Q4 2021 Roper Technologies Inc Earnings Call
Good morning, the Roper Technologies' conference call will now begin.
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After todays presentation, there will be a question and answer session.
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Now, let's turn the call over cause back Murphy, Vice President of Investor Relations. Please go ahead, Sir good morning, and thank you all for joining us as we discuss the fourth quarter and full year financial results for Roper technologies. Joining me on the call. This morning are Neil Hunn, President and Chief Executive Officer, Rob Crisci, Executive Vice President and Chief Financial Officer, Jason Conley Vice Pres.
Didn't and Chief Accounting Officer, and General Callahan, Vice President of Finance earlier.
Earlier. This morning, we issued a press release announcing our financial results. The press release also includes replay information for today's call. We have prepared slides to accompany today's call which are available through the webcast and are also available on our website now if you'll please turn to page two we begin with our safe Harbor statement. During the course of today's call. We will make forward looking statements.
You 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 and now please turn to page three.
Unless otherwise noted we will discuss our results and guidance.
On an adjusted non-GAAP and continuing operations basis for the fourth quarter. The difference between our GAAP results and adjusted results consists of the following items.
Amortization of acquisition related intangible assets purchase accounting adjustments to commission expense, a sunquest trade name and technology asset impairment related to the merger with classes and lastly income tax restructuring associated with our pending divestiture transport reconciliations can be found in our press release and in the appendix of this presentation on our website and now if you.
Please turn to page four I will hand, the call over to Neal after our prepared remarks, we will take questions from our telephone participants Neil.
Thanks, Zach and good morning, everyone. Thanks for joining us.
Turning to page four and review today's agenda as usual, we'll start with our quarterly and full year highlights. We will then provide details regarding our segment performance followed by sharing our first quarter and full year 2022 guidance.
At the end, we'll leave plenty of time to address all your questions next slide please.
As we turn to page five the main takeaways for today's call are first our strong finish to 'twenty one.
That were set up very well for a solid 2022 organic performance and third we have substantial M&A capacity, given our rapid deleveraging last year.
As it relates to the fourth quarter and closed the 2021 financial performance was excellent with double digit growth in revenue.
EBITDA depths and cash flow.
Additionally, because of our strong cash performance last year, our balance sheet is in a great spot as we exceeded our deleveraging plans for the year.
As we look towards our 2022 outlook, we have considerable tailwind that helps set up for a very strong year.
<unk>. This outlook is our software recurring revenue growth momentum.
Given strong market demand continued innovation in new products and an increased shift towards our SaaS solutions, we exit 2021 with robust air our growth so that carries momentum into 'twenty two.
In addition, our product businesses are experiencing strong demand and record levels of backlog, which provides these businesses with an unprecedented level of in hand orders and resident revenue visibility heading into the year.
Factoring all of those together, we expect 6% to 8% organic revenue growth in 2022.
In addition to this organic outlook, our balance sheet is well positioned to allow us to be more meaningfully offensive with M&A in 2022.
So the table is set for us to have great 2022, and continue our long term track record of double digit cash flow compounding.
Now, let me turn things over to our CFO , Rob <unk> to walk through our financial summary, Rob. Thanks, Neil Good morning, everyone and thanks again for joining us turning to page six looking at our Q4 income statement performance. Zach stated earlier all the financials here are reported on a continuing operations basis unless otherwise.
Noted.
Both organic revenue and total revenue for the quarter increased 13% to a total of 1.51 billion EBITDA grew 12% to $576 million EBITDA margin was down 10 basis points versus prior year at 38, 1% that all resolved and adjusted diluted earnings per.
Share of $3 73, which was above our guidance range free cash flow grew 4% in the quarter on top of last year's 23% fourth quarter growth cash conversion was once again very strong at 35% of revenue and 92% of EBITDA Q4 was a nice finish to a very strong year end positions us.
Well for a great 2022 next slide turning to page seven reviewing the Q4 results by segment Neil will discuss the full year segment performance in more detail a little later, but we wanted to just highlight the Q4 results by segment here all four segments grew double digits organically as our businesses execute.
It very well and continue to win within their niche markets application software segment grew 10% organically with broad based strength throughout the segment EBITDA margin increased to 43, 8% for network software excellent, 14% organic growth with EBITDA margin increasing to 52, 3%.
For measurement and analytical solutions, 15% organic growth was broad based with double digit growth at Neptune medical products and our industrial businesses EBITDA margin was 31, 3% as our businesses continued to navigate supply chain challenges lastly for process technologies, a nice rebound from last year's.
Declines with 17% organic revenue growth and EBITDA margins of 31, 2%.
Next slide turning to page eight which is a summary of our full year 2021 financial highlights.
For full year 2021 organic revenue growth was 9% we benefited from both our strong organic growth and meaningful contributions from our recent acquisitions to achieve 19% total revenue growth EBITDA grew 22% for the year to exceed 2.2 billion EBITDA margin increased 90 basis points to <unk>.
38, 2%.
Full year depths increased 23% to $14.18, which was above the high end of our guidance range free cash flow performance was outstanding for the year with 19% growth to 1.8 billion, our free cash flow represented 31% of revenue and 82% of EBITDA excellent cash conversion.
Which is of course, a key component of brokers business model and value creation flywheel, we are well positioned to continue our double digit cash flow compounding moving forward next slide turning to page nine which is the latest installment in our successful deleveraging story, including our discontinued operations total operating cash flow for.
2021 exceeded $2 billion after capex and servicing of our dividend nearly all of our excess free cash flow went to debt reduction in total we were able to reduce our net debt by $1 7 billion in 2020 , one which exceeded the deleveraging outlook. We shared with you last January .
By about 200 million, we ended the year with net debt to EBITDA of 3.1 subsequent to year end, we closed the previously announced $350 million detect divestiture, which has further reduced our leverage the closing of the transport divestiture expected for later this quarter, we'll bring in over $2 1 billion.
Of additional after tax proceeds we are pleased with our performance here as we once again demonstrated our ability to quickly delever. After a large acquisition reinforcing our commitment to our solid investment grade ratings, so with that I will turn it back over to Neil for the remainder of our prepared remarks Neil.
Thanks, Rob, let's turn to page 11, and walk through the 2021 highlights for our application software segment.
Revenues here were 2.38 billion up 8% on an organic basis and EBITDA margins were 44, 2%.
Across the segment, we saw organic recurring revenue, which is a touch north of 75% of our revenue for this segment increased 8% for the year.
This recurring revenue growth is enabled by strong customer retention continued migration to SaaS delivery models cross selling activity and new customer adds.
Across this group of companies the financial strength was broad based the highlight of few companies Deltec. Our enterprise software business that serves the U S. Federal contractor architect engineering and other services and markets had another great year.
Delta had nice gains in both our government contracting and private sector end markets gaining share in each and driving considerable SaaS adoption.
Delta continues to benefit by having favorable secular tailwind.
Turning to <unk> for a great year exceeding the EBITDA expectations that we outlined at the time of the acquisition in 2020.
Verona forehead impressive demand from their enterprise customers as they continue to partner with PNC agencies to tech enable their customer acquisition quoting and underwriting workflows.
Notably vertical had record quarterly bookings in Q4, which only adds to their air our momentum.
Amy do you and your team congrats to a phenomenal start as part of the Roper family.
During the fourth quarter, we combined <unk> and Sunquest to create the largest global lab diagnostics and informatics business together the businesses will begin integrating their go forward product Roadmaps and innovation efforts and operate under the classes brands.
Also of note both closest and data innovation set records by a wide margin for bookings activity in 2021.
Finally, as it relates to this group, we recently completed the acquisition of Horizon Lab systems, which adds public health water and environmental Laboratory cloud based software to the global classes product portfolio.
<unk> continues to be a solid performer for roper taking share in 'twenty, one from our primary large law competitor.
Also starting in 2020 and gaining momentum last year either.
<unk> is seeing a meaningful shift towards our cloud offering.
<unk> drive substantial increases in our recurring revenue stream.
Finally, we completed a small tuck in acquisition American legal net which will extend and enhance <unk> court docket in software solution.
Finally, stratas combination with EPS side, it's worked out wonderfully well today straddle partners with about half of the U S acute care hospitals to help them manage and forecast and plan their operating and capital expenses and continues to extend both market share and product cross selling.
Looking to the outlook for 2022 in this segment, we expect mid single digit growth that is driven by our <unk> or recurring revenue momentum, making for a solid year for this segment.
And with that let's turn to our next slide.
Turning to page 12, as a reminder, the financial performance for this segment as well as the next two MAA S&P T are shown on a continuing ops basis.
2021 revenues in our network segment were 134 billion up 11% on an organic basis and EBITDA margins clocked in at 51, 1% for the year.
The exceptional organic growth performance in this segment was underpinned by very strong growth in our recurring revenue, which is roughly 80% of the segment's revenue.
The growth in margin performance in this segment was broad based and well distributed.
As we dig into the business specific performance, our U S and Canadian freight match businesses were just amazing throughout 2021.
Market conditions were very favorable which led to record levels of network ads, especially on the carrier side more so the leadership team at <unk>.
Did a terrific job scaling infrastructure to meet the market demands, while maintaining aggressive new product innovation efforts, which led to higher ARPA as well over a longer arc of time, our freight match business has continued to be well positioned to enable the digitization of the spot freight markets.
Also all of our other businesses in this segment saw increasing levels of Ara growth throughout the year, which helps set up for a strong 2022.
The highlight of few foundry did a terrific job of continuing to extend their product advantage by using AI ml to automate tasks within the media and entertainment post production workflows.
In addition foundry is benefited by the continued increases in content creation budget for streaming animation and theatrical releases.
I trade our network food supply chain business rebounded very nicely in 2021, following the 2020 Covid shutdowns.
In addition to benefiting by foodservice reopening I trade was able to meaningfully expand their food supply chain network in 2021.
Our pipeline continues to benefit from the tech enabling of the life insurance distribution model.
And our long term care GPO pharmacy software in home health analytics businesses continue to benefit from the post COVID-19 recovery and a longer term demographic aging of America.
Finally, both RFID as antibiotics had good years, improving in the second half, especially within their health care applications.
Turning to the full year outlook, we expect to see high single digit organic growth for this segment driven by a combination of strong recurring revenue momentum and favorable market tailwind.
He's turned to the next slide.
As we turn to page 13 revenues in our Mis segment were 156 billion up 8% on an organic basis.
EBITDA margins for the segment were 33, 1% for the year again these results on a continuing ops basis.
Before getting into business specific details across the segment demand continues to be very strong as previously mentioned product backlogs ended the year at record levels.
Also each of these businesses are navigating the current supply chain environment.
Strong demand at Neptune continued throughout the year picking up in the back half as Neptune and markets continue to fully reopen.
Also the Neptune team continues to do a great job integrating their core product offering both in terms of the metering and the meter reading technologies.
These innovative product advances helped set net net tuna for many great years.
Verathon was very good last year.
Remember they had a great 2020, which was aided by COVID-19 related demand, but verathon as 2021 was meaningfully higher than 2019, roughly 40% larger.
Over the last two years. This team has innovated like crazy going from zero to number two in the U S single use bronchoscope market launching several new video laryngoscope products and developing a new ultrasound core platform.
Perhaps more importantly in 2021 Verathon largest product offering is now a mission critical consumable medical products.
Our other medical product businesses, especially MDI and Cisco recovered nicely in 2021 as health care spending started to normalize these businesses and our 2022 with record levels of order backlog.
Demand across our industrial business has rebounded with better end market and capital spending conditions, but somewhat hampered by supply chain challenges.
As it relates to the 2022 guidance, we expect to see high single digit growth for this segment underpinned by strong demand and backlog levels, but somewhat constrained by the current supply chain environment net.
Net net we expect a very strong year for this group.
Let's turn to our final segment process Tech.
As we turn to page 14 revenues in our process Tech segment were $499 million in 2021 up 8% on an organic basis.
EBITDA margins were 32, 2% for the year. These results were also reported on a continuing ops basis.
The story here is we saw improving end market conditions across virtually every one of our businesses in this segment and very strong demand in the second half.
Cornell continues to perform well for US. This is partially based on market conditions, but also based on Cornell's product innovation as they're seeing very nice demand pick up for their Iot connected pumping solutions and the share gains are enjoying as a result of their niche focused go to market teams.
Similar to that of our mis businesses. These businesses are being impacted by supply chain challenges, but continue to navigate well through the issues.
Across the group the business has exited 2021 with record levels of order backlog.
As we turn to the outlook for 2022, we expect mid teens organic growth based on strong levels of backlog and solid market conditions.
Now please turn to page 16 as will walk through our 2022 guidance.
For 2022, we're establishing adjusted depths guidance on a continuing ops basis of $15 $25 to $15 55.
Underpinning this depth guidance is organic revenue growth of 6% to 8% and a tax rate of 21% 22%.
As we've said throughout the call we feel quite bullish about our 2022 based on our 2021 recurring revenue growth and the momentum that carries into this year with strong product demand and the record levels of order backlog.
As you look to the first quarter, we're establishing adjusted depths guidance to be in the range of $3 63, and $3 67 again on a continuing ops basis.
Now some concluding comments and we'll get to your questions.
As we turn to page 17 in our closing remarks, we want to leave you with the same three points. We started with we had a strong 21, we're set up very well for a solid 2022 organic performance and we have substantial M&A capacity heading into the year.
As it relates to 2021, our revenues grew 19% to $5 8 billion and 9% on an organic basis.
EBITDA grew 22% to $2 2 billion, which was 38, 2% of revenue.
Free cash flow grew 19% to $1 8 billion, 31% of revenue and 82% of EBITDA.
Finally, we exceeded our deleveraging plan by reducing net debt by $1 7 billion and ending the year with three one times leverage.
As we discussed throughout this call. We are set up to have a very strong 2022 or 2021 software recurring revenue growth provides significant momentum heading into the year. Additionally, our product businesses had and have broad based demand and record levels of backlog.
Taken together and further aided by favorable market tailwind as we expect to see 6% to 8% organic revenue growth this year.
In addition, we have reloaded, our balance sheet and continue to have a highly active and engaged pipeline of M&A opportunities. We anticipate having about 5 billion of available M&A firepower over the course of 2022.
As a result, we have a high level of conviction that we'll continue our double digit cash flow compounding and 2022.
And with that let's open it up to your questions.
Thank you.
We'll now go to a question and answer portion of the call.
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One follow up.
And today's first question comes from.
RBC capital markets. Please go ahead.
Good morning, everyone. Good morning Deane.
We can start with the impact of all my crown supply chain et cetera, and it.
It did come up a couple of points parts in your prepared remarks.
But in the scheme of things it did not sound as.
As impactful as we've heard from other companies, so not surprising and measurement and process. It did have an impact so could you size there what might have been either revenue push outs.
Because I've seen record backlog, so that implies you might not have been able to get some of the product out the door and then just confirm on the software side, what the impact is if any I mean, it's probably limited site access maybe some landing new logos and so forth, but just how does how did that play out and what's the expectations.
In the first quarter, when hopefully we get to some sort of a normal level of activity and access yes.
Yes, so I'll start maybe going in reverse order and then there's a handful of.
Besides there is no supply chain. Unfortunately, so there wasn't an impact and any any any meaningful already non meaningful way on the on our software businesses.
Businesses had been we're working remote for the last two years and so as a complete the omicron Spike if you will as a complete non factor bookings activity as we talked about was super strong in Q4, there so.
That's our view there on our product businesses.
Yes, it was it.
It was more about supply chain and less about omicron and shutdown of facilities I mean, it happened for a week here or there not an impact early in the quarter.
And the issue on supply chain as you hear from other companies is not one thing it is really sort of.
A hornet's nest of small things one of the nice things about our organization as you know is we've got.
<unk> 25, or so product businesses and 25 groups of people focused on their bespoke issues and they did a very nice job in Q4 working through that little bit of margin pressure in those businesses at the gross margin line in Q4.
Just sort of expediting and sort of pulling things forward to be able to meet demand.
Couple of other things I would say in the alternative to Rob is as we look to 2022 those issues have abated, we expect them to sort of lessen in the second half, but still persist to some degree and the final thing is the companys. Their teams have done a very nice job of sort of taking the price taking price.
And then offsetting.
Going forward in 2022, the impact of the inflationary environment associated with this Rob anything you want yeah. That's right. So yes, it's clearly impact the product margins a little bit you saw that in the fourth quarter. We're assuming Q1, it's similar and then a little bit of gradual improvement throughout.
Throughout the year on margins for the product businesses.
And did you size or can you size any missed revenues or was it not meaningful.
It was not meaningful.
Yeah, I mean look we're at record backlog levels as all other businesses are that sell products and so we will benefit from that moving forward, but we wouldn't say it was meaningful to sort of revenue in the quarter.
Yeah.
Thank you ladies and gentlemen, our next question today comes from Christopher Glynn of Oppenheimer. Please go ahead.
Okay.
Yes, thanks, good morning, everyone.
Morning.
Congrats on rebuilding the balance sheet there just.
I wanted to ask about the pipeline you know.
But how are you seeing the toggle between whats.
Currently most actionable versus.
Decision trees around holding fire I think sometimes you've talked about.
Don't do the very good at the expensive great.
Okay.
Well I want to make sure we understand your question I mean, I think the in terms of the opportunities that are out there for acquisitions I mean, it is a it is theres a lot of opportunities are always a lot of opportunities. The pipeline of activity is full theres lots of discussions.
Diligence, we're always in some phase of diligence at some point something.
The thing that we've said for a very long period of time. The 10 years I've been here is that we continue to invest through cycle.
We're a permanent home we're trying to find the very best businesses, we can find because we're going to own them over very long arc of time and that the compounding effect overwhelms any sort of.
Short term valuation than here or there.
Compounding overwhelm thank you sort of cycle.
In December the perfect visibility to what the future holds which we don't claim to have.
That's great helpful. Thanks, and then.
Youre pretty bullish even multiyear comment on Neptune, just wondering if you could add drill in there a little bit and what youre seeing specifically for 2022 for Neptune and that particular compound or into 2023 24.
I think it's we're not going to try not to give guidance on the forward year for a specific business.
But youre right the commentary on our view of Neptune and what Dan and the team is doing there is quite bullish it's rooted in three things principally around the products. Both the meter itself doing more static from mechanical the reading technology.
Going from go into more cellular and then once you have both of those elements in place then Neptune becomes more of a data business, helping its customers sort of navigate the data and work with our customers in a more meaningful and impactful way.
Importantly on the first two especially the meter technology itself. We think we have some very real proprietary advantages in the static ultrasound technology that we're using both on the on the residential side and commercial side.
We are quite bullish about going forward.
Okay.
Thank you and our next question today comes from Allison <unk> of Wells Fargo. Please go ahead hi, good.
Good morning.
Just wanted to talk I know you mentioned you know strong freight matching obviously I'm a little biased here in terms of what I cover.
When we think about that obviously the network challenges, but a huge spotlight on that market and certainly supports opinion entrants, but how are you managing I would say that risk.
Terms of the viability of some of the new entrants that are coming onto your system.
Our system as well as competitive dynamics any thought there.
Yes, so as you know is wonderfully positioned and the spot freight market.
As one of two.
Primary.
Competitors are players that help match, the shippers and the brokers and the carriers I should say.
And as you think about the tech enabling of the brokerage model.
Fits right in the center of that and as their business model and futures only aided by that.
In terms of the tech enabled brokers.
They are just all brokers are becoming tech enabled theres. Some that are native taken tech enabled and some that has sort of migrating our business models, all of which our customers and all of which were helping do their job to.
Do their business with less human interaction to more more more computer driven connectivity.
Got it that's helpful and I.
And I guess leaning on that competitive dynamic meters, obviously you know.
With the growth and opportunities certainly attracts new innovation, there any change in competitive dynamics or things that you're concerned about and obviously Neptune seems like it. It's it's growing quite nicely for you any thoughts that was your question Allison on the competitive dynamics on the ATM freight matching or on their own Neptune.
I encourage you to look at first but this one okay. Yes. So no. So it's something that we pay very close attention to.
The team at <unk>.
<unk> has a very open ecosystem they partner with many folks and so we pay attention to all of that but this is a very vibrant two sided scaled network scale matters, a ton here and I mean, when I say a ton I mean, there's a huge.
A rate limiter for competition, you've got to have scale on both sides of the network to be effective very hard not impossible Super Super hard to create de novo, but we pay attention to that and in any competitive.
Additive activity and we need to think about how to counteract that on the Neptune side.
This is this is over a very long arc of time.
When we think that the metering technology can can render a market share advantage I'll remind you that Neptune seemingly every year for 20 years he's out.
50 to 100 basis points of market share I think we're clearly the leader in the North American water utility metering space and we'll just we expect that will just continue eating out a little bit of share gain each year.
Okay.
Thank you and our next question today comes from Julian Mitchell of Barclays. Please go ahead.
Hi, good morning.
Maybe just wanted to dial into the.
EBITDA margin guidance a little bit.
You're guiding sort of EPS up around 9%.
For the year at the midpoint sales up maybe a point or two lower than that.
Right now so were looking at EBITDA margins.
Are we expecting those to be up sort of 2030 bps or so at the midpoint.
And any color around those product businesses, just to understand in measurement and analytics and in process are we expecting margins.
March for the full year as a whole in those two divisions.
Yes. So we're we have EBITDA leverage right on our on our organic growth around 40%, which is generally pretty normal so that on a full year basis, I think youre right. We've got total EBITDA margins up a little bit sort of embedded in the guidance the software businesses are.
44% EBITDA for application 51 for network, we've got that about the same year over year very stable there youre growing youre investing your you know where I have a very nice organic growth in those businesses. This year, so that that'll drive a lot of organic EBITDA growth at those margin levels and then as we mentioned on products, It's a little.
Lower margins in the first half of the year similar to Q4, and then I think we'll benefit from a lot of the price cost things that we've been doing as we get to the second half margins get a little better. So I think on a full year basis again their margins are pretty flat year over year maybe.
Maybe a little bit of improvement as we get to the second half.
That's helpful and just my follow up question on the free cash flow outlook.
A very good performance last year with sort of 82% conversion out of EBIT.
Anything you'd call out sort of one time ish, helping that and how should we think about cash flow conversion in 2022.
Yes so.
There were a couple of things that helped us this year for sure I mean, we had great working capital performance, which which we view will always have especially when you have highly negative net working capital of revenue minus 15%.
That drives great conversion in 'twenty in particular, where some tax benefits that we benefited from.
And so you know the 80% to 83% conversion is great.
We're generally feel like if we're plus or minus 80% conversion.
Kind of where we start and then and then we see sort of the one the one off items that happen year over year. So that we always do I think will be around 80% and then sometimes it ends up a little bit better.
Okay.
The next question today comes from Scott Davis with Melius Research. Please go ahead.
Good morning, guys.
Hey, good morning.
Neil can you talk a little bit about what youre, what youre trying to accomplish with combining <unk> and sunquest.
And how do you really combined businesses like that can you integrate that can sales for example.
Combined.
I understand any other functions, but just trying to think about.
Holistically, how that helps you guys out yes.
I appreciate the question good morning to you. So first I would say as we've gone through just our portfolio work over my time as being CEO . There as we've tried to see if there are little or small pockets, where it makes sense to put businesses together, we did it a couple of years ago.
With with Seaboard of Horizon that we're both doing very similar things into the education market and now with <unk> and Sunquest as you know they are doing literally the same thing just sunquest historically in the U S and <unk>.
Ross Europe . So in terms of this integration there is they are still going to be three core technology platforms for lab information U S UK and global but this integration is really all about then sharing the innovation from that point forward, the micro services or service oriented architecture allow.
Owes us to do that.
The first three and the Q, our advanced analytics to help the laboratory.
Do their job and make better decisions.
Acceleration of anatomic pathology, which is the tissue side have allowed into the cloud and then increasingly the adoption of molecular or genetic into the lab space. So this is more about the product integration. If you will on a go forward basis go to market teams remain very similar.
As they are selling bespoke into their very specific geographies. So the go to market.
<unk> the same final thing I'd say here is the teams are totally kicked up about this internally theres a ton of enthusiasm and excitement that the teams now start 500 people 12 countries 21 languages.
And part of the largest lab diagnostics business on the planet now.
Okay that makes a lot of sense I, just just a quick follow up on that it is.
Are the customer needs essentially the same when you go around the world now Neil when you think about that product offering.
The customer needs are remarkably similar.
You have the fluid side of a lab the tissue side of the lab and increasingly the Gen V genetics or molecular labs, and then the integration of the allergies. If you will rarely now do you have a genetic test without some sort of tissue or or blood or urine tests. So how do you integrate the pathologies as a major theme. So those things are very similar.
And so if youre a lab in the U K and NHS NHS or elaborate in the U S or a lab in France, or Spain or wherever it is the needs are very similar.
Okay. That's what I thought good luck guys. Thank you.
You.
And our next question today comes from Joe Giordano with Cowen <unk> Company.
Hey, Good morning, this is Rob on for Joe.
I just had a couple of questions about like sound very nice pipeline.
You called out some of the secular tailwind behind.
These businesses.
Just kind of curious how much you have good penetration there already but how much of the growth and further gains youre going to see in the future from like new enhancements or upgrades to the existing platforms or products that you offer there and is there like an opportunity to maybe increase like spend per customer or deepen that wallet as you go forward.
So the answer is.
I'll try to generalize them that gives you a question around foundry pipeline totally different markets, obviously entertainment in life insurance distribution sort of workflows our channel.
Both businesses have net retention well north of 100% right, which tells you that you have an appreciating asset from your customer base or selling more into your customer base.
In any given year that is largely a result of two things. One is your customers are growing with you they're growing as youre growing with them and then to your selling them more value more things.
You are correct in that in foundries case.
A lot of their growth has been they're going to sort of ride the tailwind of the 8% to 12% of content spend that happens in media entertainment between streaming animation theatrical but then the workflows and postproduction are remarkably TTS Emmanuel and so as we automate those workflows. Those are modules that we can sell to monetize the investment and innovation that we're doing there.
Similarly, conceptually at least that I pipeline.
This is a.
Business that we bought it.
So it was all about and the strategy continues to be what they call straight through processing, how do you get a call from a quote of life insurance to underwriting life insurance, how does that happen with minimal to no human touch and so being able to do that and automating those workflows.
As a as a huge task, but as you do that you are creating a ton of value for the distribution channel and you're able to monetize that through the product.
That's great. Thank you very much I'll pass it along.
Thank you.
And our next question comes from Robert Baird.
Please go ahead.
Okay.
Yes. Good morning, Thanks for taking the question.
Neal you've spoken in the past about a heavy focus on software in the M&A pipeline and I'm just curious given what we've seen around public market valuations there over the last couple of months.
How private market valuations have responded and.
Is it requiring more patients on your part.
If if a reset of some sort of needs to happen there just what youre seeing in private market.
We're always patients.
So we should start with that and so it's.
Where a patient and disciplined relative to the asset selection the value that we ultimately try to transact that I'll tell you my my experience here at Roper for a decade and the experience that predated Roper by 15 year sort of being in tech M&A for 20, or 25 years now as the private markets always lag by some.
A quarter or two or three the public markets relative to valuation swings to the extent there are meaningful.
And so that's what our expect my personal expectation would be to the extent that we have.
Structurally lower public valuations, where software businesses then it might take a couple of three quarters for those to filter into the private markets unclear if thats the case right and so.
So we will be patient I also said earlier that our analytics, we always are reviewing the analytics.
Our analytics suggest that it's better to buy a great business.
The market clearing price at the time and let the compounding sort of began rather than it is to try to see if you can wait for that asset and safe.
Five of a turn of EBITDA before or by a lower quality or by a lower quality business, that's right, but we will be and we always are patient.
I understand.
And just as a follow up you had commented on <unk> EBITDA coming in above plan for the year I'm curious two questions I guess, what drove that and then.
When you purchased <unk> for you.
Talked about a mid single digit growth rare.
Revenue expectation, there, but believe that could be conservative or over time and I'm just as you've owned the business a year what needs to happen.
To move that mid single digit growth perspective, higher so the overdrive on the earnings was.
They just they did a better job of managing our costs and really the mix came in on the revenue line. So it was.
So a little bit is it first part of the year. They are still having a hard time spending money sort of with COVID-19 . So there's a little bit of that but more importantly, the momentum that the business last I mean record bookings in Q4, and just the feedback that we're getting from the customers at the enterprise level, then a nice little tuck in that helps them get some.
Customer acquisition on the lower side of the P&C agency space, that's doing well in the first few weeks in terms of you're right. We did the expectation when we bought the business is the mid single digit growth business. It's still very much is that.
Is there an upside to high single digits over a longer arc of time, we'd like to hope so Amy and her team have a very well articulated data driven market driven outside in strategy and there is some execution associated sort of inflect the growth rate a bit higher but right now we'll hold it mid singles and want to see EMEA team posted a few years of better performance.
For I call it high singles.
Thank you and our next question today comes from Steve Tusa of Jpmorgan.
Oh, Hey, Hey, good morning, Hey.
Hey, good morning, good to hear you.
The.
Some color on the first quarter.
Atlantic.
<unk> trends.
What the guidance for first quarter organic growth and then I'm sorry, I just wanted to clarify on the on the EBITDA margins.
What do you what do you guys expect for the first quarter kind of level year over year basis.
Yeah. So.
So we have a 668 organic revenue guide for the year, it's really pretty consistent throughout the year for the first quarter. The software businesses are a little bit stronger given all the momentum we have coming out of.
Out of Q4, and then the product businesses are a little bit lower given some of the supply chain challenges. We've spoken about and then I think as I mentioned the EBITDA margins. We have for Q1 are flat sequentially to what we had in Q4 for the company.
Okay, Great and then.
Just on the on that kind of comment about double digit free cash flow growth and compounding can do.
Is that kind of.
At a high level of guide for the year and could you will you be growing free cash flow at double digit.
Without without another acquisition or would that take another acquisition to grow yes.
So it's not a guide it's a it's a what we do here at <unk>. So I think if you take our organic and you take capital deployment and you look at us over.
Any given year, we're certainly over a couple of years, where double digit compound or so.
That'll that'll that'll continue to be the case and we've got a lot of firepower for M&A that will certainly help that number here in the next couple of years.
Thank you. Our next question today comes from Brian Lau off research. Please go ahead.
Hey, good morning, everybody I just wanted to talk about the network software and systems Guide So high single digits in 'twenty two after a couple of strong mid to high teens quarters <unk> kind of meaningfully ahead of the historic trends of like mid single digits does this new medium term kind of algorithm for the segment and is this where you think application software can get.
As you kind of continue the SaaS transition there as well.
Yeah, well you just historically.
Trans score was in that segment right. So that the software business have a little bit higher organic growth profile than the old segmented with with trans score with a little bit of more up and down given on various projects and I'll turn it over to Neil to.
Yes.
I think that workday has been strong it's been strong across the board as we highlighted this quarter much of 2021, there was like Super strength at our at our freight match businesses both in North America.
And Canada, so super strength of moderate a little bit while the rest of the portfolio improves a little bit but.
This has been a great couple of years last year. This year for for network application software businesses are great.
They're all of them sort of are very steady at a mid single digit growers as we transition more.
More of our revenue stream away from perpetual into recurring.
Over a long arc of time is there a chance that that can inflect, a little bit higher I believe so, but it's going to take a few years to do that.
Okay, Great and then just on a measurement.
Could you just clarify what the.
Growth would look like in 'twenty, two without supply chain constraints versus that kind of high single digit outlook.
Hard to say I don't even have to quantify very hard to say I mean I think.
Probably in the same ballpark.
Thank you ladies and gentlemen, our next question today comes from Brandon Wuxi with Alliance Bernstein. Please go ahead.
Good morning, all thanks for taking my question.
Pleasure.
Does it look at application software and network software and systems, just speaking to the recurring revenue growth would you say that sort of active SaaS transitions are a drag on the top line here or are we sort of entered the phase where they're driving topline growth.
Proportionately.
So appreciate the question love talking about this one so.
We believe in the application software business that the transition to SaaS is a net growth driver you have two opposing factors going on you have as you transition new clients to the SaaS recurring models, obviously, that's the classic J curve as it relates to the perpetual where end year, that's a bad guy.
Over the long term that is a great guy because you have a higher level of recurring revenue offsetting that.
We have these these businesses that have very large installed bases of customers that are paying maintenance in fact, it's about $900 million a year plus or minus is what our maintenance stream as across our businesses that maintenance gets transitioned to SaaS.
I don't know call it a one 7% to 5% uplift and so it becomes a net growth that the growth driver in year tends to offset the negative J curve if that makes sense. So we believe it's a net growth driver over a long arc of time. We also just in as opposed to drift on that we don't force the migration.
<unk> on our customers, we the customers are pacing the migration to the cloud. So that's why this is going to take five plus years, maybe tend to sort of fully migrate to the cloud.
We are going at the pace of our customers, but it is that's our view on the net growth driver as we migrate to the cloud.
Excellent. Thank you thank.
Thank you.
And our next question today comes from Alex It's clear Harbor asset management. Please go ahead, Hi, Hi, Good morning, Good morning, Alex I didn't see in our in the slides your working capital to sales ratio.
What is that doing.
Yes.
Yeah.
No. We used we used to have a slide it's very consistent.
Mid teens negative right.
It.
It is just part of the model now, especially post trans score when we when the working capital went away. So we're not updating it each quarter, but it's the same as it was last quarter. Okay, Yes, minus 13% is where we sit today minus.
Minus 13.
Yeah, Okay. Thank you.
On Transco and when do you expect to complete that.
They're completed in this quarter.
At quarter.
Uh huh.
Are you.
And you probably can't answer this but are you waiting to get that money to make an acquisition.
No no we have the ability to make acquisitions before that before the cash comes in.
Ladies and gentlemen, this concludes our question and answer session.
I'll turn it back to you for any closing remarks.
Thank you everyone for joining us today, and we look forward to speaking with you during our next earnings call.
Thank you.
Thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.