Operator: Good morning. The Roper Technologies conference call will now begin. Today's call is being recorded. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star zero. I would now like to turn the call over to Zack Moxcey, Vice President, Investor Relations. Please go ahead.
Zack Moxcey: Good morning, and thank you all for joining us as we discuss the Q3 2026 financial results for 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 Chief Accounting Officer, and Shannon O'Callaghan, Senior Vice President of Finance.
Zack Moxcey: Earlier this morning, we issued a press release announcing our financial results. The press release also includes replay information for today's call. We prepared slides to accompany today's call, which are available through the webcast and are also available on our website. Now, if you'll please turn to page 2. We begin with our safe harbor statement.
Zack Moxcey: 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 3. Today, we will discuss our results primarily on adjusted non-GAAP basis.
Zack Moxcey: For the Q3, the difference between our GAAP results and adjusted results consists of the following items: amortization of acquisition-related intangible assets, transaction-related expenses associated with completed acquisitions, financial impacts associated with our minority investment in Indicor, and lastly, cash collected on Outgo's beneficial interest, which is the residual amount owed to Outgo after it sells receivables to a third party and is classified within cash flows from investing activities.
Zack Moxcey: Reconciliations can be found in our press release and in the appendix of this presentation on our website. Now, if you please turn to page 4, I will hand the call over to Neil. After our prepared remarks, we will take questions from our telephone participants. Neil?
Neil Hunn: Thank you, Zack, and thanks to everyone for joining us this morning. You can see our agenda on page 4, so let's get into it. Next slide, please. First, we delivered solid Q3 results, including 7% organic revenue growth and increased DEPS guidance for the year. Second, AI momentum continues to build, and we are pleased with the progress in the quarter.
Neil Hunn: Our businesses are bringing new products to market, and we are increasingly encouraged by the breadth of that progress and what these products will do for our customers. Third, we are active again on the acquisition front, completing three bolt-ons with our longstanding capital allocation discipline. Starting with our results. Total revenue grew 8%, organic revenue grew 7%, EBITDA grew 7%, and DEPS grew 15%. At a high level, we had a strong quarter.
Neil Hunn: To spike out a few of our larger businesses, we had another encouraging quarter for Deltek, although we continue to take a wait-and-see approach. We continue to see nice supply side recovery at DAT, and unfortunately, Neptune continues to face subdued meter market conditions. Based on these results, we are also increasing our full year DEPS guidance.
Neil Hunn: It was a solid quarter, and Jason Conley will walk you through the financial details in a moment. Turning to AI. Since our last call, our businesses have introduced a broad range of products that apply AI to the specialized tasks and workflows our customers manage every day. Let me share a few examples. First, Vertafore launched agents for submission processing, benefit plans, and docket research, and has now added two agents that automate policy processing for independent agencies.
Neil Hunn: Since the beginning of the year, Vertafore has developed and launched 12 workflow automation agents with many, many more in development. At Aderant, seven AI agents are now in early access to help law firms bill more accurately and collect cash faster. The appeals agent helps draft billing appeals, the collection agent prioritizes overdue accounts, and the time agent improves billing descriptions.
Neil Hunn: These are practical uses of AI to reduce administrative work and help law firms run more efficiently. Another example is PowerPlan, where a new intelligent unitization product tackles a significant industry challenge. More than $180 billion of capital investments awaiting detailed asset classification across the US electric utilities. Our purpose-built AI capability analyzes project and accounting data and recommends how cost should be allocated to individual assets.
Neil Hunn: By accelerating that process, it helps utility recover their capital investments and earn returns sooner, bringing forward revenue, earnings, and cash flow, and the productivity gains are substantial. Customers are completing this work in minutes that previously took days or weeks. This is another powerful example of our focus across Roper, putting AI to work to help our customers grow, perform better, and operate more efficiently.
Neil Hunn: Great work by Rafi and the team at PowerPlan. At Strata, Financial Decision Intelligence helps healthcare finance teams identify what needs attention and understand what is driving performance. In a few minutes, I am going to double-click on this specifically. At CentralReach, Report Draft AI is designed to improve provider productivity and economics. Clinical reauthorization reports typically take 9 to 12 hours per learner, much of which is non-billable.
Neil Hunn: By automating data gathering and preparing a draft for clinician input and review, the product frees up substantial capacity for billable care, creating opportunities for providers to serve more learners, supporting revenue growth, and improving operational efficiency with their existing clinical teams. Foundry introduced new AI capabilities for visual effects, while Subsplash launched work management products that bring AI and automation into church operations.
Neil Hunn: What is encouraging is both the breadth of this activity and how specific these products are to the markets we serve. They address work our customers know well, work that takes time, requires specialized knowledge, and matters how their organizations operate. We continue to see a substantial opportunity to help customers do work more efficiently and effectively, and we are excited to partner with our customers from across the enterprise to realize the promise of AI.
Neil Hunn: Our confidence that opportunity is grounded in the same advantages that have always made our vertical market software businesses strong. Deep domain expertise, embedded workflows, unique data assets, trusted customer relationships, and scale distribution.
Neil Hunn: Our businesses know their customers' workflows and where AI can save time and improve decisions. Each business develops products close to its customers, while our AI accelerator team helps speed development and share reusable approaches across the portfolio. We are still early in commercialization and are starting to see adoption and monetization of our AI solutions.
Neil Hunn: Importantly, our products change how customers do work, so adoption will develop over time. As customers use our products, that experience will help our businesses refine the products and expand our capability remit. There is more work ahead, but we love the progress.
Neil Hunn: We have new products reaching customers across a broad range of markets and a meaningful opportunity to build from here. Third, we continue to execute our disciplined capital allocation strategy and are encouraged that we are able to execute three bolt-on acquisitions during the quarter.
Neil Hunn: Specifically, we deployed $436 million towards bolt-on acquisitions for iPipeline, Procare, and Strata. The common theme is expanding the capabilities and reach of our existing businesses and in complementary products, expertise, and customer relationships in markets we know well.
Neil Hunn: Each acquisition builds on our existing domain expertise and distribution, creating more opportunities to serve customers and drive long-term organic growth. Our approach remains consistent. Evaluate each opportunity carefully and deploy capital where we see attractive long-term returns. So a solid quarter with another impactful step on our AI journey. With that, let me turn the call over to Jason to walk through our financial results, capital allocation activity, and balance sheet position. Jason?
Jason Conley: Thanks, Neil. Good morning, everyone. Please turn with me to slide 6 to review our financial performance. Our Q3 was highlighted by solid organic revenue growth and strong DEPS growth. We delivered revenue of $2.2 billion, which is up 8% over prior year, underpinned by organic growth of 7%. Digging deeper here, organic recurring revenue grew 8% across our two software segments.
Jason Conley: Our enterprise software gross retention remains very high, consistently in the mid-90s. Further, core enterprise bookings were up mid-single digits on a TTM basis. EBITDA of $864 million was up 7% and converted to EBITDA margin of 39.8%. Core EBITDA margin was down 30 basis points, with our software segments in aggregate slightly expanding, while our TEP segment was down 90 basis points.
Jason Conley: Our Neptune business delivered more mechanical meters in the quarter, which has a dilutive impact on revenue dollars and margin. Over a longer arc, we expect a continued migration to ultrasonic meters, which drives higher lifetime value for customers and Neptune. DEPS of $5.89 was up 15% over prior year and above our guided range of $5.75 to $5.80 on better margin performance.
Jason Conley: Free cash flow of $805 million represents 37% of revenue, but was down 4% versus prior year, given we had timing of interest coupon payments on bonds issued in 2025, and we had a temporary lag in collections at our Illumia business as they move through an ERP implementation.
Jason Conley: For the year, we expect free cash flow to be 30% or more of revenue, and with our share repurchase activity, free cash flow per share is expected to grow in the double digits area. Now, if you turn with me to slide 7, I will walk through our financial position and capital deployment.
Jason Conley: Enabled by seasonally strong free cash flow and proceeds from the divestiture of Indicor's instrumentation businesses, we reduced our net debt to EBITDA by half a turn within the quarter to land at 2.9x, all while simultaneously deploying $436 million towards acquisitions. We finished with over $300 million of cash and $1.3 billion drawn on our $3.5 billion revolver. In the quarter, Indicor announced the sale of the remaining flow controls businesses to Xylem.
Jason Conley: We expect around $600 million of pre-tax proceeds sometime in Q4 as the transaction moves through regulatory clearance. Also in the quarter, we acquired three tuck-in businesses for iPipeline, Procare, and Strata. Consistent with our acquisition criteria, these tuck-ins play directly into the strategy of increasing organic growth where we have the highest right to win. All three tuck-ins are growing faster than their acquiring platforms and, coupled with synergies, are expected to generate very attractive returns.
Jason Conley: Looking ahead, we now have more than $6 billion of capacity for capital deployment over the next 12 months, given strong free cash flow, which will be enhanced by proceeds from Indicor's sale of its flow controls businesses. In summary, we will remain well-positioned to deploy capital towards the highest risk-adjusted return opportunities through a disciplined and analytical process and approach. Neil, with that, I'll turn the call back over to you.
Neil Hunn: Thanks, Jason. As we turn to page 9, let's review our Application Software segment. Revenue grew 7% in total with organic growth of 6%. EBITDA margins were 43.7%, up 30 basis points year over year. Looking across the segment, AI momentum continues to build with more of our businesses bringing new solutions to market. We also continue to see solid progress on cloud conversions, including encouraging signals at Deltek.
Neil Hunn: Turning to the business highlights. Aderant had another excellent quarter. The team continued to expand its AI agent platform as previously mentioned, with capabilities across rates, compliance, and general ledger forecasting. Vertafore delivered growth across its agency, MGA, and carrier businesses, and launched six new AI agents, along with its value-based credit model.
Neil Hunn: This value-based pricing model is a key enabler of product-led growth, as customers will utilize credits towards any current and future agentic solutions on the Velocity platform. As we discussed last quarter, Vertafore's strategy starts with high volume, labor-intensive work, embedding agents directly into the systems customers already use. The latest launches expand the work those agents can do and build on the foundation established with Velocity.
Neil Hunn: Deltek had another encouraging quarter with continued strength in its private sector solutions. Government contracting bookings have been solid over the last couple of quarters, although the broader market remains uncertainty.
Neil Hunn: Against that backdrop, customers are showing increased interest in moving from perpetual license to our cloud-based offerings. As we discussed earlier, we also saw new AI solution launches at CentralReach with Report Draft AI and PowerPlan with intelligent unitization. Finally, we completed two bolt-on acquisitions.
Neil Hunn: At Procare, we added Playground, which helps childcare centers manage enrollment, billing, and daily operations. Playground has exceptional product-market fit and is highly complementary to the existing Procare product stack. We're excited about the growth opportunity from pairing that product with Procare's distribution and payments infrastructure. At Strata, we added C Myers, which helps banks and credit unions plan for growth and manage financial risk.
Neil Hunn: This quarter, I spent a full day with the Strata team and finance leaders from nine of our health system customers at a co-design workshop for Financial Decision Intelligence, or FDI, Strata's new AI capability for healthcare finance. FDI became generally available on 1 September. FDI helps finance teams diagnose what is changing in their business and where to intervene to improve performance.
Neil Hunn: For example, when joint replacement margins decline despite rising procedure volumes, FDI automatically explores the underlying drivers from payer mix and reimbursement to labor and implant costs to identify the source of margin pressure and focus management's response. FDI brings together three advantages we see from across the portfolio. First, proprietary data and ontologies.
Neil Hunn: Every health system has its own accounting procedures and definitions. Two hospitals can both report their margin on joint replacements and mean very different things. Strata has spent decades mapping thousands of provider general ledgers into a specific common structure supported by healthcare cost accounting down to the individual patient encounter. That makes meaningful benchmarking possible and gives FDI its foundation.
Neil Hunn: Its calculations use the same governance measures customers rely on to close their books with consistent, repeatable results that are traceable to the source. You cannot prompt your way to that.
Neil Hunn: It is earned one customer implementation at a time over years. Second, turning insight into action. FDI operates inside the Strata platform, delivering answers in seconds and connecting those insights directly to the workflows where customers manage costs, improve margins, and allocate resources. And third, real customer trust. Healthcare finance leaders need confidence in the tools they use to make consequential decisions.
Neil Hunn: Strata has earned that confidence through long customer relationships. Trust is critical to AI adoption, and is very hard to replicate. Throughout the workshop, the customer request was simple and consistent, productivity.
Neil Hunn: Less time assembling and reconciling analysis, and more time working with operating leaders to improve performance. One CFO described analysis that took several people hours to being nearly instant, and FDI doing a more comprehensive and grounded analysis. This frees finance teams to focus on improving profitability and supporting higher quality care.
Neil Hunn: Strata is selling FDI as an add-on subscription, creating an opportunity to grow recurring revenue. This is just the beginning for FDI. I am excited about the roadmap ahead. I am proud of the Strata team's development speed and close customer collaboration, and pleased with its partnership with our Roper AI accelerator team. Deep vertical data and domain expertise within each business, paired with central AI capabilities.
Neil Hunn: That is the model we are scaling across Roper. Now turning to our outlook. We expect to see application software organic growth in the Q4 to be similar to that of the Q3, in the mid-single digit plus range. Please turn with us to page 10. Total revenue on our Network Software segment grew 8%, with organic growth of 5%. EBITDA margins were 52.4%, down 130 basis points year over year. Core margins were essentially flat the prior year. Turning to the business highlights.
Neil Hunn: DAT was strong in the quarter and accelerated growth, supported by expansion of its network, higher average revenue per user, and continued adoption of its digital freight marketplace solutions. We continue to see encouraging signs in the freight market, with the supply side recovery progressing.
Neil Hunn: As we have discussed, we would still like to see stronger load volume before calling it broader recovery. We also completed the Origo bolt-on acquisition for iPipeline. Origo connects UK pension providers, investment platforms, and financial advisors, automating wealth transfers, enabling secure data exchange.
Neil Hunn: It complements iPipeline solutions for selling and administering financial products, and expands its presence in the UK wealth and retirement market. Foundry also continued to grow and reached a record level of ARR. SoftWriters grew as adoption of its AI order entry solution continued to expand. As I shared last quarter following my visit to LI.
Neil Hunn: Script, this solution addresses a meaningful customer need, reducing the time spent on manual order entry so pharmacy teams can focus more of their capacity on clinical review, customer service, and patient care.
Neil Hunn: Order entry is the starting point, and the team now has additional AI products in beta. Subsplash is tracking in line with our year 1 target and continues to advance today offerings, including enhanced workflow automation. Turning to our outlook, we expect Network Software organic growth in Q4 to be a touch higher than Q3 and be in mid-single-digit plus range. This is based on strength at DAT and Subsplash becoming organic in Q4.
Neil Hunn: Please turn to page 11 and let's review our TEP segment. Total revenue and organic revenue both grew 10% in the quarter, with exceptional growth in NDI and strong performance of Verathon.
Neil Hunn: EBITDA margins were 34.3%, down 90 basis points year-over-year. Starting with NDI, the business had another excellent quarter delivering exceptional growth, driven by continued demand for its precision measurement solutions. Verathon also delivered a very solid quarter, with strength across its BFlex, GlideScope, and BladderScan product families. In addition, we are encouraged by the positive customer response to the CFlex single-use cystoscope launch, which further expands Verathon's single-use portfolio.
Neil Hunn: Neptune had a softer Q3 following a better than expected H1. We now see H2 revenue slightly down versus our prior outlook for modest growth. Q3 mix skewed towards mechanical meters, putting pressure on both revenue and margins. That mix is likely to continue into Q4. We view this as temporary as a long-term secular demand for static meters remains fully intact. Finally, I want to recognize the teams at CIVCO, FMI, Inovonics, and RF IDeas.
Neil Hunn: Each delivered strong execution and growth in the quarter. Turning to our TEP outlook, we expect organic growth in Q4 to be in the mid-single-digit range. With that, please turn with us to page 13. On this page, let's walk through our increased full-year adjusted DEPS guidance, as well as our Q4 outlook. For the full year, we are raising and narrowing adjusted DEPS guidance to a range of $22.35 to $22.40.
Neil Hunn: That represents a $0.15 increase at the midpoint from our prior guide, and a $0.95 increase from our original guide. Our full-year revenue expectations continue to have total revenue growth north of 8% and organic revenue growth in the 6% area. For Q4, we are establishing our adjusted DEPS guidance of $5.95 to $6, and expect our tax rate to be in the 20% to 21% ZIP code.
Neil Hunn: Please turn us to page 14, and then we will open up to your questions. We conclude with the same three points with which we started. First, we delivered solid Q3 results. Revenue grew 8%, organic revenue grew 7%, EBITDA grew 7%, and adjusted DEPS grew 15%. We are raising our full-year earnings outlook again, reflecting the strength of our year-to-date performance. Second, AI momentum continues to build across Roper.
Neil Hunn: Our businesses launched several new agentic solutions this quarter, expanding the work we can help our customers accomplish. The Strata workshop brought that opportunity to life. Our ability to deliver that kind of value rests on advantages built over many years: deep domain expertise, proprietary data, embedded workflows, and customer trust. Those advantages are unique to our businesses and central to how our businesses are developing and deploying AI. We are still early, but the opportunity is substantial.
Neil Hunn: As our software takes on more valuable customer work, we have the opportunity to expand our addressable markets and earn a greater share of the value we create. Finally, our capital allocation discipline remains unchanged. This quarter, we deployed $436 million into bolt-on acquisitions for iPipeline, Procare, and Strata, adding capabilities to established businesses in markets we know well.
Neil Hunn: As you heard Jason Conley mention, our leverage now sits at 2.9 times, and we have over $6 billion of capital deployment capacity over the next 12 months. With that, we are pleased to be putting capital back to work through M&A, and we look to 2027 with cautious optimism about compelling opportunities to deploy capital and accelerate long-term cash flow per share compounding. As always, our standard for deploying capital remains the same.
Neil Hunn: We will pursue the opportunities that offer the most attractive, durable, and long-term cash flow per share compounding, whether through acquisitions or opportunistic share repurchases. Looking ahead, our focus is straightforward. Help our customers accomplish more, expand the work our businesses can do for them, and invest the cash we generate where we can compound it most effectively.
Neil Hunn: That is how we will build an even stronger Roper and deliver durable, long-term growth in cash flow per share. As we wrap up, I would also like to welcome Abhijit Dubey to our board of directors, who is the CEO and Chief AI Officer at NTT Data. We are delighted to have him join us and look forward to his perspective and contributions as we continue to execute our strategy, broadly deploy AI across our product stacks in our enterprise, and create long-term value for our shareholders. With that, let us open up to your questions.
Operator: Thank you. We will now go to our question-and-answer session 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 followed by the one on a touch-tone phone.
Operator: If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press the star followed by the number two. Again, we request that callers limit their questions to one main question and one follow-up. Your first question is from Joe Giordano from TD Cowen. Your line is now open.
Joe Giordano: Hey, guys. Good morning.
Neil Hunn: Good morning.
Operator: Good morning.
Joe Giordano: Hey, maybe one just on a specific company, but I am sure you saw the journal article the other day on autism care hours, particularly at PE-owned facilities. Maybe it is for the wrong reasons that these hours are going up at some of these places, but I am just curious what that means for the rollout of stuff like CentralReach. It seems like almost a requirement to have technology like that if you are going to push the hours to the extent that this seems to be happening.
Neil Hunn: Well, I appreciate the question. I think the thing that is great about CentralReach's solutions is that it is all about appropriate care that is auditable, that is to the standards. There was an article, or there was a flare-up on this about a year ago, when we looked across the CentralReach customer base, and it was the most compliant set of customers. I think it was in Minnesota.
Neil Hunn: I forget where it was, a year or so ago, on some fraud claims. It was the automation with CentralReach was the cleanest set of providers in the jurisdiction. It is the same thing here. It is just a good audit sort of backbone when you use the CentralReach and our automated systems here.
Joe Giordano: If I think about the Q4 guidance, I am just curious, I know it is early for 2027, but are these exit rates fair starting points for us to think about moving forward? I am curious, something like Neptune, right? That is a project-centric business that is hard for us to contextualize. So what are the prospects into next year?
Neil Hunn: Yeah, I would say for the 2027 setup, first, it is super important that we are just starting basically next week, the planning process. So we have to go through all the process with all 29 companies and understand the puts and takes and all the nuances, so we always have to caveat that. But we would say it is generally a constructive setup. The recurring revenue, exit run rate is encouraging.
Neil Hunn: Certainly, the velocity of the product development on the AI side is encouraging now. Caveat there is, and now in the commercialization phase, and we have got to drive the bookings and adoption and consumption. That is where we are in that. I am sure there will be questions on that during today's call. If you go segment by segment, Deltek has had a couple good quarters. As I mentioned, we are still in a wait and see. We want to see that continue.
Neil Hunn: The other thing about Deltek is the business is definitively turning more recurring, more SaaS, so we have to overlap the perpetual in that business. Just a reminder, CentralReach, we get a full year of organic. In Network, certainly what we are seeing at DAT is encouraging, but it is supply-driven. So it would be healthier if it was demand-driven, but it is definitely a better setup coming into next year versus coming into this year at DAT.
Neil Hunn: Remind you, Subsplash is fully organic or organic for the full year. TEP, Neptune is really the to be determined. It has a wider range of outcomes. It had a wider range of outcomes this year that we anticipated, that we are experiencing. So that is a to be determined.
Neil Hunn: We will have to really sort of spend a lot of time with the management team and understand the industry trends heading into next year. NDI, which has just been awesome for us this year, will be more normalized next year. But the setup is generally constructive.
Joe Giordano: Thanks, guys.
Operator: Thank you. Your next question is from Brent Thill from Jefferies. Your line is now open.
Rhea Lobo: Hi, this is Rhea on for Brent. Thank you for taking the question. On Deltek last quarter, you mentioned that you wanted to see consistent conversion of the GovCon pipeline before being able to call this an inflection from OBBB. I am just curious, did this quarter give you that? I recognize it is early, but maybe just to elaborate on that last question. How are you thinking about Deltek for 2027?
Neil Hunn: Yeah, I think it was a very good quarter for Deltek. What we are seeing, thankfully, is that more customers are starting to move to the cloud, so the bookings were quite strong. That does not obviously materialize in revenue immediately, like perpetual. It is an uncertain market. I think what Deltek is doing is, and we mentioned this last quarter, announce the end of support for the Costpoint on-prem solution in Q1 2028.
Neil Hunn: So that is creating a catalyst for them to go back to the base and start to do that migration. So despite a sort of uncertain market, they are sort of making growth happen. So, we will see one more quarter before we get into next year, but momentum is good there.
Rhea Lobo: Got it. Thanks. Just curious on any incremental updates on the M&A environment since last quarter. I think you mentioned $436 million deployed towards bolt-ons, but I am wondering more so on the larger deal side of things that you are seeing. Any color you are able to provide there would be helpful.
Neil Hunn: Yeah, I would say, as I mentioned in the prepared remarks, we look to next year with cautious optimism. Janet and her team continues to be very busy. I would say the pipeline tilts more proprietary and proactive outreaches than large scale processes, so very bespoke. We just had, a couple of weeks ago, our second annual CEO conference where we had 20 or so target CEOs together for a day and a half, going through Roper and getting to know the businesses. So that was well attended and very high quality targets at that summit.
Neil Hunn: We are cautiously optimistic. All the pressures that have been on the private equity firms for now going on three years continue to exist. LP credit, DPI pressure, and just coming to grips with where public companies are valued. There is a lot, a bit of psychology in that, and that psychology appears to be coming into reality.
Rhea Lobo: Got it. Thank you.
Neil Hunn: Yep, you bet. Thanks for the questions.
Operator: Thank you. Your next question is from Brian Peterson from Raymond James. Your line is now open.
Brian Peterson: Thanks, guys, and congrats on-
Neil Hunn: Oh, Brian, we lost you. Maybe he hit star one accidentally.
Jason Conley: Yeah.
Neil Hunn: We will come back. Operator, if we come back to him, that would be great.
Jason Conley: That would be cute, yeah.
Operator: Okay. Your next question is from Terry Tillman from Truist Securities. Your line is now open.
Terry Tillman: Yeah. Hey, Neil, Jason, Zack, and the rest of the team. Thanks for taking my primary question and a follow-up. On Vertafore, I care a lot about the insurtech space. I am curious, you called out the ARR growth. How is that faring versus the overall app software growth? It is still the first question. It is a multi-parter, the first one. This idea of the value-based credits, will that just take some time for that revenue stream to ramp? Then I had a follow-up on Deltek. Thank you.
Neil Hunn: Yeah, I will take the value-based credit, and Jason can take the first one.
Jason Conley: Yeah, Terry. They are in line with the segment in terms of the ARR growth.
Terry Tillman: Okay.
Neil Hunn: On the value-based credits, just for. Those have to be consumed in a specific period of time. As a result, their revenue recognition treatment is recurring, not reoccurring. So it will look and feel like subscription revenue.
Neil Hunn: Now, obviously, it is very important for Vertafore, if you will, for deploy teams, the customer support implementation teams, to make sure there is wide-scale adoption and utilization, so you get the upgrades, the uplifts, the additional credit purchases, and the renewals. That is where we are right now. It is where I think the Velocity platform was GA'd within the last 60 or 90 days. I mean, the full GA release has been very recent, and we are in the early adoption phase.
Terry Tillman: It is good to know on recurring versus reoccurring. I am glad I asked that. In terms of Deltek, I do not know if this is kind of a change in tone here, but I forgot where you all last gave an update on the SaaS versus on-prem for Deltek, but it sounds like maybe things are picking up.
Terry Tillman: Is kind of the real takeaway that the license part of total revenue could be like an incremental headwind in 2027, but then you are going to have right behind it this kind of acceleration and recurring? Just anything more you can share on kind of what you are talking about here, because it sounds like maybe it is picking up steam.
Neil Hunn: Yeah, and I think as you can appreciate, Terry, the timing of getting to the cloud is a little harder because it is a different value prop. So that is sort of what we are managing through. But certainly, it is our biggest maintenance base at Roper. The timing of getting that to the cloud certainly would outstrip perpetual. It is just kind of how that phases over the next few years is a question. But we do feel good about the momentum as we sit here today.
Terry Tillman: All right. Thank you.
Operator: Thank you. Your next question is from Brian Peterson from Raymond James. Your line is now open.
Brian Peterson: Thanks, guys. Can you hear me? Hopefully, I am coming in okay. All right. Well, I just wanted to ask on the appetite for AI and the adoption curve. I am curious, what products are you seeing that ramp a little bit faster than expected? Also just on the customer appetite and the packaging, has that been any challenges, or is it more about change management? Just kind of curious what the customer appetite is at this point.
Neil Hunn: I will try to be comprehensive in my answer. If I do not, we can certainly take this offline as well. Let me just follow the bouncing ball of this. It was really a year ago, the models and the capability of AI could we really could do agentic work.
Neil Hunn: The first question is, can we think of the ideas, the customer magic, if you will, to sort of put into the products today? That question is absolutely without question, yes. I think it is 17 or 18 of the 21 software businesses have agentic solutions in the market. That is the first question. First, can we think of the idea? The second one, can we build them? That is yes, and that has led us to where we have the vast majority of companies having these products in the market.
Neil Hunn: Now the question is, can we drive early adoption, convert sort of, if you will, the beta customers to early adopters? The answer to that has been yes. Just go back to the remarks I said in the call about Strata and FDI or last quarter with SoftWriters with Pharmacy Automation. The answer to that has been yes.
Neil Hunn: Now it is about we need to get to broad scale into the go-to-market teams across all these businesses and get it broadly distributed into our customer bases and drive adoption. The customer interest has been very, very positive. Probably the most positive I have seen in my career in tech, because we are literally delivering a button that does magic things. That is the good part.
Neil Hunn: Now, what I think all companies, and we are not alone in this, is now you are facing budget cycles, AI committees, all the safeguards and governance of data, and so we are just going through the go-to-market processes. The early indications are positive, but we have said this year was going to be largely a year of commercialization learnings and adaptations and, again, progressing well, but it is still to be proven.
Neil Hunn: Then I think the first part of your question, where are some of the better customer reactions? Certainly CentralReach, certainly Aderant, certainly SoftWriters in Pharmacy Automation, the early adopters at Vertafore, the early adopters at Strata. I mean, there is really not I am just going through the list in my mind. There has not really been a really a flat launch. Again, it is early days, and we will not bet 1,000 across all these products, across all the companies, but we have not had any abject out-of-the-box failures, if you will.
Jason Conley: I think one of the interesting changes with AI, obviously, is when you launch a product, you can continue to iterate, so you will have immediate customer feedback. We have seen some times when something was not quite right, but then we have been able to iterate quickly based on feedback from the customer. That has been helpful.
Neil Hunn: Yeah.
Brian Peterson: I appreciate the color, guys. Maybe just one added element there. As we are thinking about use of kind of frontier models versus some of the lighter weight models, how are you guys thinking about that balance? Does that change any views on how we are thinking about AI-oriented margins over the near to medium term?
Neil Hunn: Yeah, the punchline is our gross margins on these agentic tools are very positive, sort of at our software gross margins. Our philosophy on this at the moment, and this is obviously subject to change, and this is well informed by our leadership team and our central AI accelerator team, is we are 100% optimizing speed of development and deployment. We are working with a lot of the models that are on the frontier.
Neil Hunn: We do not need the most frontier model. Let us be very clear about that. We do not need 5.6 Astra or Fable 5.1 or 0.2 or whatever the current release is. But we are going to use sort of the cheaper sort of downscaled models from the frontier. But the harnesses that come with them, you can just get moving much, much. Every one of the products, 100% of the products have the model routers.
Neil Hunn: We have multiple models underneath each product in case when you call Anthropic or OpenAI, if they are not answering the phone and with the latency you need, you immediately flip over to another model. That architecture allows us to switch to models either into small language or open source models over time to manage the cost. But right now we are optimizing for speed of development.
Brian Peterson: Great. Thank you.
Neil Hunn: You bet.
Operator: Thank you. Your next question is from Faith Brunner from William Blair. Your line is now open.
Faith Brunner: Hey, guys. Thanks for taking my questions and congrats on the quarter. Maybe to pull on a prior thread you talked about, you are seeing that encouraging engagement around adoption, and now the focus is scaling that. As you work through the early process of that, what have you learned? What challenges are still there, and how are you adjusting your go-to-market strategy to address these new challenges? How do we get to a more clear monetization path, if that makes sense? Then I have a quick follow-up.
Neil Hunn: Yeah, keep asking this question because. We will just share our learnings as we go. Obviously, we have had to figure out how to price all of these, and there is not a one pricing size fits all. It is different per company and per, I would not say per product, but per company based on where their customers are and the existing economic relationships we have with our customers. We have generally, I think we figured that out across the board.
Neil Hunn: Then it is how do you sell this in addition to, versus in lieu of everything else that we are selling? Because there still is strong demand for, if you will, the legacy software stack. So how do we make sure this is on top of in addition to? Then it is like I said, in healthcare in particular, acute care hospitals have an AI governance overlay.
Neil Hunn: That was a new learning from the Strata team, for instance. It has a traditional sales cycle and then another piece of it. So it is not a barrier. It is just maybe it slows things down a little bit. Those are the sorts of things that we are learning right now.
Faith Brunner: Okay. That makes sense. Then maybe as we get more cautiously optimistic about M&A, how are you thinking about how does AI change your whole thought process on what makes an attractive target? So is there different growth considerations, different competitive considerations that you now have to consider, and how are you guys working through that?
Neil Hunn: For sure. The first thing, and we have been doing this over the last couple, 3 years since AI, since the ChatGPT moment, if you will. We need to certainly make sure and do the diligence that the end customer of the software company we are looking at is a viable long-term customer. The customer is viable. Look at what we did. Last year it was autism therapy, so people providing therapy to youth, and people going to church.
Neil Hunn: The end customer is highly viable and will not be disintermediated by AI, if you will. It comes down to what we see in our portfolio. Do you have the defensive modes and offensive modes to be a winner in the AI world, right? Do you have the right amount of data, the data rights, proprietary nature of the data? Do you have network effects?
Neil Hunn: Do you have configuration lock-in? I will not go through the full moat framework here. Do you have the preconditions to be successful in AI? That is where we are now. Fast-forward a year or 2 or 3 from now, I think the discernment becomes even easier because targets will have taken those advantages and will either have proven or not proven that they are winning in the AI, would be able to develop products, bring them to the market, monetize the products, drive additional customer value. The companies that we are looking at now are in the earlier stages of that.
Faith Brunner: Okay, awesome. Very helpful. Thanks, guys.
Neil Hunn: You bet.
Operator: Thank you. Your next question is from George Kurosawa from Citi. Your line is now open.
George Kurosawa: Hi. Thanks for taking the questions. A couple quick ones from me. It looks like buyback activity was paused in the quarter. I think that is something you had kind of messaged you were doing as you are preparing for the M&A environment to potentially warm up. Just maybe how you are thinking about buybacks going forward.
Neil Hunn: Well, thanks, George. I think it is the same as we have always talked about, which is the relative risk-adjusted returns for us. For us, obviously, the buyback is attractive, but the option value on the M&A, given all the dynamics we have talked about in PE, and that everybody really knows about is worth the deleverage and the preparing our balance sheet for that event. Now, if we fast-forward a couple quarters from now, we still have that option available to us. We still have quite a bit on the authorization. So that is still a viable alternative if M&A markets do not cooperate.
George Kurosawa: Okay, great color. You referenced on the free cash flow side some impact from collections timing and your ERP implementation at Illumia. Maybe if you could quantify the magnitude of that, and then ERP implementations have a habit of maybe extending beyond initial timelines. Are those collections issues now addressed, or is there any potential that could extend into Q4?
Neil Hunn: Yeah, certainly a lot of focus by the team there, and I know they are going to do a good job. They are just powering through some order to cash challenges. They actually went live in January, but the big renewal season is in the summer and fall.
Neil Hunn: So we expect to see some improvement in Q4. Some of that might spill into Q1 of next year. But when you take a step back for the year, we expect free cash flow per share to be in line with DEPS growth. Maybe even a little bit better. We will see how it plays out. So that should all normalize as we close out the year.
George Kurosawa: Got it. Thanks for taking the questions.
Neil Hunn: You bet.
Operator: Thank you. Your next question is from Daniel Jester from BMO Capital Markets. Your line is now open.
Daniel Jester: Hey, good morning, and thank you for taking my question. I wanted to make sure I caught this right, but I think as you said earlier in the call that a majority of your businesses now have an AI solution in the market.
Daniel Jester: I guess given the sort of urgency and the sort of moment in time that we are in, and the past comments you have made about the ability to sort of speed your development, I guess, what is the timeline to get to 100% in terms of your businesses and software having an AI tool? Are there any sort of commonalities in terms of limiting factors to get there?
Neil Hunn: Yeah, appreciate the question. If you look at the portfolio, there are basically three companies that do not have an AI tool. One is not a true software company. It is a group purchasing organization, so they do not really have an agentic software front that is MHA, it is reported in the Network segment. They are using all sorts of AI inside the business to drive productivity. So that one, set that aside.
Neil Hunn: Then you have two businesses that are in clinical diagnostics, DI and Clinisys. They have early AI tools, but what laboratory software does and this remit is it is nearly a fully solved technical problem. This is how you run laboratories and route samples to analyzers and take results off analyzers and report that. So it is basically an already fully automated process. So there is not a large agentic remit to do here.
Neil Hunn: Now they are adding some AI tools around it, but it is not like these processes are already fully automated. So essentially a long-winded way of saying the companies that have AI remit, 100% of those companies have AI tools today.
Daniel Jester: That is super helpful, and thank you for the color. I guess I will pull on the AI monetization thread as well for my follow-up. I guess, as you think about next year, how diverse across the portfolio do you think that the monetization will be?
Daniel Jester: Do you think that some parts of the business are going to have one type of way of monetization and other parts of the business a very different one? I guess maybe at an enterprise level, how should we be thinking about monetization and is maybe any color you can provide about the diversity at which parts of the business maybe will come sooner and which parts maybe will be coming a little bit later? Thank you.
Neil Hunn: Happy to do it. All right. On the diversity of pricing models in AI, it comes in three general flavors. The first flavor we already talked about, I will call like this tokenized fixed budget, use it over a period of time where you take it as recurring. That appears to be the predominant, the majority of what Vertafore, Aderant, CentralReach, I mean, that is the predominant chunk. Maybe less CentralReach, but that is the predominant way that our companies are going to monetize early.
Neil Hunn: So it is a consumption-based thing, but you buy a fixed amount of consumption. It is use it or lose it. As you consume that, you buy additional sort of chunks. The other model is straight consumption. It is a minority of what we are doing, but where you have straight consumption, it is where our customers already buy from us largely on a consumption basis.
Neil Hunn: In pharmacy automation, a lot of the tools already paid on a per-script basis. So we monetize on a per-script basis with AI tools there. Or at DAT, we monetize what we do at Convoy and DAT on a per-load basis, so AI there will be on a per-load basis. The third way is, and this is like, for example, at Deltek, where their software remit is ERP for government contractors.
Neil Hunn: And so how do you automate the accounting close is one of the product features they are delivering right now. That is going to be basically delivered in the cloud as an add-on. So you are going to see, if you will, accelerated move from ground to cloud at a higher price point once you get to the cloud. So those are the three models.
Neil Hunn: To your point about which ones will show up first, I think it will sort of go in sort of the first two models, the consumption, if you will. Sorry, the subscription model where you have consumption embedded in that, and the straight consumption. Those will be the ones that show up earlier, and then the lifted shift to the cloud will take a little bit more time, I would anticipate. Make sense? Okay.
Daniel Jester: Great. Thank you.
Neil Hunn: Yep.
Operator: Thank you. Your next question is from Ken Wong from Oppenheimer. Your line is now open.
Ken Wong: Hey, great. Thanks for taking my question. I just wanted to circle back to TEP growth. The decel from the double digits that you guys reported this quarter. How much of that is divestiture? How much of that is you guys, I think, had called out some Neptune softness. Any color you can provide there?
Neil Hunn: Yeah. Hey, Ken. H2, we said it was going to be high single digits and it being a little bit higher in Q3. That did play out. We have mid-singles for Q4. I would just say broadly it has been the Neptune softness, and it is really a market sort of dynamic.
Neil Hunn: Then specifically for us, volume was okay, but we actually had more mechanical meters, has a lower ASP, and lower margin. That was sort of the driver of H2. We did divest the industrial businesses a few years ago, and we are getting the proceeds from that, but there is no sort of near-term divestiture activity in that segment.
Ken Wong: Okay, perfect. On the EPS guide or DEPS guide, any impact from the bolt-ons that you guys just picked up?
Jason Conley: No. The impact for us will be more next year. The current quarter, it is actually a little bit dilutive as we have got some synergies that will roll through next year. But it is actually, for Q4, it is a little bit dilutive. A few pennies.
Ken Wong: Okay, perfect. Thanks a lot, guys.
Operator: Thank you. Your next question is from Josh Tilton from Wolfe Research. Your line is now open.
Josh Tilton: Hey, guys. Thanks for sneaking me in here. Maybe for my first question, I feel like there has been a lot of hypotheticals and what if, and how do we see the path of adoption play out around AI and just the monetization framework.
Josh Tilton: I understand why everyone is asking the questions, but unless I misunderstood, I thought you guys called out in the prepared remarks that you are seeing monetization from AI today. So I kind of like to focus on that comment. Where are you seeing the monetization today. How are you seeing it. If we are already seeing it in some places today, is that where we should expect it to be the most meaningful next year.
Neil Hunn: Yeah, appreciate the question, Josh. So I think the question is more on the how do we scale this, and obviously this is new, not just for us, but for the economy at large, and so we are all trying to figure that out. Where we are seeing early AI sort of monetization is where the product stacks were first to market. So CentralReach. For instance, CentralReach, I will have Jason have to make sure I sort of keep me honest here, but 75% of their bookings are either AI-specific or AI-related bookings.
Jason Conley: Range, yeah.
Neil Hunn: In that range, for instance. Aderant, the number is like 25% of their bookings are either AI or AI-related. The anticipation for what is now back behind sort of the they were, I do not know, a year ahead of the portfolio. Now the portfolio is catching up. 25% to 75% is a wide range, but it would be nice to see that as we sort of scale across a dozen of our companies.
Neil Hunn: But it is too early to sort of say, "Is it going to be 10%, 25%, 50% of bookings over time are going to be AI or AI-related?" Fast-forward three or four years, everything is AI. This whole thing, what is AI, what is not AI, it is going to be indistinguishable. So I think we are in a moment in time in that regard.
Josh Tilton: Makes sense. And then maybe just my follow-up. Neptune sounds like, and again, I could be a little bit wrong here, but it sounds like H2 is a little bit less favorable. There is a mixed dynamic. We believe in this view of moving towards the ultrasonic meters over time, better pricing. I understand all that. I guess, was the mixed dynamic unexpected?
Josh Tilton: And I ask it in the sense that, is there a correction that can be made into next year, where we can go back to maybe a better than expected Neptune outcome after we saw what happened this quarter? We step back, we make an adjustment, and we go back to being a little bit better? Or do you expect kind of whatever you are seeing pressure the business today sort of last beyond this quarter, maybe into next year?
Jason Conley: Yeah, appreciate the question. I think the static pipeline from Neptune, customer by customer, is strong. There is definitely a market demand for it. We just had pushes on the pipeline. We do think coming into next year, it is going to be more favorable for us. Timing is going to be uncertain in terms of the quarterly cadence. But yeah, that secular demand is there, so we feel good about that.
Josh Tilton: Makes sense. Thank you, guys.
Operator: Thank you. Your next question is from Brett Linzey from Mizuho. Your line is now open.
Ryan Gilchrist: Hey, how are you doing, guys? Ryan on here for Brett. Thanks for taking my question. Yeah, I wanted to just get a little more color on Neptune. Maybe just help us understand the market conditions, the main puts and takes that you guys are watching, and then maybe how you expect the mix dynamic to play out over the coming quarters. Thanks.
Neil Hunn: Yeah, I will take another crack at this. Just remind everybody, the macro, what is happening in the North American water meter end market. Just to set that first, then we will get into the specific quarter and our best look at the outlook. What is happening is during COVID, especially in the Northeast where the water meters are in people's basements, they could not be sort of maintained or replaced.
Neil Hunn: Then post-COVID, 2022, 2023, there was a surge. There was a catch-up. Now on the backside of this year for sure, we are having to sort of comp over that surge. In the industry, there are fewer meters that are being installed last year and this year versus the years before. You are kind of going from peak to trough. This is not like a macroeconomic cycle.
Neil Hunn: It is still like a COVID super cycle dynamic that the industry at large is digesting. We have talked about that in the past, but just sort of level set you and the team and everybody on that. Inside, we believe we are on the tail end of sort of that sort of reset, getting into more a normalized sort of meter market.
Neil Hunn: What has also happened inside of that is this mix from mechanical to static. Static meters are just a better technology. They last longer. They perfectly measure the flow of water over the life of the meter, where mechanical degrades slowly over time. It is a better value proposition to the customer. That is why the market is generally going there.
Neil Hunn: Because it is higher value, it carries a higher price, and you have had this positive mix that has happened in the industry, in particular Neptune, that has helped offset some of the macro meter declines in the market. In the quarter, as Jason Conley just said, there are projects, large projects, the static meter projects that pushed, which had this.
Neil Hunn: The total number of meters that Neptune sold in the quarter was actually pretty close to the expectation, but it was a dramatic mix towards mechanical, which had both a revenue implication and a margin implication. As you just said, that likely sort of has a probability that normalizes it in the next year.
Neil Hunn: That is sort of the setup of the mix dynamic, both the macro and the mix dynamic. We believe over the long arc, this is not a call for next year. It is like this has been, over our ownership, like a mid-single-digit growth business, and we think those dynamics are intact over the long arc.
Ryan Gilchrist: Awesome. Super helpful. Thank you, guys.
Operator: Thank you. This concludes our question and answer session. I will now hand the call back to Zack Moxcey for any closing remarks.
Zack Moxcey: Thanks, everyone, for joining us today, and we look forward to speaking with you during our next earnings call.
Operator: Thank you. The conference is now concluded. Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
