Q3 2022 Roper Technologies Inc Earnings Call
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Good morning, the Roper Technologies' conference call will now begin.
Today's call is being recorded and all participants will be in listen only mode.
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I would now like to turn the call over to Saks mock senior Vice President of Investor Relations. Please go ahead.
Good morning, and thank you all for joining us as we discuss the third quarter financial results for Roper technologies.
Turning 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 President and Chief Accounting Officer, and Shannon O'callaghan, Vice President of Finance.
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, which are subject to risks and uncertainties. As described on this page in our press release and in our SEC filings.
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 continuing operations basis for the third 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 transaction related expenses for completed acquisitions.
Lastly, we have adjusted our cash flow statement to exclude the cash taxes paid related to our divestiture activity GAAP requires these payments to be classified as operating cash flow items, even though they are related to divestitures reconciliations can be found in our press release and in the appendix of this presentation on our website and now if you'll please turn to page four I'll hand, the call over to Neal after ours.
Their remarks, we will take questions from our telephone participants Neil.
Zack and good morning, everyone.
As we turn to page four will walk through our usual agenda highlights for the most recent quarter followed by color commentary for each of our segments.
Ending with our increased outlook for the year.
Let's go ahead and get started next slide please.
Yeah.
As we turn to page five the main takeaways for today's call are first we had another great quarter of operational and financial performance and we're further increasing our outlook for the year.
Second earlier this month, we acquired another leading niche software business frontline education.
Third we continue to have substantial M&A firepower north of $4 billion.
Fourth and perhaps the most important the new higher quality Roper portfolio is becoming increasingly more evident and we've never been more excited about our future.
As it relates to the operating and financial performance in the quarter. We're pleased that revenues grew 10% on organic basis and that the strength was broad based across our three segments and that margin performance improved as well.
Consistent with our commentary during the last several quarters not only did we grow nicely in the quarter, but the quality of our underlying business also improved as we saw our software recurring revenue base grow 11% on an organic basis.
More on frontline in a moment.
Based on the strength in Q3, and our expectations for Q4, we're increasing our organic growth outlook to north of 9% for the year and for those reasons together with the addition of frontline, we're increasing our full year depth guidance by 57.
At the midpoint.
And finally, we've been active in the M&A market over the last few months, we deployed just over 4 billion $3 7 billion for frontline and $300 million for two bolt ons, one for Dell Tech and the other for Adams.
To this end even after our recent $4 billion of capital deployment, we still have a large amount of available M&A firepower over $4 billion.
We continue to be very active in the M&A markets, but as you saw in Q3 and as always.
We will remain super patient and highly disciplined to ensure optimal deployment of our available capital.
Finally, we feel great about the improving quality of the portfolio and the associated financial and operating results. All of this is made possible by our incredibly committed and passionate teams and associates.
To everyone.
Turning to the next page.
As previously announced we're excited to introduce to you another niche application software leader, which we've added to the Roper portfolio frontline education.
Of note we closed this transaction on October 4th.
Frontline is a leading provider of SaaS software solutions targeted to the U S. K 12 education market.
Frontline is an exceptional business, which not surprisingly meets all our acquisition criteria, including being the clear leader that delivers administrative in HCM solutions purpose built for the K 12 market.
Having multiple durable growth drivers.
High single digit organic growth outlook.
High recurring revenue north of 90%.
Great cash flow characteristics.
And a passionate high quality team.
While early days, we are delighted to welcome frontline to the Roper family.
We will be their permanent home going forward.
This is just another great fit relative to our capital deployment and corporate strategy not only to increase the scale of our enterprise, but the quality as well.
Next slide please.
As we turn to page seven we want to take a moment and highlight the recent transformation of Roper and our higher quality portfolio.
To that end the vast majority of our 27 businesses save for their smaller size could be a highly successful standalone, leading vertical software or tech enabled product company.
Each of our 27 businesses are leaders in their respective niche markets.
Our businesses serve the mission critical needs of our customers and have intimate relationships with them.
Our market leadership purpose built software solutions and customer intimacy are the basis for our long term competitive advantage.
Next is there a higher level of organic growth. This is no accident.
We have raised our performance expectations for each of our businesses to structurally improve their long term organic growth capabilities were.
We're doing this in our balance sheet and margin friendly way.
A large component of the organic growth story, it's a higher level of recurring revenue within each of our companies approaching 60% for the enterprise and about 75% for software businesses.
In addition, our businesses are blessed with business models that generate high levels of free cash flow, a result of their operational efficiency margin levels and customer prepaid orientation of their balance sheets.
Today, our portfolio is 75% software and 25% medical and water products.
We are meaningfully less cyclical today versus 2018, given the markets we serve.
<unk> care legal education government contracting utilities and food to name some of our larger ones and our fixed subscription versus volume based revenue model.
To put today's portfolio in perspective in 2018, roughly 40% of our company was either highly cyclical or project oriented today. These market dynamics essentially no longer exists for us.
When we reflect on this portfolio transition we've never been more excited for the future of Rover Rover, given our increased quality higher growth and more resilient portfolio of companies.
With that let me turn the call over to Rob to walk you through our financial summary, and our balance sheet position Rob.
Thanks, Neil good morning, everyone.
Turning to page eight and covering our Q3 financial highlights.
As a reminder, as I said all financial results are on a continuing operations basis total revenue increased 10% to 135 billion.
The FX headwind was $20 million or one 6% and was offset by acquisition contributions, notably our mix of business has shifted meaningfully toward more domestic revenue post the announced majority sale of our industrial businesses. The U S. Now represents approximately 85% of our revenue helping to shield our resolve.
It's from the impacts of any currency fluctuations Q3 organic revenue increased 10% with broad based strength across each of our three reporting segments application software grew 7% network software grew 10% in technology enabled products grew a robust 15% organically EBITA margin.
<unk> 80 basis points to 41, 1%, resulting in 12% EBITDA growth adjusted depths was $3 67, well above our guidance range and 18% higher than last year Q3, adjusted free cash flow was $353 million, which was 9% above prior year excluding.
The section 174 tax law change, we discussed last quarter quarterly free cash flow grew 17% in the quarter. We made 157 million of additional tax payments related to our recent divestitures per our normal convention those payments have been adjusted out of our reported cash flow. So overall, an excellent third quarter.
As Neil said and great momentum heading into Q4.
Next slide.
Turning to page nine looking at our strong financial position.
We did complete the fact, the frontline acquisition early in the fourth quarter utilizing a combination of our balance sheet cash and a draw on our revolving credit facility as of today, our drawn revolver balance sits at $2 2 billion, we expect to fully pay down the revolver balance with the proceeds from our industrial sale we should.
Closed late in the fourth quarter. So after taking into account the receipt of those industrial transaction proceeds we would expect to end the year with a net debt to EBITDA ratio pro forma for our recent acquisitions in the mid twos.
Our consistently strong cash generation quickly refreshes our capacity for capital deployment. So looking forward, we remain active on the M&A front and we have the ability to deploy an additional 4 billion plus of capital now through the end of 2023.
So with that I'll turn it back over to Neil to review our segment performance.
Thanks, Rob, let's turn to page 11, and walk through our three key highlights for our application software segment.
Revenues here were $644 million up 7% on an organic basis and EBITDA margins were 43, 6%.
Across the segment, we saw recurring revenue, which is about 75% of the revenue for this segment increased 8% in the quarter.
This recurring revenue growth is enabled by strong customer retention and continued migration to our SaaS delivery models.
Across this group of companies that financial strength was broad and it's been quite consistent for several quarters running.
As we highlighted a few businesses, we'll start with <unk>.
Who had another great quarter bookings growth revenue growth and margin performance.
<unk> continues to see success in their software solutions targeted to the P&C insurance market with particular strength in the enterprise class market segment.
Across both Delta can add or we continue to see solid new customer adds a nice momentum in migration towards our SaaS solutions.
Also in the quarter, we acquired <unk> technologies for Deltak, a leading software provider servicing the Gov Con manufacturing and QA market <unk> global for admin, a leading human resources and recruiting software tool for global law firms.
The board, our nutrition and access management software business had strength across both education and health care end markets.
<unk> and data innovations continue to exhibit strong demand and operational strength.
<unk> continued its market share gains across Europe , and <unk> continues to demonstrate product market fit by gaining share of wallet across large health care systems.
Strata continues to be solid for us as evidenced by strong new customer adds and cross selling and renewal activity.
Finally, frontline will be reported in this segment starting in Q4.
Looking at the outlook for the final quarter of the year, we expect to see organic growth in the 6% to 8% area.
Turning to page 12.
Revenues in the quarter for our network software segment were $347 million up 10% on organic basis, and EBITDA margins were strong at 54, 5%.
The 10% organic growth in this segment is underpinned by 16% growth in recurring revenue.
As we dig into business specific performance, our U S and Canadian freight matching businesses continued to be fantastic.
The market conditions, while slowing of touch on the carrier side of the network remained favorable <unk>.
These businesses saw nice new customer ads and <unk> increases during the quarter.
Moving the boundary our software business that enables live action film a computer generated graphics to be combined in a single frame frame again demonstrated their financial strength net.
Net retention was very strong in <unk> grew in the strong double digits again.
Foundry success is rooted in their fast paced innovation capability and favorable long term market conditions.
Growth in our businesses that focus on alternate site health care was led by <unk> operators and importantly retention rates across each of these businesses remains extremely high.
Finally, I trade, our network food supply chain business, and our pipeline our life insurance SaaS business that tech enabled the quoting and underwriting processes each had solid customer additions, which helped drive strong <unk> growth in the quarter.
Turning to the outlook for the fourth quarter, we expect to see 8% to 10% organic growth for this segment.
As we turn to page 13 revenues in our tech enabled products segment were $360 million up 15% on organic basis.
EBITDA margins for the segment increased nicely to 37, 2% in the quarter.
It's very nice to see 15% organic growth in the quarter and easing supply chain challenges, while supply chain challenges remain we experienced demonstrable easing conditions, especially as it relates to chips and chipsets.
We are cautiously optimistic conditions conditions will continue to improve.
Let's start with Neptune, which once again set records for orders and quarter end backlog.
For a few quarters running Neptune has been able to gain market share by successfully maintaining industry, leading product lead times, while simultaneously launching new products. Both in terms of cellular connectivity and static meter reading technology.
To this end Neptune continues to experience accelerating demand.
Static meter solutions.
Verathon was simply strong vigor.
<unk> grew nicely in the quarter driven by momentum across all three components of their product portfolio bladder volume measurement video intubation and single use Bronco scopes.
As it relates to northern digital they set a new record for quarterly revenues as they experienced continued strong demand for their precision measurement solutions.
Our outlook for the final quarter to years, 5% to 7% organic growth for this segment as we have a more difficult comp heading into Q4.
Now please turn to page 15, and let's review, our updated and increased outlook for the balance of the year.
As a reminder, last quarter, we increased our adjusted depths outlook to be between $13 46, and $13 62.
We are now once again, increasing our guidance to be between $14 nine in 2014 13, an increase of 57 at the midpoint.
This increase in guidance is driven by our strong third quarter performance and the momentum we carry into Q4 together with the addition of frontline education.
Embedded in this guidance is full year organic growth of 9% plus an increase from 8% to 9% organic growth guide as discussed last quarter.
As we look to the fourth quarter, we're establishing depth guidance to be in the range of $3 72, and $3 76.
Now, we're concluding comments and we'll get to your questions.
As we turn to page 16, we want to leave you with the same key points with which we started.
First we had another great quarter of operational and financial performance and we are increasing our outlook for the year.
Second we acquired another leading niche software business frontline education.
Third we continue to have substantial M&A firepower north of $4 billion.
And fourth and perhaps the most important the new higher quality or over portfolio is becoming ever more visible.
As it relates to a strong start we grew revenues organically by 10% and EBITDA by 12%.
We're lifting our full year organic growth in depth guidance based on the factors previously discussed.
Regarding capital deployment, we have been active over the past couple of months, we deployed just over $4 billion.
To this end, our prudent and patients are being rewarded through the identification and selection of these high quality assets.
We continue to have a large amount of available M&A capacity north of $4 billion.
We continue to be very active in the M&A market, but as you saw in Q3 as always we remain super patient and highly disciplined to ensure optimal deployment of our available capital.
Finally, and perhaps the most important the new higher quality Roper portfolio is becoming increasingly more evident and we have never been more excited about the future of our enterprise.
As we turn to your questions, let us remind everyone that our strategy is the same.
We compound cash flow by acquiring and growing niche market, leading technology businesses. This.
This is what we've done for over 20 years and will continue to do.
In addition, our value creation and governance model remains unchanged, we operate a portfolio of market, leading businesses and defensible niches.
Each of our businesses has high levels of recurring revenue strong margin and compete based on customer intimacy, which yield highly resilient organic growth rates.
We operate a highly decentralized operating structure that focuses on long term business building.
Our culture sets, a very high bar for performance and focuses on continually improving.
We are all paid to grow which reinforces our culture of transparency nimbleness and humility.
Finally, we redeployed the vast majority of our capital to acquire the next great business.
We do this with centralized corporate resources in a highly disciplined thoughtful and analytical manner.
This strategy unchanged delivers compounded and superior long term shareholder value.
So thanks for joining us this morning, and with that let's open it up to your questions.
Thank you we will now.
I'll go to our question and answer portion of the call.
We request that our callers limit their questions to one main question and one follow up.
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Today's first question comes from Deane Dray at RBC capital markets. Please go ahead.
Thank you and good morning, everyone, Hey, good morning.
Hey, I know, we're not seeing it in any of your reported numbers today with all of this upside.
But have there been any changes in customer behavior on the software side, given the uncertain macro.
Whether it's velocity is new contracts orders customer ads.
Anything kind of below the radar screen.
Yeah, Deane nothing meaningful sustained manner right. So I think we attribute that first to the markets that we serve right. So think about.
Customers in health care Education insurance food government contracting utilities.
The macro forces generally are lessons are less impactful on those end markets.
I think the double digit 10%, so that's always a leading indicator of the strength.
But there is certainly.
Quarter to quarter, there can be some noise and so last quarter. We're looking at for instance, our plan might've saw some softening, but that recovered this quarter and so it's not to say theres not pockets of things, we look at but nothing in a sustained manner at this stage.
All right great to hear and as a follow up can you expand on this initiative to structurally improve the longer term organic growth rates of the businesses and just so we're clear your part of your acquisition criteria has never been to buy the fastest topline growing companies because that's just.
It doesn't fit that kind of.
Were you looking for these unicorns that have high barriers to entry.
Private equity is not gonna take public so you've never been focused on the real sexy top topline growth, but what is the target when you say kind of long term improvement in organic growth.
Yes, I would draw you back. This is the same thing we've been talking about since really over the last four or five years since it became COO and CEO and the team we have in place today. So.
We historically longest history. This we've said this is a GDP plus a little bit grower and as we've restructured the portfolio and we've as we've talked about here increase the expectation and outlook for more organic existing portfolio now.
Mid single digits, certainly through cycle and we are always looking to continue to improve that we've talked.
About the desire to improve the organic growth outlook.
Our governance system of our businesses thinking about how to do strategy right where to play and how to win and execute that strategy in a process and disciplined manner and then how to build the team and talent to sort of use that as a long term competitive advantage. We've been at this with the portfolio for three or four years and we're starting to see some signs.
Of improvement.
So we're encouraged but it's an ongoing body of work that never ends.
Thank you and our next question today comes from Scott Davis Melius Research. Please go ahead.
Hey, good morning, guys, Hey, Scott good morning.
Great results as usual, it's probably it sounds like a broken record after kind of a decade of that but.
I was hoping for a little bit of a play by play on frontline you know where they are the same kind of number of people that showed up for the auction was or less was it a little less competitive the same just a little bit of a play by play be helpful. Sure I appreciate the opportunity to talk about that I'll tell you you never have perfect information and so this.
This is using all of our our inputs and reading the tea leaves to really understand what happened in the process. The seller here Tom had some bespoke reasons they needed to get liquidity from an asset. They chose this one they happen to time it in the market, where private equity bidders had a dip.
<unk> time bidding because theres not there was not or has not been a private.
Leveraged loan market and so in that result, the process was better competitively.
Meaningfully center competitively and Thats why we believe we're able to get a very fair price for the asset. So the process dynamics are a little bit different and just another example of sort of the patients and that our commitment to investment grade leverage in and the conservative posture of our financial policy enables us to sort of move nimbly when an opportunity.
Presents itself.
That's helpful.
Can you give us just as a follow up just a little bit of sense of.
Magnitude of price and your 10% growth number this quarter or is it.
A third or half something like that.
That you can give us just a sense of what what.
What component that was.
It's very difficult for us to sort of bifurcate.
Volume and price keep in mind, we're 75% software inside software the growth algorithm of every one of our software businesses you had a little bit there.
There is price baked in every year to sort of offset a little bit mostly if not all of the threat than youre cross selling and up selling into the customer base that gives your net retention and then you're adding new customers to get the total growth and so pricing and value capture is just completely native to the.
Inner workings of the pricing model inside of software and it's not and it would be generally consistent with the past I mean, theres, maybe a little bit more prices labor has gone up and the software model.
As it relates to the product businesses.
Our product businesses have done a fabulous job of essentially passing the cost increases through with the margin to our customers as you know that lags a little bit it showed up in margins this quarter and that will continue to bleed out over the next several quarters as the backlog that was built early in the year is shipped and so the teams have done a nice job.
Some of that.
Thank you and our next question today comes from Joe Giordano with Cowen. Please go ahead.
Hey, good morning, guys, Hey, good morning.
Hey, just a follow up kind of on Dean's question.
We are starting to see like at least announcements about layoffs at tech companies in these kind of things as you know Derrick as their business starts to slow obviously the business is you have very different but if you. If you were to start extrapolating those type of announcements down to permeate throughout the broader economy like how do you.
Mike played out scenario with your businesses like Okay. We're seeing this then that means this much impact to some of these software businesses and here's what we do and here's how we kind of think about that like kind of like run us through that playbook.
Yes. So it is it is company specific right. So every company is going to adjust.
Is there market demands as a general matter as large tech employment softens I view that as a good thing for our business because it makes it easier for us to hire the labor and talent that we need to hire.
It was 0.1 0.2 is key.
Keep in mind, what we do for our customers right, we are selling and delivering to them.
They need to run their business. So we are mission critical to what they do.
And we're our pricing model is vastly fixed subscription so it's not volume of transaction base that we should be relatively muted to sort of short cycle fluctuations in the macroeconomic indicators and so a little bit better labor environment. I think is on balance a good thing for us.
And then as you think about it.
Going forward and M&A, just given where the stock is debated.
And we haven't been in a situation where some of the deals you might look at higher multiples than Roper itself. So like how are you kind of thinking about it.
Action ability of certain things, just given where the stock trades.
We're always focused on improving both the scale and the quality of the enterprise has been 20 years that'll be the next 20 years and finding the best asset at the best prices, we can find.
And there is no difference in that going forward.
Thank you and our next question today comes from Christopher Glynn Oppenheimer. Please go ahead.
Thanks, Good morning.
Good morning.
I'm curious.
NSS margins seem to step out a bit nicely.
Very strong Incrementals just wanted to kind of discuss if there is a.
Mix shift there, that's kind of episodic or kind of sticky.
Yeah, Hey, Chris It's Rob I don't think.
I don't think anything really to call out I mean, we had really strong organic growth and with the software businesses that comes through with great Incrementals. So I'm just looking back to the margins.
Last year I think we ended last year at 54 in the fourth quarter were <unk> 54, and a half EBITDA here. So yeah. No I think I think it was a nice quarter performance, probably it's probably similar for the fourth quarter in terms of EBITA margin for the segment.
Okay, and thinking about frontline accretion, we take the $175 million of EBIT.
Maybe that's 160 million EBIT, a and then there is might be some net interest.
Increase expected there so just curious how to put that together.
Yeah, that's right so for the fourth quarter, we've got about 40 of EBITDA and for frontline.
And there's about $24 million excuse me of incremental interest if you look at where we were before to now as I mentioned.
Earlier, we did draw on the revolver and so we're paying the revolver interest for much of the fourth quarter. Then we're assuming that the industrial sale closes late in the quarter and then that interest expense would go away. So I think the math on that is about 12 cents of our of our sort of 57 cents guidance increase was frontline.
Depreciation about seven or $8 million a year.
Thank you.
Thank you and our next question today comes from Julian Mitchell of Barclays. Please go ahead.
Hi, good morning.
Just wanted to circle back to network software.
In terms of the top line I think <unk> had now sort of six quarters consecutive of of around double digit organic sales growth.
And I was curious.
To what extent, it's the same one or two businesses driving that consistently or is it kind of different horses pulling it alone.
Times, and kind of the leadership's changing and any thoughts on the next few quarters, which businesses you see driving the network software organic growth yes.
Yes, sure I'll take a crack at it and then ask Rob if he wants to.
Correct or amplify anything I'd say, so it's been a pretty consistent.
Set of performance across the various businesses, we've talked for many quarters about the strength of U S. Canadian freight match right. It has just been fantastic for us.
It continues to be good.
For the last two or three quarters, we talked two quarters this quarter and last quarter, we've talked about how the rate of growth is slowing a little bit, but it's still very very good. Even this quarter. There was a strong number of new carrier adds.
So we would expect that sort of slowed down a bit over the course of the next year.
Other businesses foundry soft riders I trade SHP I pipeline.
Or just solid performers that have been very consistent and generally don't have that macro.
Sort of tailwind that the freight match businesses have had so we wouldn't expect.
Any meaningful change in front of those businesses anything you want to add.
At our comp now.
Fair.
Thank you and then just on technology enabled products.
You have had issues like most manufacturers from from cost inflation from supply chain challenges for some time.
Those are starting to ease it looks like.
So maybe help us understand you know.
What you're assuming for the pace of those supply chain challenges easing and then.
Assuming you've got volume growth ahead, easiest supply chain inflation well.
Kind of operating leverage should we expect in the TEP segment.
Not so much next quarter, but let's say next 12 months.
I'll take the first part first couple excuse me parts of that question around.
Supply chain pacing and improvement I'll, let Rob comment about the op leverage or EBITDA leverage there so.
Just to set the context for us the <unk>.
<unk> chain, we have been.
Modest Lee gated from shipping.
One or two of the businesses for short periods of time, but for the most part it's been about we've been able to ship, but its been about a higher component costs and expedited logistics in order to sort of both inbound and outbound the products.
This quarter demonstrably supply chain, especially around chips improved intra quarter, we went into the quarter, assuming is going to be difficult and it meaningfully improved during the quarter. So it's our expectation that that part of the supply chain element continues to ease Q4 and beyond there's still a little bit of chat.
<unk> around certain components, principally come out of China think motors and things like that.
Better still have longer lead times, but those appear to be abating as well, we don't assume that happens per se in Q4.
As it relates to the price in.
And sort of pushing that through we talked about a little bit before.
The companies have been very good at taking price increases to offset the component.
Price cost increases, but it lags by a handful of course, not a handful a couple of quarters, but when you take the order and when you deliver the order and that started showing up this quarter. Yeah. I'll just add this great momentum here Neptune is performing really really well Neil talked about how there there still seeing great orders and great backlog and great momentum and so that should.
That's generally carry forward.
So with the supply chain issues easing as Neil mentioned I mean, our leverage here I think it was 50% EBITDA leverage in the quarter.
We should be north of 40% leverage over the long term as these businesses continue to grow strong organically.
So that would tick up the EBITA margins, a little bit in that segment.
Thank you and our next question today comes from Steve Tusa JP.
Please go ahead.
Okay.
Hey, good morning.
Hey, good morning, Steve.
Just on the on going back to the frontline. So if that adds like 12 cents in.
Your I think your sequential increase in earnings is.
I don't know like seven or something like that.
Yes.
I know, it's only down modestly but.
And maybe some time do you have a an increase in the fourth quarter I think obviously seasonality has changed a bit but.
Anything else kind of moving around or is everything generally just kind of flat.
For from three EPS, Yeah, I think if you look at the guide the tap volume revenue is a little lower fourth quarter versus third quarter. As you mentioned some supply chain ease in some stuff shifted shift a little bit earlier.
Other than that I think youre right I mean, it's just it's a much different portfolio right. We don't have the seasonality with all the energy businesses is a big fourth quarter or is that just you know that.
Those businesses have been had been divested.
And then just for free cash flow can you just baseline us on fourth quarter.
Or just for the year, what you guys. What are you I know you don't guide, but we're getting close to the end of the year, maybe you could just baseline us on what you expect for the fourth quarter and deferred revenue is actually pretty negative in the quarter, what what's going on there.
Okay.
Yeah, So I mean cash flow should be it should be strong in the fourth quarter, obviously setting aside the fact that we're still making payments on the divestitures.
It's always our best working capital quarter on deferred revenue.
In the fourth quarters, when we get most of our renewals for the software businesses, that's usually the best quarter for that as well. So it's usually a very good working capital quarter.
And then if you look forward, we certainly don't guide cash flow, but we are really really well positioned for great cash conversion next year as we get these cash tax payments behind us and now we have a portfolio with even better working capital characteristics.
And so we feel great about our ability to continue to compound cash flow moving forward.
Thank you and our next question today comes from Allison polymer with Wells Fargo. Please go ahead.
Hi, good morning.
Yes.
Let me go back to the network software businesses.
Particularly I, usually lucky touched on freight matching and then I'd say network.
Businesses, which I would've thought had pretty strong market share historically could you maybe talk painted with the new customer adds are those markets evolving for you or is it something that we're pursuing specifically to capture share in there just any thoughts.
So each one is different between the freight matched the north American freight match business nitrate on what they are doing relative to their product and go to market strategy.
<unk>.
I would there's a lot that we can unpack and delighted to talk to you about this on a call down or more of a longer form way, but the short version.
They've done a terrific job on both their freight match product and their analytics product and then creating product tiers based on the value of the customer wants to to sort of buy into it.
<unk> also something like 75% of the bookings today are through their E Commerce channel, where three years ago or five years ago. It was zero, so they've really removed the barriers to do business with them.
And when you look at the <unk> increases like 70% of the <unk> increase has been because customers have elected to a higher package because theres been more value to sort of get from the network. So they've done a wonderful job, that's bespoke and unique to <unk>.
It is for all 27 businesses that I trade.
The go to market motion there has been it's been mostly the same but this over the course of probably about a year and a half ago. The company released.
New product offering too.
Enable the supplier part of the network to do easier trading with the buy side of the network is the simplest way I can describe it so think of it as like a lighter weight supply chain management.
Software tool for half of the network and it's just been said very consistently.
<unk> bookings over the last four or five quarters that has been released.
Great. Thanks, and then just as we think about organic recurring revenue in the software business as it has been quite strong do we assume a similar level of recurring revenue growth as we look to our Q4 numbers just any thoughts there.
We won't comment, yes, Q4 recurring yes should be should be similar that that we've seen the trends there continue to be very positive overall in our recurring revenue for sure.
Thank you and our next question today comes from Joe Ritchie Goldman Sachs. Please go ahead.
Hi, Thanks, good morning, everyone.
So you guys have been getting a bunch of questions on just the long term growth rate for your businesses and clearly like the portfolio has evolved a lot over time and I think last quarter, we talked about.
6% long term growth.
Wondering as you kind of look at that 27 companies that now make up broker.
Are there are there businesses that you expect to grow let's call. It high single to low double digits over time because of where they are.
In their maturity.
There are could you maybe just talk through some of those.
Yes, I think the <unk>.
The star right is that is the removal of the cyclicality right. So if you look at where Roper is now as we mentioned earlier, it's a very different portfolio. Because we don't have that 40% of Roper that was projected cyclicality back in 2018. So that so now you don't have the situation, where you might have something that grows 15% one year and then go.
Down 15% the next year, so really the whole portfolio.
It's sort of plus or minus mid single digit organic and in a bad year something might be up two or 3% and a great year. It could certainly be double digits.
And I'll, let neel expand on that.
I would I would maybe add three points to that Joe one is when you look at the 27 companies. It's a very tight distribution in terms of the growth rate there is not.
It's not a barbell, where you got 10 companies growing 2% and 10 companies growing 15% averages into something different it's a very tight I think the only.
Two acquisitions, we've done we've announced as a high single digit organic growth business everything else has been mid singles and working to improve that so as a general matter I think of it as a mid single digit through cycle organic growth portfolio that is as all the cash flow characteristics you'd want to see what that we'd see.
Operating leverage occur so that's going to translate to a little bit more cash flow growth organically and then you've got to layer on top of that the M&A flywheel. So we feel very comfortable we have a mid teen sort of cash flow compounding growth algorithm, that's embedded in our in our strategy.
Got it that's Super helpful. And then I guess my following question I hadn't historically thought of you guys are seeing.
Potentially a big beneficiary of.
Some of the stimulus packages that have been passed and so on.
As an example, like the K 12 education stimulus funding, but then as you are talking about seaboard and now.
Acquisition that frontline I'm just I'm just wondering like do you guys see yourself as a beneficiary of some of these stimulus measures, where we actually haven't seen a lot of that spending yet come through and perhaps we'll start to see some of that in 2023.
We think we think the answer is no we're not in any meaningful way or even in a minor way a beneficiary of the stimulus or COVID-19 funds for instance, with frontline. We studied that extensively during our diligence process and while the K through 12 districts, certainly onboarding stimulus and Covid dollars.
The vast vast majority of those funds at one time funds are spent on onetime type items, principally getting for instance.
Student to device ratio to one to one for instance.
They were districts, where super hesitant to buy a recurring software package with one time money. So frontline, we don't believe in any meaningful way.
It was a beneficiary of that we think that's a good thing goes to the durability of the growth drivers of the business.
Seaborne same thing there.
There is there is what seaboard does I mean, it's about food and management for.
These these K through 12 and higher Ed.
<unk> and its campuses as well as access management and integrated security and they have not been a meaningful beneficiary. So no is the short answer.
Thank you and our next question today comes from Brandon <unk> with Alliance Bernstein. Please go ahead.
Good morning, all and thanks for taking my question.
Uh huh.
A few quick two quick ones on the M&A environment.
Pat you haven't been shy in the past levering up for big deals.
Our target leverage ratio changed all at the higher rate environment.
No net debt the leverage ratio is completely independent of the rate environment.
Okay great.
And then.
Within a higher rate environment do you feel you have an advantage over P funds, and particularly with the IPO market trying to weave.
We've long said that higher interest rates are we believe are have been a.
We're a benefactor of that 70 for the reasons that 70% to 80% of our capital that we deploy is from our internally generated cash flow, obviously, 20% to 30% is from from the balance sheet.
Versus private equity, who we're competing against.
<unk> 50, plus percent of what they deploy in every <unk> every deal is a variable rate.
Debt at the moment, so they are much more indexed and their values are much more indexed.
To shorter term rates than anything that we would see some very high yield very high out of those markets are pending close so we think we're beneficiaries.
In a higher rate environment, because one would think over time. If these rates are sustained and thats a big if they are sustained then you'd see valuations.
Accordingly.
And so we think thats, that's our view on that we've been very consistent with that view for a long time.
Thank you and our next question today comes from Alex Blanton Clear Harbor asset management. Please go ahead.
Good morning.
And then my second question would you wait until I see thank you before you cut off my Mic. Please.
Yes sure no problem with the first question is.
And the tech enabled segment.
The 15% growth.
What portion of that was just due to supply chain catch up.
Catching up on.
Things that had been delayed because of the supply chain.
Yes.
Alex that's a hard one to give you a level of precision I will tell you we did better in the quarter because of the supply chain got better I mean, verathon had a lot of things that had to go exactly right.
Most rigorous work they did Neptune did a nice job as well northern digital did a great job.
No.
Chunk of the beat would certainly be attributed to that.
Okay.
And secondly on the.
Acquisition front.
In the past when you've made a big acquisition like issues had a pause in your acquisition pace.
Pace until you.
Transition into the into the new company.
Thanks.
Squared away.
What do you expect to do this time, you have $4 billion in and.
Dry powder would you expect to use some of that or a lot of that or a little of that in the coming year.
Yeah, Alex So there's certainly no need for a pause to delever because our leverage rates are still relatively low because we are benefiting from the fact that we did these divestitures and we're still really redeploying those proceeds in addition to our normal cadence.
So really no reason to pause that we're very active in the M&A market today will remain active we might do deals very soon it might it might take us a couple of quarters as Neil mentioned, where it can be very very patient, but we're certainly going to remain active and theres not going to be any sort of a of a pause in that activity like you've seen after some of the larger deals what we did lever up an M&A situation.
Where we sort of had to take some time to reduce the leverage and there's a good backlog of companies define it you are looking at yes.
Yes, the market is the number of deals and processes that are in flight are.
A quite quite large yes.
Okay. Thank you.
Youre welcome.
This concludes our question and answer session. We will now turn back to Zach box for you for any closing remarks.
Thank you everyone for joining us today, we look forward to speaking with you during our next earnings call.
Thank you. The conference has now concluded and we thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.