing cast producers that enable sort of our meaningfully enable our capital deployment strategy.

Okay and.

I don't know if this is a hedge question or not but.

I didn't hear anything on power plant, just wondering how thats tracking financially and culturally as you think you've had it for about a year now.

Yes, culturally it's great Joe as the leader of that business has done a great job with the culture and and sort of getting on the right growth sort of drivers and footing as we talked about a couple of times in the past well around the time, we acquired the business. We're just on the back end of a sort of an industry.

The wide adoption of lease accounting software to its power plant was a bit of one of many benefactors of.

On the back side of that we had to had and are currently finished ship, finishing retooling. The go to market capability to go back to the old school way of of identifying leads are working leave and closing leads.

Into later stages of the sales funnel, so they've done a really nice job retooling to go to market feel good about the business as we head into next year.

Okay. Thank you.

Yes.

Next question will come from Julian Mitchell with Barclays.

You mentioned that at around with benefiting this quarter from cross selling.

All right Hey, there's a lot in there so I'll try to sort of ticket one by one so it's hard for us to make up a comprehensive our broad based sort of statement across.

Heaviest cost and the SaaS businesses the cost to acquire the customer and so then we want to see the solution sort of stacked on top of that over a long period of time. So we're certainly that is certainly the strategy of each one of our businesses, but if that's a generalized statement. It's hard to give you a specific one because each business is deployment against that is unique to that business.

And as they get the benefit of all the new releases when the new releases are released which oftentimes on almost most cases is not the case when its hosted by the customer and lowest goes on but there are not financial incentives.

To migrate to the cloud and again, maybe the final thing I would say is this is theres no push from us to mandate X percent of revenue gets into the cloud by why date. This is very much company by company and that companies being pulled by their customers.

Go into the cloud and as a result, the businesses are various states the maturity.

Yes, so it's the cost the company we have most index to commercial construction to us is our constructconnect business.

The principal business that they are in is they have.

Virtually every tensed commercial.

Become more and more valuable to the cuts to the contractors as the economy gets weaker and weaker and so it's somewhat has a sort of a.

Yes.

Hey, guys good morning.

Hey, good morning, running as Steve.

So you guys didn't give.

Total company organic revenue update for the year for guidance I think it was 4% last quarter, what's that going to be now.

Yes. So we gave each of the segments I think you'd be add up all the segments for the fourth quarter, it's going to be pretty close to Q to Q3 organic so in the 2% range. So I think if you add that off for the full year were somewhere just north of three.

Okay.

Think they said something like 70 million Bucks in EBITDA Im not sure how much you know DNA goes with that but what is the kind of dilution for next year from that deal.

Yes, so our best estimate it'd be 45 to 50 million of EBITDA would go away that was in 19, obviously wouldn't have in 2020 as Neal mentioned it really is.

Very consistent that their last quarter's their biggest scores as I'm showing no firm from covering us for a long period of time and actually November December is 35% to 40% their annual EBITDA typically so that's our best guess is what are what number as you know, we'll get that we won't get next year.

November and December .

Okay, and then one last one I mean by acknowledging the pipeline looks good at power plant, what what is actually what was actually the growth at that business in the quarter.

Okay.

Ill now move to a question from Joe Ritchie with Goldman Sachs.

And Joe you may be muted teams on mute.

Hearing no response from that mine will move to next question and that will come from Joe Giordano with Cowen.

Yes, it's pretty simple right. So it's a little north of 500 million dollar contract about half of that is the design and implementation of the rating half is six years worth of maintenance operations.

Our profile create sorry in the margin profiles pretty consistent across the totality of the of the period.

And then just another one.

Without giving any names are there any businesses within your portfolio that youre looking at or that makes sense to divest and the next year. So.

Understood. Thank you for time.

Yep.

Just one morning.

Thank you save a slightly below the average for the company.

You see.

And.

Project opportunities.

Sure. There's there are.

Is that number and my fingertip, a dozen or so a larger LNG projects that are.

In the feed.

Sort of than the planning phase late stage of planning phase across the globe and we're specified in I think 11 of the 12 and still have an opportunity in the 12 and so we're at the long term.

Got it project positioning and see what you've commented on now for several quarters is selected.

What kind of revenue growth should be talking about there.

Compared with let's say the recent past.

It's it's these as you know these these projects that many years to unfold and so we're talking about just the very long term. The next several years of CCC bases projects very long lead time projects appears to be quite robust don't want to get into the comments of specific or growth rates of specific companies.

And when that CCC was first acquired in 1992.

They were doing almost entirely retrofits.

Existing projects because.

The compressor companies that were selling compressors to these projects we're not using.

CCC software.

It sounds as if that is completely changed is that is that correct are you now I would say adopted.

I went down it's been complaints.

With the various customer opportunities across the globe to do more of getting larger percentage and market share of the retrofit opportunities to get more back in balance and so we can fully endorsed the strategy and look forward to execution against it.

Is your and finally as your principal competition in that business still the Oems as it was.

Sure Yep.

Okay. Thank you.

Thank you.

Thank you everyone for joining us today, we look forward to speaking with you during our next call.

With that ladies and gentlemen, this does conclude your conference for today. Thank you for your participation you may now disconnect.

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