Q3 2023 Roper Technologies Inc Earnings Call

Good morning, Joe.

Roper Technologies' conference call will now begin.

Today's call is being recorded.

All participants will be in listen only mode did you need assistance. Please signal a conference specialist by pressing Star then zero I would now like to turn the call over to Zack Moxie, Vice President 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. Joining me on the call. This morning are Neil Hunn, President and Chief Executive Officer, Jason Connolly Executive Vice President and Chief Financial Officer, Brandon Cross, Vice President and principal accounting Officer, and Shannon O'callaghan, Vice President of Finance earlier this morning.

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. 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 you should listen to today's call in the context of that information.

Now please turn to page three.

Today, we will discuss our results primarily 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, the financial impact associated with our minority investment in the core transaction and restructuring related expenses associated with our completed acquisition and lastly, a gain from the sale of non operating assets reconciliations can be found in our press release and in the appendix of this presentation on our web.

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.

Neil.

Thank you Zack and thanks to everyone for joining our call.

Looking forward to sharing our third quarter results with you this morning, which like each of the first two quarters. This year were quite good.

As we turn to page four let's look at today's agenda.

As usual, we'll start with the most recent quarters financial highlights and Jason will discuss our 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.

As we turn to page five the four main takeaways for today's call are first we continue to perform at a high level operationally delivering another quarter of very strong financial results definitively demonstrating the quality of our portfolio of businesses are leaders in our governance system stuck.

Second we continue to be very active on the M&A front deploying about 2 billion over last quarter.

Third we are increasing our full year guidance.

Fourth we remain very well positioned for further disciplined capital deployment.

As it relates to the first takeaway our continued strong performance. We saw total revenue grew 16% and organic revenue grew 6%.

Consistent with our longstanding strategy, we continue to not only scale or enterprise, but also simultaneously improve its underlying quality and recurring revenue base with organic software recurring revenue growing high single digits in the quarter.

Importantly, the cash as we've been highlighting throughout the year, we had very strong cash flow performance with free cash flow growing 19%.

Most recent TTM period, and 77% in the quarter.

Turning to our second main takeaway the deployment of 2 billion over last quarter was led by our acquisitions of some pellets and ripple com both of which are bolt ons for strata and delta have respectively.

These are each strategically interesting bolt ons that are highly compelling from a value creation perspective.

We're able to buy these businesses for about 14 times next year's EBITDA more on these in a bit.

In addition in the quarter, we made a $125 million minority investment in sort of tenure, our professional services automation software business. We're excited to partner with the belly and general Atlantic ventures to deploy the value creation thesis associated with this unique opportunity.

Third we are increasing our full year total revenue growth to be 14% plus.

Increasing our organic revenue growth to be 7% plus.

And increasing our full year desk guidance to be in the range of $16 62 to <unk> 66, or up 21 cents at the midpoint versus our previous guidance of 16, 36% to $16 50.

And fourth we continue to be very well positioned for further capital deployment by having over 4 billion of M&A firepower.

We remain very active in the market as we evaluate and diligent many attractive opportunities.

So with that Jason Let me turn the call over to you. So you can walk through our third quarter results and our very strong financial position Jason.

Thanks, Neil and good morning to those that have joined our call.

And thank you for your interest in rubber.

Turning to slide six I'll take you through our third quarter enterprise results in a bit more detail.

Revenue of $1 56 billion was 16% over prior year with 6% organic growth and a 9% contribution from acquisitions led by frontline.

As Neil mentioned organic software recurring revenue growth was in the high single digit area.

This was led by strength in customer expansion and net new logos across our enterprise software businesses.

Additionally, our product businesses continued to deliver with 10% organic growth in the quarter highlighted by Neptune and marathon.

Revenue converted nicely through EBITDA, with EBITDA of $652 million or 18% over prior year.

Margin expanded in the quarter to 41, 7% with EBITDA operating leverage of 46%.

This all translated to a depth of $4 30 to satisfy our guidance of 416% for 'twenty.

Of note our recent acquisitions had minimal impact on earnings this quarter.

We expect depths accretion from these deals in 2024, as we pay down the revolver and benefit from full synergy realization.

Free cash flow was very strong in the quarter and came in line with our expectations, we generated $625 million of free cash flow, which is up $272 million over prior year.

As a reminder, our frontline business delivers most of its free cash flow in the third quarter, so that plus a terrific organic contribution drove the significant growth.

Looking at cash flow.

Trailing 12 month basis as shown on this slide provides a more relevant comparison.

With the frontline and frontline renewals tucked into the third quarter, our TTM free cash flow was 182 billion, which is up 19% over the prior TTM period.

With the expectation for a strong Q4, we're on track to deliver north of 30% free cash flow margins in 2023.

Taking a broader view our TTM free cash flow has compounded 16% over a three year period, which is in line with EBITDA growth.

In summary, our focus on compounding cash flow is evident in our results and we will continue to guide us into the future.

Next slide on page seven here, taking a look at our financial position. We ended the quarter with net debt of $6 6 billion, including about 900 million drawn on our revolver.

With trailing EBITDA of over $2 4 billion. This leaves us with net leverage of about two seven times.

Looking forward, we have capacity to deploy 4 billion or more over the foreseeable period, even after deploying 2 billion in the third quarter.

As always cash flow growth optimization, guys are key strategic choices.

So while our balance sheet, maybe try and we will be disciplined and patient when it comes to capital deployment.

To that end private markets are slowly ties with activity picking up over the last quarter.

With that I'll turn it back over to Neil to go through the segment results and outlook.

Ill.

Thanks, Jason Let's turn to page nine before I walk through our segment details we'd like to start with an overview of our acquisition of <unk> and the combination with our strata business.

To remind everyone stratus in part of Roper for eight years as a leader in delivering SaaS based financial planning decision support and performance analytics solutions to U S hospitals and health systems.

So Intel is a leading provider of SaaS based enterprise performance management and data solutions to hospitals higher education and financial institutions.

As many of you know U S based hospitals and health systems continue to face intense pressure from macro market trends challenges, resulting from care setting shifts reimbursement rates lagging rising costs and labor labor staffing issues.

The combined strata and since health business will uniquely be able to help health systems address these difficult financial and operational challenges together.

Together, the enterprise has relationships with about 70% of the countries health systems.

Third alone since <unk> meets all our acquisition criteria a leader in a niche market delivers mission critical application specific solutions.

Isn't HST organic growth business and operate in extremely asset light business model.

Taken together, Australia, it only gets more attractive in terms of the combined customer base, the combined product offering the combined financial profile and the combined future product development opportunities.

For 'twenty 'twenty four we expect <unk> to deliver about 185 million of revenue and about $90 million of EBITDA inclusive of cost synergies of note. This EBITDA is $5 million higher than at the time of the deal announcement.

Considering the 1.25 billion dollar net purchase price. The valuation is about 14 times next year's EBITDA and will only improve from there.

Operationally the teams have moved quite expeditiously and are ahead of schedule relative to the near term value creation plan, having implemented about 85% of the cost synergy opportunities within the first 45 days.

In addition, the customer feedback has been overwhelmingly positive.

Finally, the new combined leadership team headed by strata as CEO, John Martino are turning their strategic attention to new combined product development ideas net.

Net net this is a highly compelling value creation opportunity for our customers and our shareholders.

And with that let's now turn to page 10, and walk through our application software segment.

Third quarter revenues for application software segment were $803 million up 5% on organic basis, and EBITDA margins increased to 44, 6% in the quarter.

We will start with Delta Delta.

<unk> was solid in the quarter was sustained momentum in their SMB channel and the private sector solutions.

They continue to see sluggish activity in their Gov Con enterprise segment, given the backdrop of federal government spending uncertainty.

Re tenant retention rates across the entirety of deltak remain high.

Importantly over the last couple of months Deltec released a jet AI enabled data collection capability for their government IQ business and in L. O M based processing features for their vantage point product.

It's good to see further adoption of <unk> within the portfolio.

Also in the quarter as we outlined on last quarter's call Deltec closed the acquisition of Replicon, albeit about a month later than anticipated.

To remind you replicon as a market, leading timekeeping and workforce management SaaS solution focused on professional services firms and it's highly complementary to adult tech strategy.

We continue to expect rebel contact contribute north of $70 million of revenue and 24 million of EBITDA next year.

At her in our software business focused on the needs of law firms continues to excel and delivered a very strong quarter.

In the quarter at or it saw a record third quarter bookings and continued success in the adoption and cross sell other SaaS solutions.

Also and importantly, during the quarter at or continue to mature and gain market traction with their general bed I enabler matti.

Aderans most recent Ginnie I product release enables passive fee earner time entry assistance through Aderans I Timesheet product line.

Great to see this rapid product innovation aderans.

<unk> our software business is tech enabled property and casualty insurance agencies continues to be a great business for us with solid performance across our core P&C business and their recent MGA solutions bolt on.

Strata independent from the <unk> acquisition was strong in the quarter and continued to gain market adoption of their leading decision support and financial planning solutions.

Finally, frontline's had strong customer renewal season, and delivered significant cash flow as Jason mentioned to the enterprise in the quarter.

Sure.

Operator: Good morning. The Roper Technologies Conference call will now begin. Today's call is being recorded. All participants will be in listen only mode. Do you need assistance? Please signify conference specialist by pressing star than zero.

Looking to the final quarter of the year, we expect to see organic revenue growth to be in the mid single digit area for the segment.

Turning to page 11.

Third quarter revenues for our network software segment were $364 million up 5% on organic basis, and EBITDA margins were 56, 3%.

Zack Moxcey: I would now like to turn the call over to Zack Moxcey, vice president, investor relations. Please go ahead.

Let's start with our U S and Canadian freight matching businesses D. A T and load link both of which grew in the quarter. Despite the continued challenges across the broader freight and logistics markets.

Zack Moxcey: Good morning, and thank you all for joining us. We discussed the third quarter financial results for Roper. Roper Technologies. 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'Callahan, 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.

Over the last quarter or two these businesses have done a fantastic job at baseline and their cost structures, while continuing to invest in new product development.

This led to strong segment margins in the quarter.

Relative to product development and as we highlighted they touch last quarter D. T launched Jenny I enabled solutions among other initiatives targeted to combat freight industry fraud, which is a problem that plagued the entire industry.

Zack Moxcey: We have prepared supplies to accompany today's call, which are available through the webcast and are also available on our website. Now you please turn to page two. We begin with our state harbor statement. During the course of today's call, we will make forward-looking statements which are subject to risk and uncertainties as described on this page and our press release and in our SEC filing. You should listen to today's call and the context of that information.

Within the first month of release D. T has made a significant dent in fraudulent activity and DHS customers have noticed and recognized as great accomplishment.

This is a shining example of why and how Roper business has continued to innovate through and across macroeconomic cycles, which enables us to consistently deliver on market and customer opportunities ultimately leading to market share gains.

Zack Moxcey: And now please turn to page three. Today, we will discuss our results primarily on an adjusted non-gap and continuing operations basis. For the third quarter, the difference between our gap results and adjust results consists of the following items. Emeritization of acquisition related intangible assets, the financial impact associated with our minority investment in Indicor, transaction and restructuring related expenses associated with our completed acquisition, and lastly, a gain from the sale of non-operating assets. Reconciliation can be found in our press release and in the appendix of this presentation on our website.

Turning to our pipeline our network software business at Tech enabled the distribution channel for life insurance and annuities.

Our pipeline continues to execute at a high level and gain market share and.

In the quarter, they had very nice AOR gains driven by strong retention and customer expansion activity.

This growth is directly attributable to IP I pipeline strategy that is laser focused on their core life insurance and annuity customer base.

Zack Moxcey: And now if you 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?

We talked about this concept during our Investor day earlier in the year.

A closely held value of Roper in our businesses is a notion that would compete and win based on customer intimacy.

Neil Hunn: Thank you, Zach, and thanks to everyone for joining our call. We're looking forward to sharing our third quarter results with you this morning, which like each of the first two quarters this year were quite good.

Customer intimacy requires focus and strategic choice.

<unk> pipeline over the last two to three years has excelled at this the concept of focus on the core and choice, which enables further market share gains great job team.

Neil Hunn: As we turn to page four, let's look at today's agenda. As usual, we'll start with the most recent quarters financial highlights than Jason will discuss our results. After that, we'll turn to our segment specific discussion and wrap up outlining our increased 2023 enterprise guidance. Let's go ahead and get started. Next slide, please.

Foundry, our media and entertainment Postproduction software business continued their business model transition to a subscription model and is ahead of plan in that regard, though industry demand was temporarily paused given both the Hollywood writers and actors strikes.

Neil Hunn: As we turn to page five, the four main takeaways for today's call are first. We continue to perform at a high level, operationally, delivering another quarter of very strong financial results, definitively demonstrating the quality of our portfolio businesses, our leaders, and our government system. Second, we continue to be very active on the M&A press, deploying about two billion over last quarter. Third, we're increasing our FOIA guidance, and fourth, we remain very well positioned for further disciplines, capital deployment.

Notwithstanding foundry continues to innovate their product offering and will aggressively compete for customer wallet share in the coming months as the actor striking results.

Finally, our alternate site health care businesses image, a soft riders and SHP were strong in the quarter.

Execution was solid and the business has benefited by having improved census, and skilled nursing assisted living facilities and home health, reaching the highest occupancy levels and patient volumes since the onset of the pandemic.

For the final quarter of the year, we expect to see low single digit growth for this segment based on continued challenging freight market conditions and the actor strike impact on foundry.

Neil Hunn: As it relates to the first takeaway, our continued strong performance. We saw total revenue growth, 16%, and organic revenue growth, 6%. Consistent with our long-standing strategy, we continue to not only scale our enterprise, but also simultaneously improve its underlying quality, and return revenue base with organic software, return revenue growing, high single digits in the quarter.

Now, let's turn to page 12, and walk through or a tough segment.

Revenues in the quarter were 396 million up 10% on organic basis.

EBITDA margins for this segment were strong at 36, 5% in the quarter.

We'll start with Neptune, our water meter and technology business.

Neil Hunn: Unfortunately, the cash. As we've been highlighting throughout the year, we had very strong cash flow performance with free cash flow growing 19% or the most recent TTM period and 77% in the quarter. Turning to our second main takeaway, the deployment of 2 billion over last quarter was led by our acquisitions of Centellus and Replicon, both of which are bolt-ons for Toronto and Delta, respectively. These are each strategically interesting bolt-ons and are highly compelling from a value creation perspective as we're able to buy these businesses for about 14 times next year's EBITDA, more on these in a bit.

That tuned delivered another fantastic quarter of operational and financial performance as has been the case for several quarters Neptune continues to see strong demand and momentum for their residential and commercial ultrasonic or static meters and increasing adoption for their meter data management software.

We remain bullish about Neptune and the market in which they compete given this market tends to be quite steady as Neptune as customers' 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.

Neil Hunn: In addition, in the quarter, we made $125 million dollar minority investment in Surtinia, a professional services automation software business. We're excited to partner with the Velley and General Atlantic Ventures to deploy the value creation thesis associated with this unique opportunity. Third, we're increasing our full-year total revenue growth to be 14% plus, increasing our organic revenue growth to be 7% plus, and increasing our full-year depth guidance to be in the range of 1662 to 1666 or up 21 cents at the midpoint versus our previous guidance of 1636 to 1650. And fourth, we continue to be very well positioned for further capital deployment by having over 4 billion of M&A firepower. We remain very active in the market as we evaluate and diligent many attractive opportunities.

Specifically verathon saw strength across our reoccurring single use products, both bronchoscope, our beef works and video intubation or glide scope as well as bladder scan capital purchases.

A group of smaller businesses here antibiotics IPA in RFID as were fantastic as they were last quarter substantially working through a series of nagging supply chain challenges.

Relative to the final quarter of the year, we expect to see low double digit organic growth for this segment.

Now please turn to page 14, and let's go through our increased 2023 guidance.

Based on our strong third 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 14% plus an increase from about 13% last quarter.

Jason Conley: So with that, Jason, let me turn to Colin Review so you can walk through our third quarter results in a very strong financial position.

In addition, we're raising our full year organic revenue outlook to be in a 7% plus ZIP code and increase from about 7% last quarter and 5% to 6% and our original guide for the year.

Jason Conley: Jason? Thanks, Neil, and good morning to those that have joined our call. And thank you for your interest in Roper.

As a result of our improved revenue outlook, we're increasing our depth guidance for the year to be in the range of $16 62, and <unk> 66 up from our prior guidance of 16, 36% to $16 50.

Jason Conley: Turning to slide six, I'll take you through our third quarter enterprise results in a bit more detail. Revenue of 1.56 billion was 16% over a prior year, with 6% organic growth, and a 9% contribution from acquisitions led by frontline. As Neil mentioned, organic software recurring revenue growth within the high single digit area. This was led by strength and customer expansion and net new logos across our enterprise software businesses. Additionally, our product businesses continue to deliver with 10% organic growth in a quarter highlighted by Neptune and Verathon.

Assumed in this guidance the tax rate trending to the high end of our 21% to 22% range.

For the fourth quarter, we're establishing adjusted <unk> guidance to be in the range of $4 28, and $4 32.

Now please turn over to page 15, 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 we delivered yet another solid quarter.

Jason Conley: Revenue converted nicely through EBITDA, with EBITDA 652 million or 18% over a prior year. Martin expanded in the quarter to 41.7% with EBITDA operating leverage of 46%. This all translated to depths of $4.32 versus our guidance of 416-420. Of note, our recent acquisitions had minimal impact on earnings this quarter. We expect depth secretion from these deals in 2024 as we pay down the revolver and benefit from full synergy realization. Free cash flow was very strong in the quarter and came in line with our expectations.

In the third quarter revenues increased 16% to 156 billion.

This growth was underpinned with 6% organic revenue growth and high single digit organic software recurring revenue growth.

In addition, EBITDA margins were notably strong at 41, 7% and cash flow was outstanding growing 77% in the quarter and 19% on a TTM basis.

Second we successfully deployed $2 billion of capital in the quarter led by the bolt ons ups and tell us and our Replicon.

These two deals will deliver about 115 million of EBITDA next year and are priced about 14 times next year's EBITDA.

Jason Conley: We generated 625 million free cash flow, which is up 272 million over a prior year. As a reminder, our frontline business delivers most of its free cash flow in the third quarter, so that plus a terrific organic contribution and drove the significant growth. Looking at cash flow in a trailing 12 month basis, as shown on this slide, provides a more relevant comparison. With the front line renewals tucked into the third quarter, our TTM free cash flow is 1.82 billion, which is up 19% over the prior TTM period.

Might compelling.

Third based on the strong 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 depths outlook to be between $16 60 to $16 66.

And finally, notwithstanding this quarter's 2 billion of deployment, we continue to be active with our capital deployment activities as we have north of 4 billion of available M&A firepower.

As we've been discussing over the past several quarters, we have a very large pipeline of opportunities, though as always we remain super patient and highly disciplined to ensure the continued optimal deployment of our available capital just as we did with us and tell us and our Replicon acquisitions, we firmly believe that patients as is always the case with capital deployment.

Jason Conley: With the expectation for a strong Q4, we're on track to deliver north of 30% free cash flow margins in 2023. Taking a broader view, our TTM free cash flow is compounded 16% over a three year period, which is in line with EBITDA growth.

We'll be rewarded.

Jason Conley: In summary, our focus on compounding cash flow is evident in our results and will continue to guide us into the future.

Before we turn to your questions I'd like to share an exciting addition to the Roper executive team during the quarter Janet Glaser joined our team and is leading our acquisition cultivation and corporate development outreach efforts.

Jason Conley: Next slide on page seven here, taking a look at our financial position, we ended the quarter with net debt of 6.6 billion, including about 900 million drawn on our revolver. With trailing over 2.4 billion, this leaves us with net leverage, of about 2.7 times. Looking forward, we have capacity to deploy 4 billion or more over the foreseeable period, even after deploying 2 billion in the third quarter. As always, cash flow growth optimization guides our strategic choices. So while our balance sheet may be primed, we will be disciplined in patient when it comes to capital deployment. To that end, private markets are slowly falling with activity picking up over the last quarter.

We will partner with our M&A resources, our corporate leadership team and several of our business units to increase our forward leaning posture with private equity sponsors and their businesses. Most recently Jan It was a global sector leader and portfolio manager at Fidelity.

We're super excited that Jan has joined our leadership team and welcome aboard.

As we turn to your questions and if you could flip to the final slide our strategic flywheel, we like to remind everyone that what we do at Roper is simple.

We compound cash flow over the long arc of time by operating a portfolio of market, leading application specific and vertically oriented businesses.

One of the companies part of Roper, we operate a decentralized environment our businesses can can compete and win based on customer intimacy, yet we chose our businesses on how to structurally improve their growth rates and underlying business calling.

Neil Hunn: With that, I'll turn it back over to Neil to go through the segment results and outlook. Neil? Thanks, Jason.

Neil Hunn: Let's turn to page nine, and before we walk toward segment details, we'd like to start with an overview of our acquisition of Centellus and the combination with our strata business. To remind everyone, strata is in part of Roper for eight years as a leader in delivering fast-based financial planning, decision support, and performance analytics solutions to US hospitals and health systems. Centellus is a leading provider of SaaS-based enterprise performance management and data solutions to hospitals, higher education, and financial institutions. As many of you know, US-based hospitals and health systems continue to face intense pressure from macro market trends, challenges resulting from care-setting shifts, reimbursement rates, lagging rising costs, and labor staffing issues.

Finally, we run a centralized process driven capital deployment strategy that focus on finding the next great business to add to that our cash flow flywheel taken.

Taken together, we compound our cash flow in the mid teens area over the long arc of time.

So with that thank you for your continued interest in Roper and let's open it up to your questions.

We will now 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.

If you would like to ask a question you may do so by pressing the star key followed by the digit one on your Touchtone telephone.

If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then the cube.

Neil Hunn: The combined strata and Centellus business will uniquely be able to help health systems address these difficult financial and operational challenges. Together, the enterprise has relationships with about 70% of the country's health systems. Stand alone, Centellus meets all our acquisition criteria. A leader in a niche market delivers mission-critical application specific solutions, is an HSD organic growth business and operates an extremely asset-like business model. Taken together with strata, it only gets more attractive in terms of the combined customer base, the combined product offering, the combined financial profile, and the combined future product development opportunities. For 2024, we expect Centellus to deliver about 185 million revenue in about 90 million of EBITDA inclusive of cost synergies. Of note, this EBITDA is 5 million higher than at the time of a deal now.

Again, we request that callers limit their questions.

Two one main question and one follow up.

The first question comes from Julian Mitchell with Barclays. Please go ahead.

Thanks, Good morning.

Maybe just wanted to focus on the network.

Software business for a second.

I had one question really trying to put a finer point on.

How much of a headwind in that Q4 <unk>.

Sales Guy do you have from.

The freight markets.

What sort of pace of decline or softness there in a foundry more of a sort of review the month of October type headwinds and then was there anything one time in the network software margins in Q3 that made them so high.

Neil Hunn: Investment. Considering the $1.25 billion net purchase price, the valuation is about 14 times next year's EBITDA, and will only improve from there. Operationally, the teams have moved quite expeditiously and are ahead of schedule relative to the near-term valuation plan having implemented about 85% of the cost-energy opportunities within the first 45 days. In addition, the customer feedback has been overwhelmingly positive. Finally, the new combined leadership team headed by Stratas, CEO John Martino, are turning their strategic attention to new combined product development ideas.

Hey, good morning, Julien. Thanks for your question, so ill try to take care of reverse order the margins I tried to cover in my prepared remarks.

The T and load Lake have just done a great job in Q2, and Q3 aligning the cost structures of where the business is today and so they are actually a little bit ahead of where they wanted to be in that regard. So that's what drove the margins.

Well that the foundry is it's very much in Q4, I mean, there are still most very much as an accurate strike for foundry.

Postproduction, they need content flowing through the pipeline and.

Neil Hunn: Netnet, this is a highly compelling valuation opportunity for our customers and our shareholders.

And right now writers are writing, but doctors aren't acting.

The general consensus is that okay that'll serve resolve itself in Q4, but one never knows that our pipelines are build and sort of leading into maybe the second half of Q1, and Q2 boundaries demand will start to get back to normal level. So it's sort of as a Q3 Q4, maybe Q1 impacting.

Neil Hunn: And with that, let's now turn to page 10 and walk through our application software segment. Third quarter revenues for application software segment were 803 million, up 5% on organic basis, and EBITDA margins increased to 44.6% in a quarter.

All of the two.

Neil Hunn: We'll start with Dell Tech. Dell Tech was solid in the quarter with sustained momentum in their SMB channel and their private sector solutions. They continue to see sluggish activity in their Docton enterprise segment given the backdrop of federal government spending uncertainty. Retention rates across the entirety of Dell Tech remain high. Importantly, over the last couple months, Dell Tech released a Gen AI-enabled data collection capability for the GovWine IQ business and an LLM-based processing features for their vantage point product.

And load links all reminds us D J T.

He has just been remarkable over the last couple of years until an abnormal growth has been exceptional.

D C.

Super long history of being very steady growing they grew in the quarter. They continue to innovate you know in October here, we've seen a sort of we're bouncing along the bottom if you will maybe a slight uptick in the first handful of weeks in October who knows of that sort of started a trend or just some of the yellow sort of.

Neil Hunn: It's good to see further adoption of Gen AI within the portfolio. Also in the quarter, as we outline on last quarter's call, Dell Tech closed the acquisition of Replicon albeit about a month later than anticipated. To remind you, Replicon is a market-leading timekeeping and workforce management fast solution focused on professional services firms and is highly complementary to Dell Tech's strategy. We continue to expect Replicon to contribute north of 70 million revenue and 24 million EBITDA next year.

No capacity coming into a different part of the market and reshaping.

But at.

We expect normal behavior for D. T is just we got to we got to wait about get off the bottom here in terms of.

The industry great volumes, if you wanted to that so I think that's right I mean, the abnormality. If you drew a straight line from 2019, you'd see that business substantially right. So we had started this exceptional growth lot of carriers come in the market they are exiting out.

Again, it's just been a good steady grower for us over the last 20 years absent sorry. This exceptional period and just back on foundry I didn't say that what we did observe is the gross retention of the business has been extremely strong.

Neil Hunn: Adderent, our software business focus on the needs of law firms continues to excel and deliver a very strong quarter. In the quarter, Adderent saw record-third quarter bookings and continued success in the adoption and cross-sell of their SaaS solutions. Also, and importantly during the quarter, Adderent continued to mature again market traction with their gender-based AI-enabler Maddy. Adderent's most recent Gen AI product release enables passive fee earner time entry assistance to Adderent's i-time-team product line.

Have moved to a subscription model this year and so that gives customers pause on it they get they get off maintenance, they're going to have to come back on a subscription. So we felt good to see you. Once the actor Stryker has done that that's that business is going to pick back up next year hopefully.

Thanks, very much and then just a quick follow up it sounds like Centel is off to a strong start but made my question on set tineid.

Neil Hunn: Great to see this rapid product innovation at Adderent. Veraphore, our software business tech enables property and casual insurance agencies continues to be a great business for us with solid performance across their core PNC business and their recent NGA solutions bolt-on. Strata, independent from the Centella's acquisition, was strong in the quarter and continued to gain market adoption of their leading decision support and financial planning solutions. Finally, front line had strong customer renewal season and delivered significant cashflow as Jason mentioned to the enterprise in the quarter.

More maybe a slightly unusual.

Structure for ROE puts a go in for this minority interest approach.

Given that the attributes when you bring something in house.

So maybe just sort of explain why you went for this structure.

And any sense of the scale of say, a 10 year or the size of that business.

Yeah. So we're partners with her belly principally.

<unk>.

Is that the belly partners, we know quite well it was a.

Neil Hunn: Looking to the final quarter of the year, we expect to see organic revenue growth to be in the mid-single-digit area for the segment.

One of the founders of this the person who led the jet practice of Bain came together to join her belly.

The long history of both of them as individuals they actually approached us to see if we can lend some more expertise to the situation. So we were intrigued by being able to help we're intrigued by the value creation opportunity here, it's a very compelling value creation opportunity and then also learned a thing or two along the way I mean this is a smart group of people that are.

Neil Hunn: Turning to page 11, third quarter revenues for a network software segment were 364 million, up 5% on organic basis, and EBITDA margins were 56.3%. Let's start with our US and Canadian freight matching businesses, DAT and load link, both of which grew in the quarter, despite the continued challenges across the broader freight and logistics markets. Over the last quarter or two, these businesses have done a fantastic job at baselining their cost structures while continuing to invest in new product development.

Have a long history of doing this type of transaction.

It's a unique opportunity Julian as you mentioned, we're not we're not looking to do a lot more things like this this is not the beginning of like a large book of minority investments will continue to be opportunistic, but it's not going to be anything it's going to be.

Neil Hunn: This led to strong segment origins in the quarter. Railroads are product development, and as we highlighted a touch last quarter, DAT launched GNI-enabled solutions among other initiatives targeted to combat freight industry fraud, which is a problem that plagued the entire industry. Within the first months of release, DAT has made a significant dent in fraudulent activity, and DAT's customers have noticed and recognized this great accomplishment. This is a shiny example of why and how Roper businesses continue to end to a true and across macroeconomic cycles, which enables us to consistently deliver on market and customer opportunities, ultimately leading to market share gains.

Few and far between in terms of our pacing in volume on this and the scale I think we're on as a private business that will sort of keep the scale of the business sort of in the private domain.

Great. Thank you.

The next question comes from Allison <unk> with Wells Fargo. Please.

Please go ahead.

Hi, good morning.

Good morning.

E vapor products it seems like you're taking a pick up in terms of where you were expecting the second half of this year I know you mentioned Nexium marathon, but any specific vertical driving sort of that outperformance in the sector.

Neil Hunn: Turning die pipeline, our network software business that tech enables a distribution channel for life insurance and annuities. I pipeline continues to execute at a high level and gain market share. In the quarter, they had very nice ARR gains driven by strong retention and customer expansion activity. This growth is directly attributable to I pipeline strategy that is laser-focused on their core life insurance and annuity customer base. We talked about this concept during our investor date earlier in the year.

Marketplace, Oh, I'm, sorry, you broke up just at the very end there.

I would say so just to just to reiterate it sort of Neptune is they've made it is a bit market based and that market continues to be very healthy that customers are are are ordering patterns are consistent and robust lots of backlog carrying into next year.

So there is market share gains and product advantages, we have but also a cooperative market for sure.

Neil Hunn: A closely held value of Roper Interbusiness is a notion that would compete and win based on customer intimacy. Customer intimacy requires focus and strategic choice. I pipeline over the last two to three years has excelled in this, the concept of focus on the core and choice, which enables further market share gains.

With Verathon the market dynamic is moving towards single use in the category of Bronco scopes from from re firm reusable because of infection control. So it's a market that is definitely a growth market that we are very soon to be the number one player in and knock on wood, maybe this quarter.

Neil Hunn: Great job, team. Foundry, our immediate entertainment post-production software business, continued their business mob transition to a subscription model and as a head of plan in that regard, though industry demand was temporarily paused given both the Hollywood writers and actor strikes. Now with standing, Foundry continues to innovate their product offering and will aggressively compete for customer while not sharing the coming months as the actor strike results.

And so thats mark related, but just tremendous execution by the team, but go to market and product tons of product vitality.

And then also in the segment.

We have a couple of we mentioned a couple of smaller RF product businesses, that's left market and more just clearing through just just a mountain of supply chain problems that plagued the businesses for many a few quarters in second quarter and third quarter are great in that regard to those businesses.

Neil Hunn: Finally, our alternate site healthcare businesses, MHA, softwriters and SHP were strong in the quarter. Execution was solid and the business is benefited by having approved pensions, skilled nursing, assisted living facilities and home health, reaching the highest occupancy levels and patient volumes since the onset of the pandemic.

And then just turning to M&A, you mentioned sort of that as private market starting to Ah can you maybe.

You talked to three.

Multiples that youre starting to see there are they as attractive as what we've just seen this past quarter or do they still need to come and I'll go back here.

Yes, that's really the question.

Neil Hunn: For the final quarter of the year, we expect to see low single-digit growth for this segment based on continued challenging freight marking conditions and the actor strike impact on Foundry.

So the.

The market, Jason sort of referred to it as like a coiled spring I mean, there is a.

Tremendous amount of activity like forming activity investment bankers pipelines, our billing processes are starting there is increasing pressure from the Lps onto the sponsors to start thinking about getting some liquidity back to them. The sponsors starting to think about raising new funds, what they need liquidity to do that so there.

Neil Hunn: Now let's turn to page 12 and walk through a test segment. Revenues in the quarter were 396 million up 10% on an organic basis. Even that margins for the segment were strong and 36.5% in the quarter.

Neil Hunn: We'll start with Neptune, our water meter and technology business. Neptune delivered another fantastic quarter of operational and financial performance. As has been the case for several quarters, Neptune continues to see strong demand and momentum for their residential and commercial ultrasonic or static meters and increasing adoption for their meter data management software. We remain bullish about Neptune and the market in which they compete given this market tends to be quite steady as Neptune to use customers budget specifically fixed year to year and not tied to broader macro economic trends or cycles.

A lot of the the precursor activity that is required to see transactions come back into the market.

<unk> still remains about the bid ask spread between buyers and sellers.

He is still the number of <unk>.

Clinton deals to date is still small so this is a.

We anticipate with what we know there's going to be more opportunities, we don't yet know where theyre going to clear.

We continue to be Super patients you know the market is coming to us we don't have to chase the market. If we can find very compelling value opportunities like Replicon entellus, we'll do them. If we if we don't we will remain patient.

Neil Hunn: Verathon was awesome in the quarter as well with double digit order growth and tremendous operational execution. Specifically, Verathon saw strengths across the reoccurring single use products, both Brockis Goep or B Flex and Video Innovation or Glide Goep, as well as Blatterscan Capital Purchases. A group of smaller businesses here, end of Onyx, IPA and RFIDs, were fantastic as they were last quarter, substantially working through a series of nagging supply chain challenges. Rolled up to the final quarter of the year, we expect to see low double digit organic growth for this segment.

Understood. Thank you.

Thank you.

The next question comes from Deane Dray with RBC capital markets. Please go ahead.

Thank you and good morning, everyone.

Hey, good morning, Hey, first congrats on hiring Janet I've known her many years I think she'll be a great addition to the team so congrats.

Thanks are there that we're looking at or sort of a.

She's not on the extra that were looking at her and she's a blushing.

You got to be great part of the team for sure. That's Fabulous Alright. So first I wanted to go back more of a macro question have there been any changes at the margin in customer decision, making.

Neil Hunn: Now please turn to page 14 and let's go through our increased 2023 guidance. Based on our strong third quarter performance, we're raising our full year 2023 guidance for total revenue, organic revenue and adjusted deaths. For 2023, we now expect total revenue growth to be 14% plus an increase from about 13% last quarter. In addition, we're raising our full year organic revenue outlook to be in a 7% plus zip code and increase from about 7% last quarter and 5% to 6% in our original guide for the year.

The pace of new logos, you called out Deltak, which is understandable given there are government service side some of the uncertainties, there, but just kind of broad brush are you seeing any changes in customer behavior.

Let's say, it's a it's played out as we anticipated.

Over the course of the year and it's really been a mixed bag.

Just look at once of the deltak strong across SMB, both on the government contracting.

Neil Hunn: As a result of our improved revenue outlook, we're increasing our deaths guidance for the year to be in the range of 1662 and 1666 up from prior guidance of 1636 to 1650. Assumed in this guidance, the tax rate trending to the high end of our 21 to 22% range.

That sector of professional services markets strong at the enterprise level for P. S less strong on the government contracting side at the enterprise level. So it really is a mixed bag in that case, its less macro related and more tied to the uncertainty around what's happening in the federal government and budgets.

Neil Hunn: For the fourth quarter, we're establishing adjusted deaths guidance to be in the range of 428 and 432. Now please turn to this to page 15 and then we'll look forward to answering your questions.

And what's going on there.

You'll see strength across our pipeline to see strength that address those are very healthy customer bases.

So it really is a mixed bag obviously the weakness at DHT given that we just talked about with just where it breaks some freight markets are so it's really a collection of bespoke things than it is sort of a broad brush macro across the portfolio.

Neil Hunn: We want to leave you with the same four points with which we started. First, we delivered yet another solid quarter and the third quarter revenues increased 16% to 1.56 billion. This growth was underpinned with 6% organic revenue growth and high single-digit organic software at recurrent revenue growth. In addition, EBITDA margins were notably strong at 41.7% and cash flow was outstanding growing 77% in the quarter and 19% on a TTM basis. Second, we successfully deployed 2 billion in capital and the quarter led by the Bolton's of Centellus and Replicon.

Neil Hunn: These two deals will deliver about 115 million of EBITDA next year and are priced about 14 times next year's EBITDA, quite compelling. Third, based on the strong quarter performance, the recurring nature of a 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 1662 and 1666. And finally, notwithstanding this quarter's 2 billion of deployment, we continue to be active with our capital deployment activities as we have north to 4 billion of available M&A firepower.

Alright, thats good to hear.

And then.

Second question on maybe more of an update on Gen. AI. It was interesting that you called out several initiatives that the companies are pursuing.

And out of rent.

Are these mostly bottom up initiatives by the companies or is there anything from the headquarter side, maybe you're getting some expertise to help identify opportunities and.

Maybe give us a sense of how penetrated it is today with an ROE for and what kind of adoption might you see a year from now just kind of it sounds like you're playing more offense here and this and what lots of insights.

Sure.

Yes, so we're definitely playing offense here. We think this is a transformational technology right it's not a.

That's really the paradigm are heightening of that we think this is foundational technology that will change the way we all live our personal lives and business will be conducted over the course of the next five to 10 years right. So that's our view on that on the technology of <unk>.

Neil Hunn: As we've been discussing over the past several quarters, we have a very large pipeline of opportunities though, as always, we remain super patient and highly disciplined to ensure that they continue to optimal deployment of our available capital just as we did with us and tell us inter-replicant acquisitions. We firmly believe that patience, as is always the case with capital deployment, will be rewarded.

Ginny.

Large language models et cetera. So what we're doing is really a combination of top down bottoms up if you will from a top down perspective Deane we've organized.

We definitely sized I should say a couple of our group executives to teach our employee Mike Corkery.

To lead in education series across a variety of topics around genii for companies. So we've done a series of zoom meetings, three or four or five or six still a doe staked out every three or four weeks around that started with what is G&A and evolving more and more of that how do you deploy methods of deployment.

Neil Hunn: Before we turn to your questions, I'd like to share an exciting addition to the Roper Executive Team. During the quarter, Janet Glazer joined our team and is leading her acquisition cultivation and corporate development outreach efforts. Janet will partner with our M&A resources, our corporate leadership team, and several more business units to increase our forward-leaning posture with private equity sponsors and their businesses. Most recently, Janet was a global sector leader and portfolio manager at Fidelity. We're super excited that Janet has joined our leadership team and welcome aboard.

Where how the organization deployed both on productivity and new product ideas. So the hope was that is that it.

It's burns this creative thinking across the 18000 people Aruba vague about how the impact our customers' positively impact our operations positively.

Neil Hunn: As we turn to your questions, and if you could flip to the final slide, our strategic flywheel, we'd like to remind everyone that what we do at Roper is simple. We compound cashflow over a long mark of time by operating a portfolio market leading application-specific and vertically-oriented businesses. Once a company is part of Roper, we operate a decentralized environment so our businesses can compete and win based on customer intimacy.

So ultimately it will be a bottoms up groundswell of ideas, but we're accelerating the learning if you will ultimately we might do a couple of other things that are centered around the concept of excellent some of the larger players or the deployment models for cyber security safety and security purposes, but as with Rover. All the good ideas will be generated bottoms up from the field.

Neil Hunn: Yes, we coach our businesses on how to structurally improve their growth rates and underline business quality. Finally, we run a centralized process driven capital deployment strategy to focus on finding the next great business to add to our cashflow flywheel. Taken together, we compound our cashflow in the mid-teens area over a long, hard-to-time.

The leadership team and the employee base.

Great to hear thank you.

Okay.

The next question comes from Joe <unk> with Baird.

Please go ahead.

Great. Thank you.

In the slides you make the distinction that organic software growth recurring software growth that's already in the high single digits and then of course your reported organic is 5% I guess my question is that generally going to be the spread you would expect just given professional services.

Zack Moxcey: So with that, thank you for your continued interest in Roper and let's open it up to your questions.

Operator: We will now 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. If you would like to ask a question, you may do so by pressing the star key, followed by the digit one on your touch-tone telephone. If you are using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star then the digit two. Again, we request that callers limit their questions to one main question and one follow-up.

And probably license attrition over time.

And then as that spread expected to be consistent in that foreseeable future.

Okay.

Hey, Joe Jason I would say that that there always will be a spread was probably a little bit more pronounced this quarter, just because we had some some deals.

Push out and we have talked about foundry going from.

Perpetual to subscription.

Julian Mitchell: The first question comes from Julian Mitchell with Barclays. Please go ahead. Thanks for good morning.

There always will be a spread is probably August is probably a little bit more pronounced in the third quarter, though.

Neil Hunn: Maybe I just wanted to focus on the network software business for a second. One question really kind of put a finer point on how much of a headwind in that Q4 sales guide you have from the freight markets. What sort of pace of decline or softness there? And it's foundry more of a sort of review month of October type headwinds. And then was there anything one time in the network software margins in Q3 that made them so high?

Okay. Thanks, Thanks for that and then I will.

Want to go back a couple of quarters ago. Now you mentioned that a S had ramping services capacity.

Strong bookings in your health care assets I'm wondering if you can maybe just provide an update on maybe whether those awards have gone by and then in the broader health care apparatus, you know what.

Are you seeing there obviously, you're increasing exposure there now via M&A I guess, how does maybe organic growth is a profile stand relative to the broader segment.

Yeah. So.

So relative to the professional services ramp Bill that was principally into our laboratory Global laboratory business classes, they've done just a tremendous job competing and winning in the U K in the French market.

Neil Hunn: Hey, good morning, Julian, thanks for the question. So, I'll try to take my reverse order. The margins, I try to cover in my prepared remarks how the AT and load length have just done a great job in Q2 and Q3, allowing the cost structures or the businesses today. And so they've actually a little bit of head and where they wanted to be in that regard, so that's what drove the margins. You know, well, that the foundry, it's very much in Q4.

In the Benelux region, they tend to be larger installs and they did a nice job. There. It also is around power plan.

We're in that I think their second quarter services bookings was the largest services bookings quarter in the company's history. If my memory serves me correctly. So the deals have ports are formed and the capacity is in the process of utilized so.

Neil Hunn: I mean, there's still much, very much is an access strike for foundry and post-production. They need content flowing through the pipeline and right now writers are writing, but actors aren't acting. The general consensus is that that'll sort of resolve itself in Q4, but one never knows then the pipeline's a build and sort of leading into maybe the second half of Q1 and Q2 foundry's demand. They'll sort of tip at the normal levels.

Good operational sort of foresight from those two businesses.

And then relative to health care exposure I mean, it's.

And tell us I mean, it's.

<unk> Standalone high single digit growth business or side of business was a little bit better than that over our ownership period.

Neil Hunn: So it's sort of the Q3, Q4, maybe Q1 impacting. We're all into DAT and load length, our minds is DAT has just been remarkable. Over the last two, a couple of years, it's really been abnormal growth. It's been exceptional. DAT is a super long history of being very steady and growing. They grew in the quarter. They continue to innovate, in October here. We've seen sort of we're bouncing along the bottom, if you will.

And the.

The companies the combined company now they've dropped and most of the cost synergy work is super excited about the new product development ideas. They have to further monetize both the customer base and persona I mean, we have 70% of the health systems. So its customers with the persona of the CFO.

It's not just the same service same persona between the two companies that were very excited about what that can do.

Neil Hunn: Maybe a slight uptick in the first handful of weeks in October, who knows if that's the start of the trend or just some of the yellow sort of capacity coming into a different part of the market and reshaping. But we expect normal behavior for DAT. We've got to wait about get off the bottom here in terms of the industry's great lines. Do you want to add to that? No, I think that's right.

That's great. Thank you very much.

Youre welcome.

The next question comes from Scott Davis from Melius Research. Please go ahead.

Good morning, everybody good morning.

Good morning.

You guys. When you compete when you're doing a more bolt on <unk> deal and this kind of rate environment are you competing against a different type of.

Neil Hunn: I mean, they add normality. If you do a straight line from 2019, you'd see that this has been up substantially, right? So we have sort of this exceptional throughout a lot of carriers come in the market. They're exiting out. Again, it's just been a good steady growth for us over the last 20 years. I've said sort of this exceptional period. And just back on the foundry, I would say that what we've observed is the gross retention of the business has been extremely strong.

Competitor.

These things versus maybe a year or two ago.

So less p/e shop, showing up in and you just kind of trying to get a sense of sort of just less competition overall for those types of transactions.

So.

What I would say is.

Neil Hunn: We have moved to a subscription model this year, and so that gives customers pause on if they get off maintenance. They're going to have to come back on its subscription. So we've talked to you once the actor strike is done, that business is going to be picked back up next year, hopefully.

As a general matter, we're still competing against the sponsor community, though the depth of the field.

A little thinner.

In the case of Centel us it was really a proprietary deal.

Julian Mitchell: Thanks very much. And then just a quick follow-up, sounds like St.

And we haven't seen many proprietary deals.

Neil Hunn: Pellis off to a strong start, but maybe my question on Sir Tiniere more, maybe a slightly unusual structure for Roper to go in for this minority interest approach, given the attributes when you bring something in-house. So maybe just sort of explain why you went for this structure in any sense of the scale of Sir Tiniere or all the size of that business. Yeah, so we're partners with Haveli principally, and the Haveli partners, we know quite well.

In a long time right.

In a more frothy market, even if you were the most likely owner of an asset.

The seller would run a market check.

And in this case, we're able to just sort of cut through all that and reach a deal that made sense for both parties. So maybe in that regards I mean, the competition is a little thinner, but it's the same set of characters.

Yes.

Okay makes sense.

Not much to pick on very solid quarter overall, but can you give us a sense of materiality of kind of the foundry.

Yeah.

Just the strike impact in everything it if foundry wasn't in the in the mix would growth have been higher than the 5%.

Neil Hunn: It was one of the founders of Vista, and then the person who led the check practice at Bain came together to join Haveli. So in the long history, both of them as individuals, they actually approached us to see if we could lend some our expertise to the situation. So we're intrigued by being able to help, we're intrigued by the valuation opportunity here. It's a very compelling valuation opportunity, and then also learn a thing or two along the way.

Segment growth.

Yeah, I'd say, a little bit I mean, it's.

For the second half its like single digit revenue impact.

Relative to our last guidance.

Okay mid singles.

Okay.

Alright, alright, thank you I'll pass it on I appreciate it.

Here from me.

Sure.

Neil Hunn: I mean, this is a smart group of people that have a long history of doing this type of transaction. At the unique opportunity, Julian, as you mentioned, we're not looking to do a lot more of things like this. This is not the beginning of like a large book of minority investments. We'll continue to be opportunistic, but it's not going to be anything. It's going to be a few in part between in terms of our pacing and volume on this. And the scale, I think we're on at the private business, so we'll sort keep the scale of the business sort of in the private domain. Great, thank you.

The next question comes from Terry Tillman with Truest.

Please go ahead.

Yeah, Thanks for taking my questions and good morning, gentlemen.

First question is on frontline if I'm not mistaken you have this important renewal season, we saw the strong cash flow in the quarter I'm curious if those are important kind of milestones when they are renewing and you get the cash flow, but what happens and what did you see with expansion of our interest in expanding products or modules, adding more seats, taking pricing and then the second part of my first.

And that's just how it is new business growth going in frontline.

Allison Poliniak: The next question comes from Allison Poliniak with Wells Fargo. Please go ahead. Hi, good morning. I'm sorry about the technology enabled products. It seems like you're certainly a pickup in terms of where you were expecting the second half of this year. I know you mentioned Neptune and Barathon, but any specific vertical driving sort of that out performance in the sector in this space. Oh, sorry about that. You broke up just on the very end there.

Yeah.

Okay. So frontline as we mentioned I mean, it was just a good first year.

The we're right on plan consistent with last year.

Retention was in line with historical and net retention so relative to the upsell cross selling was in line with historical rates sort of one of three 1% for very consistent in the quarter FERC.

For frontline for net retention so steady as she goes it just goes to the the criticality of what frontline does for the customers in which they serve again, they empower frontline of education.

Allison Poliniak: So I would say, so yeah, just to just reiterated sort of Neptune is, I mean, it is a bit market based in that market continues to be very healthy. The customers are ordering patterns are consistent and robust lots of backlog carrying in the next year. So there is there's market share gains and products advantage. We have it also a cooperative market for sure. You know, with Barathon, the market dynamic is moving towards single use in the category of rocket scopes from from re firm use of holes because of infection control.

So it's good in terms of the new the new cross selling or excuse me the net new customers.

Been very good on the sort of the run rate business at frontline.

Actually a little bit better than prior years, and then as it goes with the lowest loss small numbers. There is a handful of large deals that frontline normally gets in any given year. The larger deals have been a little slower to show up this year.

They are still in the pipeline there just sort of pushing to the right, but we're talking about three to five deals over a course of a year. It did just a law of small numbers. So we're not reading too much into that hard to recall, a macro or a lack of execution. It's just there's just a small number of deals.

Allison Poliniak: So it's a market that is definitely a growth market that we are very soon to be the number one player in knock on wood, maybe this quarter. And so that's market related, but just tremendous execution by the team, but good market and product. It means tons of product vitality.

Neil Hunn: And then also in the segment, we have a couple, we mentioned a couple of small are product businesses that less marketed more just clearing through just just the mountain of supply chain problems that plague the businesses for many a few quarters and second quarter and third quarter rates in that regard for those businesses.

Okay. Thanks for that Neil and I guess, just my follow up is on Neptune.

See this momentum continuing into 'twenty, four and how much should we hang our hat on this meter data management product I mean does that move the needle doesn't have a good attach rate. Thanks.

Yes, so Neptune.

<unk> got a lot of backlog carry in next year and obviously, we've got to go through our planning process are all all of our companies and understand what the puts and takes but.

We expect them to have another good year as a general matter just given the momentum and the backlog the market positioning.

Allison Poliniak: And then just turning to MNA, you mentioned sort of that private market starting to saw key maybe, you know, talked through sort of the multiples that you're starting to see there are they as attractive as what we've just seen as past quarter or do they still need to come in a little bit here. Yeah, that's really the question. The so the market, Jason sort of referred to it as like a coil spring.

The capacity they have.

The competitive advantage they have relative master data data management software, it's been an important part of this business you know as we have.

More and more technology on the meter to get more data off the meters and do and push more.

Capability to the leaders to help to be able to sort of process.

Allison Poliniak: I mean, there is a tremendous amount of activity like forming activity, investment bankers, pipelines are filling processes are starting. There's increasing pressure from the LPs onto the sponsors to start thinking about getting some liquidity back to them. The sponsor started to think about raising new funds, which they need liquidity to do that. So there's a lot of the the precursor activity that is required to see transactions come back into the market.

Volume of data and to be able to put it into.

One billing system or cash collection system, and so we'd have a we have a.

Pretty decent sized and highly capable software group at Neptune that didn't exist 10 years ago that deals with this and it's a growing part of the business. That's always it's a smaller part of the business, but it is a fast growing part of the business one worthy of calling out in the quarter. So I appreciate the question.

Thanks.

Allison Poliniak: The question still remains about the bid aspect between buyers and sellers. You still the number of printed deals today that's still small, right. So this is and we anticipate well, we know there's going to be more opportunities. We don't yet know whether they're going to clear. We continue to be super patient, you know, the market's coming to us. We don't have to chase the market.

The next question comes from Christopher Glynn with Oppenheimer. Please go ahead.

Thanks, Good morning all.

So lots been asked but I was curious about some language in the press release that guidance doesn't include.

Obviously future acquisitions or divestitures, you've had a pretty broad stroke of divestiture over a couple year period recently.

Neil Hunn: If we can find very compelling value opportunities like replicants and tell us we'll do them if we don't we'll remain patient. Understood. Thank you.

Bye.

Curious if that the <unk>.

<unk> done putting that word in the press release.

And you just standard language Christopher so none.

Dean Dre: The next question comes from Dean Dre with RBC capital mark. Please go ahead. Thank you.

Sure.

Nothing to read into that.

Okay, great. Thank you that's all I got.

Neil Hunn: Good morning, everyone. Good morning. Hey, first congrats on hiring Janet. I've known her many years. I think she'll be a great addition to the team. So congrats.

The next question comes from.

Joe Giordano with TD Cowen. Please go ahead.

Hey, good morning, guys.

Good morning.

Hey.

On M&A like if we're going into like kind of a more murky kind of macro environment here, a little bit more uncertain I get why we kind of open up those markets a little bit but judy's large.

Neil Hunn: There have been any changes at the margin and customer decision making, the pace of new logos. You called out Dell tech, which is understandable given their government service side, some of the uncertainties there, but just kind of broad brush. Are you seeing any changes in customer behavior? See, it's played out as we anticipated over the course of the year. It's really been a mixed bag. Just look at one company in Dell tech, you know, strong across SMV, both on the government contracting and private sector, professional services markets, strong at the enterprise level for PS, less strong on the government contracting side at the enterprise level.

Like larger scale bolt ons become incrementally more attractive to you in times like this just because you kind of know the market's more you probably have more certainty around an outcome than like bringing in something that perhaps is an adjacency or something that you just less familiar with in general.

Neil Hunn: So it really is a mixed bag. In that case, it's less macro related and more tied to the. The uncertainty around what's happening in the federal government and budgets and what's going on there. You see strength across high pipelines. You see strength and adorant. Those are very healthy customer bases. So it really is a mixed bag.

Well, Joe I would.

I would say, yes, or no to that I would I mean first of all times of uncertainty relative to our capital deployment, our history and pattern recognition says there was a great time for US right to go back to like the pandemic, we do very for like in the late summer of 2020.

It's a terrific business for us great asset for us our largest deal because of our balance sheet strength and our flexibility we were in business when nobody else was in the sellers need to sell front.

Frontline's very different reasons last year, very similar and tell us I mean, its opportunity and this uncertainty. So we like that now as it relates to is there going to be a player will deploy to a platform or a bolt on.

Neil Hunn: Obviously the weakness at DAT given that we just talked about, which is where afraid from frame markets are. So it's really a collection of the spoke things than it is sort of a broad brush macro across the portfolio. All right, that's good to hear.

We built over 20 years, the ability to understand be great. If you will.

Neil Hunn: And then second question on maybe more of an update on Gen AI. It was interesting that you called out several initiatives that the companies are pursuing DAT and adorant. Are these mostly bottom up initiatives by the companies, or is there anything from the headquarters side? Maybe you're getting some expertise to help identify opportunities. And maybe give us a sense of how penetrated it is today within Rover and what kind of adoption might you see a year from now.

Humbly, our business sticker and part of that is understanding the markets.

And understand that competitive advantages, but into that we're looking for stability right. We're looking for stable competitive forces observable competitive forces small markets clear leadership position high gross and net retention those that's the formula for stability from which to grow from and.

And so if we see things like that.

Uncertain times will certainly lean into that at the same time as we talked about at our Investor day.

For our capital deployment strategy, we are trying to lean in to do more bolt on activity.

Neil Hunn: Just kind of it sounds like you're playing more offense here in this and would love some insights. Thanks. Sure. Yeah, so we're definitely playing offense here. We think this is a transformational technology, right? It's not a. Not a trendy paradigm or hyping a fat. We think this is foundational technology that will change the way we all live are personalized and visually conducted over the course of the next 10 years, right? So that's that's our view on the technology of. Gen AI and large language models, etc.

Because they have historically been the best value, creating deals we've done they help our businesses once they turn organic grow faster. That's a gigantic part of what we brought Janet M to do is to help lead that part of our investment strategy and so we'll do either but but I understand sort of the dynamic between the interplay between the two.

Neil Hunn: So what we're doing is really a combination of top down bottoms up, if you will, from a top down perspective, Dean, we've organized. We definitely try to say a couple of our group executives to teach our poor and my corporate to lead an education series across a variety of topics around Gen AI for companies. So we've done a series of Zoom meetings, you know, three or four, we've got five or six still ago, they're spaced out every three or four weeks around.

Yes.

Makes sense and then just the last.

And we still don't have a speaker of the house, we may have a government shutdown coming at the end of the year what are the implications of something like that on Delta X business.

I think all of that is factored into the current environment.

I think the the large.

But the enterprise class Derma contractors based on just the uncertainty.

We're being very cautious in their activity they've been cautious.

Over to you.

It fits in and fits and starts this year.

So I think it's baked in it's certainly reflected in our balance of the outlook for this year.

Neil Hunn: But started with what is Gen AI and it's evolving more and more into how do you deploy methods of deployment? How where and how the organization deploy both from productivity and new product ideas? So the hope with that is that it creates, it's what it's burns this creative thinking across the 18,000 people are rooper. Think about how the impact our customers positively has impact our operations positively. So ultimately, it will be bottoms up grounds of ideas, but we're accelerating the learning, if you will.

Continued uncertainty.

And this but the good news is this will eventually clear itself and then the government gets you back to spending and that'll be a catalyst for delta.

Great, Thanks, and I'll just echo.

I'll just echo <unk> comments, great great hire on on Janet will miss or the client, but a good home for her and great higher for you guys. Thanks guys.

Thank you.

The next question comes from Steve Tusa with J P. Morgan. Please go ahead.

Neil Hunn: Ultimately, we might do a couple other things to this center around, you know, contracts with some of the larger players or deployment models for cybersecurity safety and security purposes. But as with rooper, all the good ideas will be generated bottoms up from the field and the leadership team and the employees. Great to hear.

Hey, good morning.

Hey, Steve Good morning to you.

<unk> Janet as well.

Yes.

Yeah can you guys just.

Obviously, great cash in the quarter I guess.

Joe Vruwink: Thank you. The next question comes from Joe Vruwink with Fared. Please go ahead. Great. Thank you. In the slides, you make the distinction that organic software grows the recurring software growth. That's already in the high single digits. And then of course, your reported organic is 5%. I guess like the question is that generally going to be the spread you would expect just given professional services and probably license attrition over time? And then is that spread expected to be consistent in the foreseeable future?

Guys had talked about the seasonality here.

How do we kind of think about the <unk> from a working capital perspective, now like how should we.

Should we look at history.

Is there anything that kind of gives back when it comes to frontline in the fourth quarter like what what are how do we think about working capital should we expect another.

Strong working capital performance similar to what we just saw in the third quarter.

<unk> history.

Yes.

Before frontline Hugh borrowers are.

Our strongest quarter of the year, we have a lot of large renewals in our enterprise software businesses.

We expect it to be strong again this year I mean, I don't think frontline is going to really give back there are just not going to give right there'll be kind of flattish on cash.

Jason Conley: Hey Joe, Jason, I would say that there are always will be a spread. It was probably a little bit more pronounced this quarter, just because we had some some deals and NAS push out and we have, you know, we talked about found re going from, you know, perpetual to subscription. So yeah, there are always will be a spread is probably a little bit more pronounced in the third quarter though. Okay, thanks for that.

So we feel good about sort of the fourth quarter and how it's going to close out the year, we still expect to be north of 30% free cash flow margins for this year. So Q3 was obviously strong and we expect the same in Q4.

Anything else year over year in Q4 from a cash tax timing perspective or outside of working capital we have to be aware of.

Not really.

Sure.

Okay.

Actively net income growth and then some working capital.

Neil Hunn: And then I wanted to go back a couple quarters ago. Now, you mentioned that has had ramping services capacity. If that was the support strong bookings and your health care assets. I'm wondering if you can maybe just provide an update on maybe whether those awards have gone live. And then in the broader health care apparatus. You know, what are you seeing there? Obviously, you're increasing exposure there now via MNA. I guess how does maybe organic growth as a profile stand relative to the AS broader segment?

Benefits right.

Great and then just just following up on the on the.

Environment in enterprise software.

You guys mentioned, there's like there's pockets of softening I think I just could you just clarify like what Youre just seeing broadly there.

From from customers in the 'twenty four it just seems like the economy is mixed but a lot of the software.

Business is out there holding up really well.

Neil Hunn: Yeah, so, so we're all done to the professional services ramp build that was principally at our laboratory, global laboratory business, clean assists. They've done just a tremendous job competing and winning in the, in the UK in the French market, in the Benilux region, they tend to be larger installs and they did a nice job there. It also is around power plan, where, and that they, I think their second quarter services bookings was the largest services bookings quarter in the company's history.

How would you guys kind of characterize the environment, maybe a little bit deeper there.

Yeah, I mean, I think it's again I'll just just.

To remind everybody right. We've got a business model that's built on durability right. So it's a very highly recurring what we do is mission critical. So we're not we're not on the fringe generally speaking something that can be turned off and on we're just we're the system of record we operate sort of the freight market.

Customers need our software that leads to high retention theres pricing thats routine and the growth algorithm. Most of the cyclicality has been taken out of the business and so this is the macro as it is a very durable set of businesses. So we're talking about a point or two here or there relative to the impact of all of this.

Neil Hunn: My memory serves me correctly. So, the deals have forced sort of formed in the capacity is, is in the process of the utilize. So, good operational sort of foresight from those two businesses. And then relative to health care exposure, I mean, it's with some tell us, I mean, it's a standalone high single digit growth business. Our standard business was a little bit better than that over our ownership period. And, and the companies, the combined company, now they've got the most of the cost energy work is super excited about the new product development ideas they have to further monetize both the customer base and the persona.

There isn't we talked quite a bit getting ready for this call Steve about this there is some broad brush.

Pan Roper macroeconomic impact and what we'd say is what we've said from the beginning of the year as we just expected from our January call. The software it would be a little slower because generally you are not going to buy new large software with uncertainty in the market. So the impact on our growth algorithm.

Neil Hunn: I mean, we have 70% of the health systems as customers with the persona of the CFO, which is not just the same customer with the same persona between the two companies. And we're very excited about what that can do.

As gross retention should we expect that it is a little bit higher.

Cross selling and Upselling should be a little bit lower because youre not going to grow as much with your customers and then we're not sort of net retention is going to net out to be in the same area code as it always has been and then youre not going to sell as many large new things and that's essentially what's played out across the enterprise, but there's pockets of differences you got a ton of strength.

Neil Hunn: That's great. Thank you very much.

Scott Davis: Welcome. The next question comes from Scott Davis or Melius research. Please go ahead. Good morning, everybody. Good morning. When you're doing a more bolt-on-ish deal in this kind of rate environment, are you competing against a different type of competitor in these things versus maybe a year or two ago? There's less PE shop showing up and you're just kind of trying to get a sense of just less competition overall for those types of transactions.

That batteries, you have a little bit of weakness in dotcom that Delta you got strength.

No.

Sure.

And help me with the pipelines are in times of strength that I pipeline, improving strength that constructing that but then you have to the AC headwind. So it really is a mixed bag of things.

Got it okay, great color. Thanks, a lot.

Okay.

The next question comes from Joe Ritchie with Goldman Sachs. Please go ahead.

Scott Davis: So what I would say is that the general matter we're still competing against the sponsor community, though the depth of the field is a little thinner. In the case of Centellus, it was really a proprietary deal. And we haven't seen many proprietary deals in a long time, right? I mean, in a more frothy market, even if you were the most likely owner of an asset, the seller would run a market check.

Hey, good morning, guys.

Gradsky boats that Janet I look forward to reconnecting sometime in the near future.

Just my first question, maybe just talking on the bolt ons for a second so clearly highlighted can tell us about the comm today.

Look across your portfolio, where do you see the most opportunity to potentially bolt on.

So we're in the.

In the early stages of doing that right. So we don't want to what we do not and we will not do is do a center led process from Sarasota.

Scott Davis: And in this case, we're able to just sort of cut through all that and reach a deal that made Centellus a party. So maybe in that regard, I mean, the competition's a little thinner, but it's the same set of characters.

Say to any one of our companies here is something you should model.

Not going to do that we will not do that but we are going to do is we're asking the vast vast majority of our businesses as they go through their strategic planning cycle to have both an organic and inorganic strategy and so as we go through that vetting exercise, we will build Eric will understand our strategic areas of expansion and then we'll have the discussion should it be organ.

Neil Hunn: Okay, makes sense. Not much to pick on, very solid quarter overall, but can you give us a sense of materiality of kind of the foundry, you know, just the strike impact and everything? If foundry wasn't in the mix, would growth have been higher than the 5 percent segment growth? Yeah, a little bit. I mean, it's, you know, for the second half, it's like single digit revenue impact relative to our last guide. Okay, mid singles. Okay, all right. Good. All right. Thank you. I'll pass it on. Appreciate it.

And for inorganic from there, we'll then forward lean to figure out the inorganic opportunities and then go from there.

That's the process.

As a general matter think the larger businesses, the most obvious ones or will start deltec frontline Alberta for.

But it's not limited to our largest ones I mean, strada was sort of an average or a mean size business for us. If you will and there was a very compelling opportunity I think will ultimately have if you will the vast majority of maybe as many as 20 of our 27 companies will have some inorganic growth strategy, whether or not we execute against that's a whole another thing but at least.

Terry Tillman: The next question comes from Terry Tillman with Truist. Please go ahead. Yeah, thanks for taking my questions and a good morning, gentlemen.

Neil Hunn: The first question is on front line. If I'm not mistaken, you know, you have this important renewal season. We saw the strong cash flow in the quarter round period. Those are important kind of milestones when they're renewing and you get the cash flow. But what happens? And what did you see with expansion or interest in expanding products or modules, adding more seats, taking pricing? And then the second part of my first question is just how is new business growth going?

Australia has formed across the vast majority of the portfolio.

Got it that's helpful. Neil and I guess, maybe just just a follow on question. He did you think about renewal rate that you mentioned frontline because I think <unk> tends to be.

More of like a.

The typical quarter or you see more renewals for frontline across your portfolio does it tend to be more weighted around like the fourth quarter or just if any.

Neil Hunn: In front line? Okay, so front line as we mentioned, I mean, it was just a good first year. The renewals were right on plan, consistent with last year. Gross retention was in line with historical and net retention. So relative to the upsell cross selling was in line with historical rates. Sort of one of three, one of four is very consistent in the quarter for front line for net retention. So steady as she goes, it just goes to the criticality of what front line does for the customers in which they serve.

Any.

Color you can give us on I guess the confidence in your attention rate thing.

Hi, going into next year.

Yeah, Joe Yes, fourth quarter is a very strong renewal season for us.

Adele Deltec.

For Aaron.

So, but I'd say it is balanced across the year, but more in the fourth quarter.

Obviously with frontline and third part of that has changed the dynamic there, but we expect a strong renewals we had our operating calls this quarter.

Neil Hunn: Again, they empower the front line of education. So it's good. In terms of the new cross selling or excuse me, net new customers, it's been very good on the sort of the run rate business at front line. Can sit actually a little bit better than prior years. And then as it goes with the law of small numbers, there's a handful of large deals that front line normally gets any given year. The larger deals have been a little slower as show up this year.

The renewal process has already kicked off in the fourth quarter for these businesses and we are hearing positive feedback.

Okay, great. Thanks, guys.

The next question comes from Brett Linzey with Mizuho. Please go ahead.

Hi, good morning, all congrats on a nice quarter.

Thank you and good morning.

Just wanted to come back to construct connect I think in the previous comment you said improving strength I was just hoping you can put a finer point on that improving activity and just particularly given the some of the incoming data and construction is a little bit weaker higher rates and so on so I'd just be curious what you're seeing there.

Neil Hunn: They're still on the pipeline. They're just starting up pushing to the right. But we're talking about three to five deals of course of a year. It did just a lot of small numbers. So we're not reading too much into that. Hard to recall a macro or lack of execution. It's just just a small number of deals.

Neil Hunn: Okay, thanks for that, Neil. And I guess just my follow-up is on Neptune. You know, do you foresee this momentum continuing in the 24? And how much should we hang our hat on this meter data management product? I mean, does that move the needle? Does it have good attach rate? Thanks. For the momentum, the backlog, the market position, the capacity they have, the competitive advantage they have, relative to master data, data management as the software.

So just to remind everybody construction that is.

As the leader in commercial construction informatics and so in this data set is used in the planning stages of construction. So once they shovel goes in the ground.

Part of the of the industry and one in which we compete.

It's actually so think of it if you're a contractor or building products manufacturer and there is so much work to do that you have a backlog and responding to rfps. That's the environment. We've been in for the last handful of years. It actually has a dampening.

Demand driver for our business.

Neil Hunn: It's been an important part of this business, you know, as we have more, more technology on the meter to get more data off the meters and do and push more capability to the meters. You have to be able to sort of process gigantic volume of data. I'm going to be able to put it into a billing system or cash collection system. And so we have a pretty decent size and highly capable software group in Neptune that didn't exist 10 years ago that deals with this.

When business is harder to find there's fewer projects then the contractors are having to work harder and find opportunities that plays into the strength of construct connect so so to the first point of why we're seeing some improving strength there because the market is coming to us it tends to have counter cyclical demand drivers.

We have to when we talk about construction and I forgot to talk about the operational improvements that have happened in the business with <unk> and his team.

They're doing a tremendous job taking complexity out of this business, having a go to market motion that is more efficient having a product motion is more efficient having a marketing message is more efficient and so.

Neil Hunn: And it's a growing part of the business. It's always, it's a smaller part of the business, but it's a fast growing part of the business. One more they've called out in the corner. So I appreciate the question.

Christopher Glenn: Thanks.

When the market is coming to us we're going to do we are doing a better job capturing that demand. So it's a combination of both market and operations.

Christopher Glenn: The next question comes from Christopher Glenn with Oppenheimer.

Joe Giordano: Please go ahead. Thanks. Good morning, all. So lots been asked. There was curious about some language in the press release that guidance doesn't include obviously future acquisitions or divestitures. You've had a pretty broad stroke of divestiture over a couple of year period recently passed by. So curious if that the intent on putting that word in the press release. Thank you, just standard language. Christopher, so nothing nothing to read into that. Okay, great. Thank you.

Joe Giordano: That's all I got.

Got it appreciate the color and then just last question on the margin outlook I understand you don't want to give full guidance here at October for next year, but just thinking about the moving pieces. The mixed differences in the businesses is there a framework to think about in terms of percent margin expansion incremental margins and particularly within networks off.

I mean do we build off these high levels for next year.

Yes, I mean, I think it's a little early to talk about margins for next year, but I mean broadly 45% operating leverage is sort of what our long term model is and we've been close to that this year I think you're probably right, though in network. It will be maybe a little bit above that next year, but it's still too early to tell.

Neil Hunn: The next question comes from Joe Giordano with TV Cohen. Please go ahead. Hey, good morning, guys. Hey, so on M&A, like if we're going into like kind of a more murky kind of macro environment here, a little bit more uncertain. I get why would kind of open up those markets a little bit, but do these large, like larger scale both on becoming incrementally more attractive to you in like times like this, just because you kind of know the markets more.

Got it appreciate the color.

The next question comes from Brad Hewitt with Wolfe Research.

Please go ahead.

Neil Hunn: Or you probably have kind of more certainty around an outcome than like, you know, bringing in something that perhaps is energy consider something that you're just less familiar with in general. Well, well, Joe, I would, I would say yes and no to that. I would, I mean, first of all, times of uncertainty, relative capital deployment, our history and powder recognition says those are great times for us. Right, you go back to like the pandemic we do word for like in the late summer of 2020.

Hi, Thanks, good morning, everyone.

Good morning, Brian So I noticed that Tim had Achier VP of acquisition is on the board of <unk>.

Is there anything to read through there in terms of potentially seeing that relationship with <unk> to evolve and keep it overtime.

I wouldn't read too much into that.

Have a board member and a board observer and part of us delivering our knowledge. If you will to that enterprise also learning for the enterprise comes partially through the board interaction.

So I would not read anything into that other than he was Tim was the ones who will help shepherd the process. He had the relationships obviously the M&A team lead the diligence and so he is just the name board member I wouldn't read anything into that this is one step into a second step transaction.

Okay. That's helpful and then maybe switching gears.

Neil Hunn: It was one just a terrific business for us. Great asset for us. Our largest deal because of our balance sheet strength and our flexibility. We were we were in business when nobody else was in the sellers need to sell. Frontlines very different reasons last year, very similar, some tell us something. I mean, it's it's opportunity in this uncertainty. So we like that. Now, as it relates to it's going to be a plan with the points of platform or bolt on.

In terms of free cash flow conversion.

Is it typically targeted conversion of about 80% of EBITDA and historically you've executed on that but now following the end of course sale just curious.

If you guys have kind of reassess that number and whether there's scope to kind of outperform on that from a longer term perspective.

Yes, I think Ive said for about a year, we kind of look at things as a kind of a margin so as a percent of revenue and being north of 30% of revenue and free cash flow is kind of right way to think about it with EBITDA you, obviously with interest rates changing its not.

Neil Hunn: We build over 20 years, the ability to understand, be a great if you will. Unbelieve a business figure and part of that is understanding the markets and understanding competitive advantages, but in that we're looking for stability, right? We're looking for stable competitive forces, observable competitive forces, small markets, clear leadership position, high growth and that retention, both not the formula for stability with from which to grow from. And so if we see things like that and these uncertain times will certainly lean into that at the same time as we talked about in our investor day.

Good to look at it.

In a certain point in time, but over time that can that can change. So a percentage of revenue is sort of how we think about that north of 30% is our target.

Sure.

I appreciate it.

Okay.

This concludes our question and answer session. We will now return back to Zack Mark seat for any closing remarks.

Neil Hunn: For capital point strategy, we are trying to lean in to do more bolt on activity because they historically been the best value created deals we've done. They help our businesses once they turn organic real faster. That's a gigantic part of what we brought Janet in to do is to help lead that part of our investment strategy. And so we'll do either, but you understand sort of the dynamic between the interplay between the two.

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

Yes.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

[music].

Neil Hunn: Yeah, that makes sense, and then just last, we still don't have a speaker at the house, we may have a government shutdown coming at the end of the year. What are the implications of something like that on Delta X business? I think all of that is factored into the current environment. I think the large, what the enterprise class government contractors based on, just the uncertainty, or being very cautious in their activity, they've been cautious over, you know, it fits and starts this year.

Yeah.

Yes.

Neil Hunn: So I think it's baked in, it's certainly reflected in our ballot for the outlook for this year, sort of continued uncertainty. But the good news is this will venture clear itself and then the government will be getting back to spending and that will be a catalyst for Delta. Great, thanks, and I'll just echo Dean. I'll just echo Dean's comment and a great, great hire on Janet. We'll miss her as a client, but a good home for her and great hire for you guys. Thanks, guys. Thank you.

Steve Tusa: The next question comes from Steve Tusa with JP Morgan. Please go ahead. Hey, good morning. Thanks Steve, good morning to you. Congrats to Janet as well. Yeah, can you guys just, obviously, a great cash in the quarter, I guess, you know, you guys have talked about the seasonality here. How do we kind of think about the 4Q from a working capital perspective now? Like, how should we look at history and, you know, is there anything that kind of gives back when it comes to front line in the fourth quarter?

Steve Tusa: Like, what, what, how do we think about working capital should we expect another strong working capital performance summer? What we just saw in the third quarter? Like history? Yeah, I mean, you know, before front line Q4 was our, you know, our strongest quarter of the year, you know, we have a lot of large renewals that are enterprise software businesses. We expected to be strong again this year, and I don't think front line is going to really give back.

Steve Tusa: They're just not going to give, right? They'll be kind of flatish on cash. So we feel good about sort of the, you know, the fourth quarter and how it's going to close out the year. We still expect to be north of 30% free cash loan margins for this year, and so Q3 was obviously strong and we expect same Q4. And anything else year over year and Q4 from a cash tax timing perspective or outside of working capital, we have to be aware of?

Steve Tusa: Not really. Yeah. Okay. So effectively net income growth and then some working capital benefits. Right. Okay. Great. And then just following up on the environment and enterprise software, you guys mentioned there's like, there's pockets of self-inning. I think I just clarify like what you're just seeing broadly there from customers into 24. It just seems like the economy's mixed, but a lot of the software businesses out there holding up really well. How would you guys kind of characterize the environment maybe a little bit deeper there?

Steve Tusa: Yeah. I mean, I think it's again, I'll just just to remind everybody, right? I mean, we've got a business model that's like built under ability, right? So it's very highly occurring. What we do is mission critical, so we're not around on the fringe. Generally speaking, something that can be turned off and on or just work system or record. I don't know. We operate sort of the freight market. There are customers need our software that leads to higher retention.

Steve Tusa: There's pricing that's retaining the growth algorithm. Most of the cyclical cavities been taken out of the business. And so this is the macro is it's a very durable set of businesses. We're talking about a point or two here or there relative to the impact of all of this. There isn't. We talk quite a bit getting ready for this call Steve about this. There's some broad brush. A pan-rooper macroeconomic impact, and what we say is what we said from the beginning of the year is we just expected from our January call that software would be a little slower because generally you're not going to buy new large software with uncertainty in the market.

Steve Tusa: So the impact on a growth algorithm is growth retention, we expected it is a little bit higher. Cross-felling and upselling should be a little bit lower because you're not going to grow[inaudible] strength. I've got a lot of strength. [inaudible] next year. Yeah, Joey out 4th quarter is a very strong renewal season for us at Deltech, sort of for Adderand. So, but I'd say, you know, it is balanced across the year, but more in the 4th quarter, but obviously with frontline and third quarter, that's changed the dynamic there.

Steve Tusa: But we expect the strong renewals, you know, we had our operating calls this quarter and the renewal process has already kicked off in the 4th quarter for these businesses. And, you know, we're hearing positive feedback. Okay, great. Thanks, guys.

Brett Linzey: The next question comes from Brett Linzey with Mizzouho. Please go ahead. Hi, good morning, all congrats on a nice quarter. Hey, I just wanted to come back to construct connect. I think in the previous comment, you said improving strength is just hoping you'll put a fighter point on that improving activity and just particularly given the, you know, some of the incoming data and construction is a little bit weaker, higher rates and so on. So, I just be curious what you're seeing there. Yeah.

Neil Hunn: So, just to remind everybody, construct connect is a leader in commercial construction and mathematics. So, in this data set is used in the planning stages of construction. So, once they shovel goes in the ground, that's a different part of the industry and one that would do that. So, it's actually, when, so think of it, if you're a contractor or a building private manufacturer, and there's so much work to do that you have a backlog and I've responding to RFPs, that's the environment we've been in for the last handful of years.

Neil Hunn: It actually has a dampening demand driver for our business. When business is harder to find, there's fewer projects than the contractors are having to work harder and find opportunities that place into the strength of construct connect. So, to the first point of while we're seeing some improving strength there is because the market's coming to us. It tends to have counter-specical demand drivers. But, we have to, when we talk about construct connect, we've got to talk about the operational improvements that have happened in the business with Matt Straza and his team.

Neil Hunn: After you're out connect, they're doing a tremendous job taking complexity out of this business. Having to go to market motion is more efficient. Having a product motion is more efficient. Having a marketing message is more efficient. And so, when the market's coming to us, we are doing a better job capturing that demand. So, it's a combination of both market and operations. You got to appreciate the color.

Jason Conley: And the last question on the margin outlook. You understand you don't want to get full guides here in October for next year. But, just thinking about the moving pieces, the mixed differences in the businesses. Is there a framework to think about in terms of, you know, percent margin expansion incremental margins, and particularly within networks software? Do we build off these high levels for next year? Yeah, I mean, I think it's a little related to talk about margins for next year.

Jason Conley: But, I mean, broadly, you know, 45% operating leverage is sort of what our long-term model is. And we've been, you know, close to that this year. I think you're probably right, though, in that work, it'll be maybe a little bit above that next year. But, it's still too early to tell. Got it. Appreciate the color. Thank you.

Brad Hewitt: The next question comes from Brad Hewitt with Wolf Research. Please go ahead. Hi, thanks. Good morning. Good morning, Brent. So, I noticed that Tim Haddock, your VP of Acquisitions, is on the board of Syltinia.

Neil Hunn: Is there anything to read through there in terms of potentially seeing that relationship with Syltinia evolve and deepen over time? I would read too much into that. We have a board member and a board observer, and part of us delivering our knowledge, if you will, to that enterprise, and also learning from the enterprise comes partially through the board interaction. And so I would not read anything into that other than he was.

Neil Hunn: Tim was the one who helped shepherd the process. He had the relationships, obviously the M18 leads the diligence. And so he's just the name board member. I would read anything into that this is a one step into a second step transaction.

Jason Conley: Okay, that's helpful. And then maybe switching gears in terms of free cash flow conversion. You guys have typically targeted conversion of about 80% of EBITDA and historically you've executed on that. But now following the Indicor sale, just curious, if you guys have kind of reassessed that number and whether they're scope to kind of outperform on that from a longer term perspective. Yeah, I think I've said for about a year, we've kind of looked at things as a kind of a margin, so as a percent of revenue.

Jason Conley: And being north to 30% of revenue on free cash flow is a kind of right way to think about it. You know, with EBITDA, obviously with interest rates changing, it's not, you know, it's good to look at it. You know, in a certain point of time and over time, that can change. So a percent of the revenue is sort of how we think about it. North and 30% are target.

Jason Conley: Appreciate it.

Operator: This concludes our question and answer session.

Zack Moxcey: We will now return back to Zach Moxie for an closing remarks. Thank you for joining us today. We look forward to speaking with you during an afternoon call.

Operator: The conference has now concluded. Thank you for attending today's presentation.

Operator: You may now disconnect. Thank you very much.