Q2 2023 Roper Technologies Inc Earnings Call
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Speaker 2: Please signal conference presence by pressing the star key followed by zero. And now I would like to turn the conference over to Zach Moxley, Vice President Investor Relations. Please go ahead sir.
Speaker 3: Good morning, and thank you all for joining us as we discuss the second quarter financial results for Roper Technologies.
Speaker 3: Joining me on the call this morning are Neil Hunn, President and Chief Executive Officer, Jason Conley, Executive Vice President and Chief Financial Officer, Brandon Cross, Vice President and Principal Accounting Officer, and Shannon O'Callaghan, Vice President of Finance.
Speaker 3: Earlier this morning, we issued a press release announcing our financial results. The press release also includes replay information for today's call.
Speaker 3: 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 2.
Speaker 3: 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. You should listen to today's call in the context of that information. And now please turn to page 3.
Speaker 3: Today, we will discuss our results primarily on an adjusted, non-GAAP , and continuing operations basis.
Speaker 3: For the second quarter, the difference between our GAAP results and adjusted results consists of the following items, amortization of acquisition related intangible assets and the financial impacts associated with our minority investment in IndiCorps. Reconciliations can be found in our press release and in the appendix of this presentation on our website.
Speaker 3: And now, if you'll please turn to page four, I will hand the call over to Neil. After our prepared remarks, we will take questions from our telephone participants. Neil? Yeah, and thanks to everyone for joining our call.
Speaker 3: We're looking forward to sharing our second quarter results with you this morning, which like Q1 were quite good.
Speaker 4: As we turn to page four, let's look at today's agenda.
Speaker 4: I'll start with our second quarter enterprise highlights, then ask Jason to share our financial results. After that, we'll turn to our segment specific discussion and wrap up outlining our increased 2023 enterprise guidance. So let's go ahead and get started. Next slide, please.
Speaker 4: As we turn to page five, the four main takeaways for today's call are first
Speaker 4: We continue to perform extremely well and had a very strong second quarter, another demonstration of the quality of our portfolio businesses.
Speaker 4: Second, we're increasing our foliar guidance both in terms of total and organic gravity growth and adjusted depth.
Speaker 4: Third, generative AI. We're very excited by the promise of this technology and outline reasons why today. And fourth, we remain very well positioned for discipline, capital deployment.
Speaker 4: As it relates to the first takeaway, a strong start to the year and a solid second quarter, we saw total revenue grow 17% and organic revenue grow 9%.
Speaker 4: Consistent with our longstanding strategy, we continue to not only scale our enterprise, but also simultaneously improve its underlying quality and recurring revenue base.
Speaker 4: Importantly, we had very strong cash flow performance with free cash flow growing 17% in the quarter.
Speaker 4: Our results this quarter are another proof point that our higher quality, less cyclical portfolio was purpose built to consistently perform at a very high level.
Given the strong second quarter, we're increasing our full year total revenue growth to be around 13%, increasing our organic revenue growth to be around 7%, and increasing our full year depth guidance to be in the range of 1636 to 1650, or up 23 cents at the midpoint versus our previous guidance of 1610 to 1630.
Third, relative to Gen AI, we feel we're structurally advantaged and excited by this technology as our vertical and application-specific businesses will use their specialized market positions and knowledge to provide context to these enabling technologies, both to create customer value and internal productivity gains. More on this during today's call.
And finally, we continue to be well positioned relative to capital deployment.
We remain active in the market as we evaluate and actively diligence many high quality opportunities.
Jason, I'll turn the call over to you so you can walk through our second quarter results and our very strong financial position. Jason?
Thanks, Neil, and I hope everyone is doing well this morning.
Turning to slide six, the second quarter was another good post in 2023.
Revenue came in at $1.53 billion, which was up 17% over prior year.
Organic growth was 9%, which was led by 8% software recurring revenue growth across the enterprise, and outsize growth 19% in our tech-enabled product segment.
EBITDA increased 20% to $617 million with EBITDA operating leverage of 46%.
Notably, margin expanded across all three segments in the quarter. Depths of $4.12 was 12 cents above the high end of our guidance range and 20% above prior year.
Depth growth was in line with EVA growth given the offsetting impact of a higher tax rate and lower net interest expense.
Moving to free cash flow, as a reminder, the second quarter is always our lowest conversion quarter in the year as we make two federal tax payments.
We delivered $295 million to free cash flow in the quarter, which was up 17 percent over prior year. As I previously mentioned, Frontline's cash flow is seasonally weighted to Q3 and Q4, especially in Q3, and this is in line with our K-12 customers' annual renewals.
So, we expect a meaningful increase to cash flow in the second half.
Taking a broader view of cash flow on this slide, recall that we acquired Virta 4 in 2020 and had a one-time cash tax benefit of $120 million, of which about $60 million benefited the second quarter of 2021.
We therefore had very strong multi-year cash flow performance when normalizing for this 2021 tax item.
For the year, we are confident that free cash flow will be greater than 30% of revenue.
Turning to our balance sheet on slide 7, our net leverage sits at 2.2 times at the end of the quarter with about $6.7 billion of debt and just under $1.5 billion of cash against our TTM EBITDA of $2.35 billion.
Also, our $3.5 billion revolver remains fully undrawn.
To summarize, we have significant acquisition capacity and remain quite active in many bespoke passes.
To that end, in Q3 we expect to close on Replicon, which is a bolt-on acquisition for our Delltech business with a purchase price of $450 million, or about $370 million net of a long-term cash tax benefit.
Neil will discuss the details around this exciting addition to the DELTEC platform in a segment discussion.
So with that, I'll turn it back over to Neil to talk about our segment performance and outlook. Neil? Thanks, Jason. Let's turn to page 9 and walk through our Q2 highlights for our application software segment. Revenues here were $770 million, up 6% on an organic basis, and EBITDA margins increased to 43.7% in the quarter.
In this segment, we continue to see consistently strong performance across the entire group of companies.
We'll start with Deltech. Deltech was, once again, solid across both their government contracting and private sector businesses.
Importantly, Deltech continues to see momentum build with their SaaS offerings and retention rates remain at historically high levels.
Also in the quarter, and as Jason mentioned earlier, we announced the acquisition of Replicon for Deltech, Roper's largest bolt-on to date.
Replicon is a market leading, timekeeping, and workforce management SaaS solution focused on professional services firms, and is highly complementary to Dell Tech Strategy.
We expect replicant to contribute north of $70 million of revenue and $24 million of EBITDA next year, and we expect the deal to close during the third quarter.
Finally, as it relates to DELTEC, we wanted to brag on them for a moment.
During the quarter, the Washington Post awarded Deltech the number four top workplace in the DC metro area for large companies. As you know, we have a closely held belief that talent and culture can create long-term competitive advantage, and this is certainly the case for Deltech.
During Roper's ownership of ZELTEC, the company has increased its organic growth rate.
retention levels, recurring revenue, and margin structure, and a big contributor to that success is the structural talent advantage that DelTec continues to build.
Congrats to Mike and congrats to your entire team. Adirant, our software business focused on the needs of law firms, continues to be excellent. In the quarter, Adirant solved record bookings and continued success in the adoption and cross-sell of their SaaS solutions.
Also, and importantly during the quarter, Adirant launched their generative AI enabler, Maddy.
Today, MATTI is enabling two solutions, outside council guidelines management and time entry.
with plans to extend this to AR cash receipt matching and docketing over the coming months.
Over time, MADI will be integrated widely across Addern's product platforms. Generative AI for a legal space has tremendous potential.
One such example in the market today is Onis.
ONIX powered by MATI solved a massive challenge that all law firms face, namely how to navigate outside counsel guidelines for the billing requirements that clients impose on their law firms.
It's fairly common for a large law firm to have to navigate hundreds of thousands of bespoke client billing requirements. Today, Onyxx uses generative AI to extract contractual terms and convert them into business rules used in the time entry and billing processes. A true game changer.
More broadly at CrossRoper, we're excited about the potential of generative AI and large language models.
We believe, given our deeply verticalized and application-specific business model, that our businesses are structurally advantaged, given that all AI, computational and generative, need context, specifically data and workflows, in which to train or target the technology.
Internally, we're working closely with our businesses on the productivity and product-enabled opportunities associated with Gen AI.
closely with our businesses on the productivity and product-enabled opportunities associated with Gen AI. Certainly, much more to come on this.
Now back to the segment performance in VertiFor, our software business that tech enables, property and casualty insurance agencies. VertiFor continues to be a great asset for us with solid performance across our core PNC business and the recent MGA solutions bolt-on. Our healthcare IT businesses also perform very well in the quarter.
of staff is particularly challenging.
and frontline software solutions better equip K-12 school districts to navigate these challenges.
Because of this, Frontline solutions are mission critical and of high importance to their school district customers. As such, Frontline's net retention is consistently strong. Looking to the second half of the year, we expect to see organic revenue growth to be in the mid-single digits area for the segment. Overall, very strong results and outlook for this segment.
Turning to page 10.
Revenues in the quarter for a network software segment were $358 million, up 5% on an organic basis, and EBITDA margins were strong at 54.2%.
As with our application software segment, growth and performance was solid across the segment.
Relative to business specific comments, we'll start with the US and Canadian freight matching businesses, DAT and Loadline.
both of which grew in the quarter despite continued challenges across the broader freight and logistics markets.
I'll remind you that our businesses are critical to the operation and execution of the North American spot freight market. In addition, and importantly, the spot market is a long-term secular beneficiary in terms of the volume of future freight ships.
Throughout and across the freight and economic cycle, DAT and Loadleak continue to innovate and launch new products and offerings to help drive enhanced customer value and share of wallet.
As we speak, DAT is launching a generative AI-enabled solution, among other initiatives targeted to combat freight industry fraud.
This is in addition to their existing set of computational AI and data science driven solutions like DATIQ which they've deployed at scale over the last three or four years.
iPipeline, our network software business that tech enables the distribution channel for life insurance and annuities, had very nice ARR gains in the quarter, driven by strong retention and customer expansion activity.
Foundry continued its string of strong performance and had terrific growth for their flagship product, Nuke, which enabled continued double-digit recurring revenue growth.
As we mentioned last quarter, Foundry commenced their subscription pricing transition for Nuke and in the first time of the year had north of 60% of their Nuke units sold under their new model ahead of their transition plan.
Finally, our alternate site healthcare businesses led by soft riders and SHP were strong in the corner.
Execution was solid and the business is benefited by an improving census and skilled nursing, assisted living facilities, and home health, reaching the highest occupancy levels in patient volume since the onset of the pandemic.
Turning to the second half of the year, we expect to see mid-single-digit organic growth in the U.S. and the U.S. in the U.S.
As we turn to page 11, revenues in the quarter for a tech-enabled product segment were $403 million, up 19% on an organic basis.
Even on margins for this segment, we're strong at 36.4% for the quarter.
Across the segment, business performance and execution was exceptional. Importantly, the broad-based supply chain issues continue to ease.
Neptune, our water meter and technology product business continues to be great.
In the quarter, they had record revenue performance. Importantly, Neptune continues to see increasing demand and momentum for their residential and commercial ultrasonic or static meters.
We remain bullish about Neptune and the market in which they compete, given this market tends to be quite steady as Neptune's customer's budgets are typically fixed year to year and not tied to broader macroeconomic trends or cycles.
Verathon was awesome in the quarter as well, with double-digit order growth and tremendous operational execution.
Specifically, Verithon solves strengths across their reoccurring single-use products, both BroncoScope or B-Flex, and Video Innovation or GlideScope, as well as BladderScan Capital purchases.
Northern Digital, or NDI, was also strong in the quarter, setting a record revenue.
for the business. A group of smaller businesses here, IPA, RF Ideas, and Enovonix were fantastic in the quarter as they substantially worked through a series of nagging supply chain challenges.
Relative to the second half of the year, we expect to see high single-digit organic revenue growth. Recall, we have a tough Q3 revenue and margin comp to lap from the prior year.
Now please turn to page 13 and let's review our increased 2023 guidance.
Based on our strong second quarter performance, we're raising our full year 2023 guidance for total revenue, organic revenue, and adjusted depths.
For 2023, we now expect total revenue growth to be around 13%, an increase from 12% plus last quarter.
In addition, we're raising our full year organic revenue outlook to be in the 7% zip code, an increase from 6 to 7% last quarter, and 5 to 6% in our original guide.
As a result of our improved revenue outlook, we're increasing our DEPS guidance to be in the range of 1636 and 1650, up for our prior guidance of 1610 to 1630.
Assume that this guidance is a tax rate trending to the high end of our 21 to 22 percent range.
Specific to the third quarter, we're establishing our desk guidance to be in the range of 4.16 and 4.20.
Now, please turn with us to page 14, and then we'll look forward to answering your questions.
We want to leave you with the same four points with which we started. First, the year started strong and we delivered solid second quarter results. In the quarter, we saw revenues increase 17% to $1.53 billion.
This growth was underpinned with 9% organic revenue growth and 8% organic software recurring revenue growth.
In addition, EBITDA margins were quite strong at 40.3%. Second, based on the strong second quarter performance, the recurring nature of our revenue stream, and the importance of our solutions to our customers, we're increasing our full year total and organic revenue growth outlook and increasing our full year depth outlook to be between 1636 and 1650.
Third, we're excited by the potential of generative AI, both as it relates to internal productivity and using our application specificity to provide context for new product development ideas. We look forward to sharing progress and updates in coming quarters and years.
And finally, we continue to be active with our capital deployment activities as we have north of 4 billion available M&A firepower.
As we've been discussing over the past several months, we have a very large pipeline of opportunities, though as always, we will remain super patient and highly disciplined to ensure the continued optimal deployment of our available capital. Now as we turn to our questions, and if you flip to the final slide, our strategic flywheel, we will want to once again thank those of you who joined us in New York for our first ever.
compelling long-term business model that compounds cash flow in the mid-team area.
So, thank you for your continued interest in ROPER, and with that, let's open it up to your questions. Yes, thank you. We will now go to our question and answer portion of the call. Requests of our callers limit their questions to one question and one follow-up. If you'd like to ask a question, we do so by pressing star, the key followed by the digit 1 on your question phone.
If you are using a speakerphone, please pick up your handset before pressing the keys. To draw your question, please press star then digit 2.
Again, for your question callers and other questions, one main question and one follow-up. The first question comes from Julian Mitchell with Barclays.
Hi, good morning. Maybe just the first question around in network software, you had a very strong margin performance up over 200 points of only mid-single digit organic growth. So I just wondered if there was anything driving that perhaps on mix or anything kind of...
one time and then also in that division how you're thinking about second half growth in DAT and load link versus first half.
Hey, good morning, Julian. It's Jason. So yeah, I mean, I think we had a strong performance across a lot of the businesses. I think the, probably the one standout is our Construct Connect business. We acquired a bolt-on that we closed last year, and we're seeing, realizing the benefits from that deal. Thank you.
Like I said, beyond that, it's just across the segment.
Roll to your second question, second half for DAT and load length, operate match businesses. We continue to be cautious there and conservative. We've held that posture the whole year. DAT performed very well in the quarter. It grew high single digits. The...
The broker part of the business and the data analytics part of the business remains super solid, high retention rates. But as we all know, the carrier side of the market, the excess carriers are trading out of the market, and that has a weighing effect on DAT. So we've modeled that in all year long, and it's playing out generally in line with what we thought here in Sarasota. Maybe.
touch better, but we'll just say in line with Sarasota's expectations. And relative to the second half of the AT, the big wildcard is what happens with yellow and UPS. I mean, so we'll see what happens there. It could be a pickup for the spot market if something were to turn negative on either one or both of those. That's interesting. Thank you. And then just.
As we look at the second half guidance, you called out in TEP, the tough comp for third quarter. Just one other thing I wanted to check on the back half, it looks like the guidance implies fourth quarter depth doesn't really go up much sequentially in Q4.
I think we talked about a little bit about just the seasonal shutdown at Neptune. We've had that historically. I wouldn't point to any conservatism. We've got networks still at mid single digits. So maybe in the priorities you might have seen some acceleration coming into the fourth quarter. But nothing really.
Correct.
Great, thank you. Thanks, Julian. Thank you. And the next question comes from Dean Drey with RBC Capital Markets.
Thank you. Good morning everyone. Morning. Can we start with just broadly the tone of business. There was a reference in the first quarter I think also at the analysts day that you were seeing some slower customer decision-making.
But the way I look at this quarter with the upside on the organic side and the outlook, has that improved? And very specifically, would you measure that in new logos and SaaS conversions, but just kind of that tone of business.
Yeah, I would characterize it. Our software businesses are playing out about as we expected coming into the year. Expecting a little bit of a slowdown. So you see delayed decision-making that pushes out net new sales, but it also has the
just more cautious as they look forward. So that's playing out about as we expected. It's not acute in any one of our businesses. It's just sprinkled across the universe of our portfolio. Relative to TEP, I mean, it was just fantastic. We had a lot of demand in the medical.
that they had just terrific supply chain sort of performance and operational performance in the quarter.
Yeah, that's really good to hear. And just as a follow-up, can we talk about the impact AI is having in how you're evaluating M&A candidates?
So, you know, is there an eye towards, you know, the barriers to entry? Roper is focused on these deep domain expertise types of, you know, deep vertical. So how do you look at where and how AI might be a threat to these? How do you look at the...
candidates in terms of where and how AI might advance their business model and just you know what has changed there. Yeah I think it's certainly a consideration today where you know computational AI has been a consideration for a few years generative is newer this year.
I think the thing that is nice about our portfolio or M&A strategy is it just happens to play into the strength of where generative AI and computational AI is best suited. So more verticalized, more application specific, more intimacy with customers. And so our M&A approach is well suited given the...
the development of these technologies. And as always, you've heard us say this for decades, we're looking in our capital deployment, if there's a zero in the Monte Carlo, we can envision a Tuesday, then we're out. We're just not gonna lean into that. So we'll look at, we always look at that and to the extent we can dream up a zero in the Monte Carlo because of the gender of computational AI, then we're not gonna.
consider it in any way, so that's not a new thing for us.
Anything to add, Jason? No, I think that's right. And any sort of content type business we've always steered away from, and I think this just accentuates that with the admin of AI and the center of AI.
I think that's right. And any sort of content type business we've always steered away from. And I think this is just accentuates that with the admin of AI, general AI. Thank you.
Thank you. And the next question comes from Joe with Robert W. Baird & Company.
Great. Hi everyone. Good morning. Hey, good morning. If I go back to last quarter, I think you referenced the Leadership Summit and the business unit presidents coming together. This quarter there was an announcement about iPipeline and Virta 4 partnering together on product.
broader suite when it comes to certain end markets that are jointly served today.
Yeah, I think there's definitely and demonstrably benefits for getting our leaders together.
It's going to be more in sharing best practices, sharing leadership philosophy, sharing failures and what they learn from the failure. It's going to be more about how do you lead, how do you manage, how do you inspire teams for terrific career decision makers?
performance. It's going to be less on connection with the product teams because most of our businesses are in independent and disconnected markets and swim lanes.
So, if there's something that makes sense, we'll certainly do it. If it doesn't make sense, we won't. The good news about this particular, you know, I-Pipeline and VertiFor is it happened organically between the businesses without any push from the center. So, you know that's authentic and it's going to drive value for our customers.
Okay, that's helpful. Just on the topic of generative AI, as you say, your businesses, they provide the context that the applications need. So, growth retention, if anything, is biased higher in many aspects. How do you think about net retention?
and just participating in new avenues for growth. So with some of the early products discussed today, does that really strengthen the core or is there separate monetization that can happen?
No, no, I think there's definitely monetization that can happen. It'll happen over time. There's no silver bullet in the short run. We played a long game built for long-term customer value and relationships, but there's just massive amounts of value that can be created by doing things with both computational and generative AI.
and our relationship with our customers are such that we're, at least for the last 20 years, we're able to capture our fair share of the value that's created. So I don't know why that would be any different going forward. And then as we all know, there's a tremendous amount of value or productivity to capture inside the four walls of our businesses using generative AI as well. Great, thank you very much.
Thank you. Thank you. And the next question comes from Alison Ploniek with Wells Fargo. Hi, good morning. I saw the announcement with IntelliTrans stepping out and partnering with the product sensor business. Is that something that's just unique to IntelliTrans or is it something that you're doing to sort of leverage that sort of after-life business that you have?
Any thoughts there? That's very, very bespoke to IntelliTrans. I mean, there's not an enterprise-wide strategy to do anything like that, nor would we. If there was, we wouldn't push it down. It's antithetical to what Roper's about. So that's very bespoke to IntelliTrans. Gold star for asking IntelliTrans questions, by the way. Yeah. Well, you know, it helps.
and what sort of drove that outperformance this quarter. Thanks.
Yeah, so, Alex is Jason. I think it's pretty consistent cadence in terms of the quarters. You know, what I would say is the outperformance in Q3 was really across the board. We had, you know, Neptune continues to execute really well in their backlog. Their daily sales are up over their plan.
healthcare is doing really well in terms of procedures. So just executing on a kind of book and ship basis there. And then some of our product businesses had some backlog that finally got cleared. So that really drove the Q3. And then the second half, like I said, organic growth should be fairly consistent. It's just what we had last year. We had a lot of backlog clear. And then we had a lot of growth growth that was really, really good.
We can hear you perfect. All good. Wonderful. Happy Friday, Neil, Jason, and Zach. Maybe the first question, it's almost technically two questions, but I'm going to call it one and a half questions. Is actually back on Dell Tech one of your biggest businesses, if not biggest business, on the app software side? I'm just curious on the relative health and demand.
Somebody earlier asked about macro, but how the government side's performing versus private sector side. And the second part of that first question is, it seems like something with Replicon, and I think you said it's about 70 million, you could have some pretty good revenue synergy opportunities. And how do you think about that $70 million business, you know, kind of unleashing that product into that large Dell Tech installed base? And then I had a follow up. You know, maybe that would have been I was thinking like for 5 years, maybe now that
So, we'll call that two questions, but give you grace. But the Delcheck demand, as we talked about in prepared remarks or performance, was solid across both government contracting and private sector.
We were encouraged by the pipeline build in the quarter for Q4 and early 24 in government contracting. There definitely was a little bit of a lull in their pocket in government contracting relative to the debt ceiling. It was nice to see activity get back to normalize or maybe slightly better than normalized activities relative to early pipeline build.
So that was encouraging to see. You've got to see how that plays out for sure. Replicon, we really like this bolt-on. As we said, it's the largest bolt-on we've done at 450 million, the 370 net of the tax benefit. It's time entry without attachment to an ERP. So time only is a highly demanded solution in the PS world.
It is not sold today in government contracting. And so we have not underwritten into a revenue synergy opportunity. That's not part of the 70 million or the 24 that we talked about. But it is certainly the expectation over time is to get Deltech to take this product into another core market of government contracting.
Thanks for being generous. I guess technically the third question. On the idea of the M&A pipeline, you talked about working through opportunities and bespoke situations, etc. But compared to 90 days ago, would you suggest that it's more actionable on the bolt-ons versus the potential platform deals? This may be a temperature gauge on the bolt-on.
deals, private, that did not happen because the buyer universe rejected the seller's expectation on value. And so we view that as the deal ultimately did not consummate. We view that as actually an encouraging sign around as an early indicator that valuations are going to pull in to be normalized with cost of capital.
We're encouraged by that, but still our pipeline leans into the bolt-on opportunities. Yeah, I would say... That's great. Thank you. Yeah, PEX is down dramatically year over year. There's just a lot of assets that at some point need to go. It's been a year and a half now. We think...
It's getting closer.
Thanks.
Thank you. And the next question comes from Christopher Glynn with Oppenheimer. Thanks. Good morning. I wanted to touch on Foundry. Curious if there's any risk of any fallout or perturbations from labor strife.
risk and also if you could revisit the comments on the transition plan for that. Sure, so Foundry for those that aren't familiar with it, it's a business and media entertainment that's used in post-production for a process called compositing where you take a live-action image and a computer-generated image and push them together in a single scene. So think Game of Thrones, pretty much every scene in Game of Thrones was used, was composited with Foundry software as is almost...
The current expectation is the strikes will be resolved this year. And if that's the case, then there'll be very little impact Foundry next year as they'll be back in production and sort of catch up. If it extends beyond this year, then yeah, Foundry will likely be negatively impacted to some extent next year. So that's just going to have to watch item for us.
And your second question, Foundry this year commenced the transition to a subscription pricing model for the core product of Nuke. So this year you can buy it either as a license or a subscription, as we mentioned about 60% of Nuke units were sold on a subscription basis this year. So it's a nice transition ahead of the plan.
with J.P. Morgan.
Hey guys, good morning. Good morning. You okay?
Am I okay? Yeah, okay. You found it a little froggy there, okay? No, no, no, no, no, it's just a little bit early Thanks for the concern, I appreciate it. Can you just talk about what you expect for third quarter free cash? Maybe just talk about the deferred revenue drag?
you guys have had in the first half, what's driving that? And then just what are organic bookings year over year for the software businesses in the second quarter? Thanks. Yeah, so, you know, as we mentioned before, the front line's a new dynamic, right, for Roper, where all of the renewals happen in the third quarter. So we're already tracking really strong, just, you know, month to date, if you will, for the renewals there.
And they actually consume cash in the first half, just to give you a perspective on that. You know, and they also, I think we historically have very strong second half seasonality. So that plus just some of the, I think some of the timing of working capital in the second quarter points to a much better second half.
You know, 1st, half we usually we pay out incentives we had this year we have that legal settlement. So that points to sort of that that seasonal change for this year. And so we're, you know, we're still on track to to deliver North 30% of pre cash flow to revenue.
And then you asked about the trends on. So we kind of look at enterprise software bookings. And it was up sequentially a bit and up year over year. Not quite as strong as the first quarter, maybe like low singles area, which is about in line with what we had, you know, it's obviously embedded in sort of our slowdown for the second half.
Maybe just on the AI theme, appreciate some of the color that you guys gave. What was curious is, is there some sort of AI playbook that you guys are laying out for the portfolio companies to be thinking through? Just curious how you're approaching that across the portfolio and appreciate some of those one-off case studies. Thanks a lot.
Yeah, so playbook, I would say no. Accelerated education across multiple fronts, yes. So what is it? What's the art of the possible? What are the risks? What are the IP ownership issues? What is, how do you get productivity with an R&D? How do you get marketing?
Got it. That's helpful. And then, maybe we wanted to just ask about, you guys often talk about the portfolio being mostly macro insulated. I think the macro hasn't been as bad as many have feared, but as you guys think through that, have there been any companies that, as things have softened a little bit, that maybe have stuck out and maybe...
It was just truly exceptional last couple of years, and then this year it's moderated, still growing. We talked about that quite a bit last quarter. Really nothing, I mean Neptune is solid, as we said in the prepared remarks, their customers' budgets tend to be very fixed year to year and not tied to housing starts, which some people think is the case, but it generally is not.
Jason, anything? I don't think so. There's really nothing surprising on the cyclical piece. Yeah, I mean, as Shannon just pointed out, maybe there's a little bit around government contracting, as I mentioned earlier, on the debt ceiling. It's not a macro point per se, but that's now clear. That delta. Understood. Thank you, guys. Appreciate it. Thanks. Thanks for having me.
Thank you. The next question comes from Joe Ritchie with Goldman Sachs.
Good morning guys. Maybe just to round out that pre-cash flow margin point going forward now that the seasonality has maybe changed a little bit. Should we think about the second quarter as being a pre-cash flow margin around 20% going forward as you think about modeling?
Great, that's helpful. Lastly, we talked a little bit about technology enabled products and the growth this quarter, tougher comps going forward. I'm just curious, is there a way to potentially quantify the supply chain easing impact that occurred this quarter? Is that part of the headwind then potentially as you kind of
as you think about the second half of the year? It might be hard. We might have to, I mean, mid-single digit growth is normal for that segment.
Then we got to parse how much might be strength at Verathon and CivCo that might be a little bit recurring on top of that, but then the balance maybe...and then the balance would be the supply chain sort of pull and release.
Okay, we can always follow up offline. Thank you guys.
You bet. Thanks Joe. Thank you. This concludes our question and answer session. We will now return back to Zach Moxey for any closing remarks.
Thanks everyone for joining us today. We look forward to speaking with you during our next earnings call. Thank you. The conference is now concluded. Thank you for attending today's presentation, made out of disconnect.