Roper Technologies, Inc.
Q2 2019 Earnings Call Transcript

Published: 25 Jul 2019

[Operator:]

Good day, everyone and welcome to Roper Technologies Second Quarter 2019 Financial Results Conference Call. I'll remind you that today's call is being recorded. And now I'd like to turn the conference over to Zack Moxcey.

[Zack Moxcey:]

Good morning and thank you all for joining us as we discuss the second quarter financial results for Roper Technologies. Joining me on the call this morning are Neil Hunn, President and Chief Executive Officer; Rob Crisci, Executive Vice President and Chief Financial Officer; Jason Conley, Vice President and Controller; and Shannon O'Callaghan, Vice President of Finance. Earlier this morning, we issued a press release announcing our financial results. The press release also includes replay information for today's call. We have prepared slides to accompany today's call which are available through the webcast and are also available on our website.

[Neil Hunn:]

Thanks, Zack, and good morning, everyone. As usual, we'll start with our second quarter highlights. I'll then turn our call over to Rob to discuss our financial results. I'll then walk us through the segment details and outlook, followed by our Q3 in 2019 guidance, then we'll open it up for Q&A. Next slide. We had another very strong quarter here at Roper. Revenue grew as expected, margin execution was strong and operating cash flow increased 13%. It was nice to see gross margins expand 90 basis points in the quarter increasing in both of our product segments. And we always like to see leverage down the P&L with EBITDA growing faster than revenue and cash flow outpacing that of EBITDA. Our software segments continued their strong momentum led by 6% organic growth and our network systems and software segment which saw broad based growth highlighted by DAT, iTrade, MHA and SoftWriters. Application software grew 2% despite a difficult comp against Deltek significant perpetual wins a year ago. Deltek continues to win in the marketplace with bookings up double-digits and SaaS adoption accelerating in the quarter. Growth in our Measurement & Analytical Solutions segment was led by high-single-digit growth in our medical product businesses as new products gain traction following recent investments. And Neptune strategic concepts continued with another solid quarter of growth.

[Rob Crisci:]

Thanks, Neil. Good morning, everybody. Turning to page six, I would like to recap some of the numbers behind our strong second quarter financial performance, starting with revenue, revenue was 1.332 billion in the quarter, an increase of 3% and organic increase of 2%. This was right online as Neil mentioned with our internal guidance model coming into the quarter. We had organic growth in three of the four segments, the one thing that was down was our process technology segment as expected against the very difficult plus 20% comp last year. Margin expansion was very strong, so gross margins increased 90 basis points to 64%, EBITDA increased 5%, EBITDA margin up 70 basis point. So, really good margin expansion for the quarter, probably a little bit better than we had anticipated coming in. So that all adds up to DEPS for the quarter of $3.07, which was a 6% increase over last year and a little bit better than our guidance coming in as $3 to $3.04. Next slide. Turning to asset-light business model slide. We will look here the net working capital as a percent of the Q2 annualized revenue, so slightly different view this quarter. Looking back over the past six years of the trend to give a little bit of a perspective and what's been going on with working capital here for Roper over a long period of time. So, if you look back and compare June 2013 quarter to the June 2019 quarter, you will see our inventory is down 200 basis points to 4.3% of revenue. Receivables are down 240 basis points to 17.3% of revenue, payables down a little bit to 10.5%, but deferred revenue up 680 basis points to 13.5% and if you add all that together you see this consistent negative working capital we talked about at Roper at minus 2.4% for the quarter and that over a thousand basis point improvement versus the same period in 2013.

[Neil Hunn:]

Thanks, Rob. Let's go and turn to our application software segment. In the quarter, the segment represented 29% of our revenue and revenues came in at 391 million, which was plus to organic and EBITDA was 155 million, which represented 39.7% margin. Starting with Deltek, we saw a continuation of a few trends that we've discussed over the past several quarters. First, we saw an acceleration in bookings and recurring revenues as a result of an increased mix of business towards Deltek SaaS offerings. In fact, in the quarter, Deltek signed their largest Vantagepoint's SaaS contract. As a reminder, Vantagepoint is Deltek's new enterprise software offering targeting professionals service firms. Also, the business continues to see a nice balance of activity across their two macro end markets, professional services and government contract. To remind you, Deltek had a very difficult comp given a very large volume of perpetual deal signed a year ago. Adjusting for this, Deltek grew their bookings double digits in the quarter. Deltek team continues to execute exceptionally well.

[Operator:]

Thank you. And now we'll begin the question-and-answer session of the call. And moving first to Deane Dray at RBC Capital Markets.

[Deane Dray:]

Thank you. Good morning, everyone.

[Neil Hunn:]

Good morning, Deane.

[Rob Crisci:]

Good morning.

[Deane Dray:]

I don't normally have the opportunity or the responsibility of asking you about short cycle industrial softness in the quarter is just, it's not typically something that we're talking about, but it's presenting itself here. So, can you provide some more color on the, kind of the cadence in the quarter the push out some of the destocking? And what visibility do you have? And if you can get it by business that might give us some context? And start there, please?

[Neil Hunn:]

I'll appreciate the question. I'll give you some thoughts and ask Rob, if he has any additional. So, its first say, we got to note that we're, it's 8% of our business, it's 6 or 7 businesses over 45 that we're talking about. And we're maybe not the best read across to other things. But I'll tell you what we saw. So, April was just fine. Really no issues there. May saw a little bit of weakness and June saw a lot of weakness. Interestingly, it was across really all of the industrial businesses that we have, it was across geographies Europe might have been a little bit weaker than North America, but nothing discernible. And really, across different various end market it was an isolated to one end market. What we think, what we saw also was projects push, and then a bit of consumable or spare sort of destocking, right. So, it's really across both the capital piece and the recurring piece. Interesting, the first three weeks or so in July, we saw a pretty meaningful recovery. But we don't yet know enough, if that's just a bounce back from June or if it's -- or what the real root cause was, for a while we saw the declination across the quarter. It was window dressing for the quarter or if it was something around trade, tensions or something -- some folks waiting for lower interest rates, we don't yet know the root cause. And so, it's just a little too early for us to call a specific direction. So, we chose to be what we think is relatively concerted here. So, we saw down mid-single to the second quarter, our assumption is down high singles for the balance of the year. And we're managing the businesses assuming that that occurs, right. We don't want our leaders in these businesses to get sort of caught assuming a recovery and then it doesn't happen, then you have a margin problem. So, that's a bit of the color. And if Rob if you want to add any additional.

[Rob Crisci:]

Yes. Sure. So just a clearly sighs that as Neil mentioned that 8% of the company's revenue about 25% of that segment. So, this is not included in Neptune. Neptune continues to grow, it exactly the same sort of mid-single digit plus, it's just the businesses that Neil mentioned. So, the bookings were down sort of high-single-digits. And therefore, we're assuming the second half of the year is high-single-digit declines where we used to have flat, so it's about 25 million of revenue that comes out of the second half. That's really the only sort of change in the entire company and what we're seeing at this point versus three months ago,

[Deane Dray:]

It's helpful. And if I'm looking to calibrate how the slowing on the organic side ripples through into your guidance. Just to make sure, I've got the right pieces here. Gatan adding back $0.20, it looks like the tax rate a bit lower is adding $0.08 versus our estimate. So then when I look at the midpoint raise, it does look like there is a second half lower operating guidance. It's something in the high teens sense if that's right and maybe try some context there.

[Rob Crisci:]

So, the tax rate is slightly lower that’s offset by higher share count, little bit higher interest, we are losing some proceeds from Gatan that impact to interest. So, those other things sort of cancel each other out is really around $0.10 on industrial is the big change.

[Deane Dray:]

That's helpful. Just last one for me on Gatan, was there any loss of momentum in the sales process. You mentioned some slowing, but it sounds like those were tough comps, but is there any momentum loss in the business as it's brought back into Roper?

[Neil Hunn:]

So, the team at Gatan really should be applauded for how well they executed and performed over what has been a really long drawn out 18 months, 12 to 18 months process here, The business performed amazingly well last year with sort of new product cycle and as expect with Gatan, it sort of drive up a new product cycle and you moderate a little bit and you drive up on another product cycle. So, we're just in that moderation phase, but the team is just I mean A plus across the board with the distraction of sales process, which was immense and given sort of the CMA sort of process here in the last six months. So, great, great remarks to the team there and were certainly - add momentum to try to re-market the process, the business now and have a better outcome.

[Rob Crisci:]

And I would just add, they did perform very well in the second quarter. So good performance.

[Deane Dray:]

Thank you.

[Neil Hunn:]

Thank you.

[Operator:]

Thank you. Moving next to Robert McCarthy at Stephens. Sir?

[Robert McCarthy:]

Hi, guys. Good morning. Sorry, I'm about jumping from call to call, but I guess the first question is building on Deane's excellent questions, in terms of the short cycle, you are not planning for any kind of contemplated balancing guidance here. You're telling your business heads to kind of focus on cash and margin, which is sensible. You said I think six or seven of your segments are really - are your companies within the broader of it, are kind of affected, I mean have you highlighted the past exactly which one of these segments or sub-segments these are and could you just kind of highlight what you're seeing with that kind of level of granularity.

[Neil Hunn:]

So, it's the thing I should have mentioned related to Deane's question is, the Strewers, alpha, it's Danisco, it's Hardy , I mean there is four or five other that are much smaller but the trends and I just talked about are consistent across all of this, they are not isolated to one. It was very consistent read across our seven or eight companies here on the trends that we said, but it’s the industrial complex that 8% of revenue that we have.

[Robert McCarthy:]

And then with respect to Gatan, I was under the impression that there were not that many natural buyers or potentially, I guess private equity. But could you talk about the fact that you think you've got a lot of interest because that doesn’t square with what I have heard maybe I’m just an idiot, but I will leave it there?

[Neil Hunn:]

We know what Gatan is right, it’s a clear market leader, it has great growth prospects of a longer time, it's got a great team and amazing cash flow and so, as a result, there is a lot of people that are interested in a business like that, strategic and sponsors alike.

[Robert McCarthy:]

Okay. And then the final question is you know, I was going to ask about obviously, the Foundry acquisition. It sounds like you answered the question, it sounds this elevation of - is it Jody Madden that you've kind of taken the key man risk or the key creative soul risk out of the equation, because obviously you think about companies with this nexus of technology and entertainment. You think about Steve Jobs or Jim Hansen or whoever the case may be, you don't want that person walking out the door, I mean would you say she rises to that level when there are other people within the company or the organization that you've made a real strong push to just retain because obviously at the end of the day. This is probably much more of a human capital business than some of the others?

[Neil Hunn:]

Well, first I would say Foundry really like all of our software businesses is just a really boring software business, right. The great software that enables creators then do amazing work. Right. We're not the creative part of the ecosystem or supply chain and visual effects, we're the enabling toolkit that allows that to happen. Sort of maybe the first statement that’s highly consistent characteristics with really every Roper business, not just the product software businesses, but the product businesses. The team, I think we mentioned last quarter that the totality of the Foundry team that we met in the diligence process and confirmed here in the first little bit of ownership, the breadth of that team, that depth of that team is quite strong. And when we sat down and did the onboarding and started to engage with the team about our long-term orientation, multiyear product strategy, multiyear go to market strategies. It just became very clear to the incumbent CEO, Jody, ourselves that the most natural fit for the long-term success inside of our framework was Jody. And she's, she's fantastic. She's for the last four or five years has been the face of the company relative to the product. And we're expecting her to do great things with the business.

[Robert McCarthy:]

Thanks for entertaining my questions. Congratulations for a great quarter.

[Neil Hunn:]

Thank you.

[Operator:]

And we'll go next to Christopher Glynn at Oppenheimer.

[Christopher Glynn:]

Thanks. Good morning. I had a question about some of the pipeline dynamics that seem to come up a lot where, you have kind of a surfeit of actionable deals, but opportunity cost dynamics are always at play. I'm wondering how that works as a partial gate to timing of deal flow. And as a curiosity, when was the last time you had kind of an air pocket and actionable pipeline dynamics?

[Neil Hunn:]

I've been at Roper for eight years, and I cannot recall a real air pocket in terms of the pipeline. I mean, it's always a steady drumbeat, multiple deals, presented at near final stages to our board, five times a year. I mean, so air pockets or? I can't recall, I'm looking at Rob he, he's agreeing with me. Relative to we're always to your first question about opportunity cost. I mean, this is a very, it's a debate we have on every transaction, right? You're coming across one that it looks really good, right? It has all the characteristics, we look for niche, leadership, great team, accretive CRI, accretive organic growth rate you know the list. And or like and the price might be X and are like, that really looks good. But is there something better that's just right around the corner. So, we're always having the opportunity costs discussion. And it's one of those things that that we've sort of honed over the years, and we do the best we can relative to that decision. It's obviously an opportunity cost decision. One, where we don't have perfect information about what's around the corner. And then we're always steeped in what gives us real confidence. And ultimately, everything we do is we're just steeped in the cash return methodology. There's always that buffer built in day one when we buy a company relative to the values created for shareholders. And so that's at least how we think about it. Rob, you want to add any color to that.

[Rob Crisci:]

No, there is always an opportunity. And it's just a matter of finding the best deals at the right price and getting them done.

[Christopher Glynn:]

Okay, thanks. And then follow up is on TransCore, the product implementing without you. That seems pretty groundbreaking for TransCore, maybe I'm wrong. But could you elaborate on that thought?

[Neil Hunn:]

Well, hey, it's very early. We got a great partner in Gentex, right. They are the clear market leader in the smart mirror technology. And so, it's been a nice collaboration with them. But yes, I do believe it has the potential to be groundbreaking. You know think about cars 10 years ago, or five years ago, you didn't have auto sensing, lane departure systems and whatnot. Now, they're almost standard. So, I don't know if this technology becomes standard like that, but it's certainly our hope that it would. And it's great to have Audi as the first partner. There is a lot of work that had to be done not just in the technology that goes in the car, but also how you deal with intra-tolling agency and customer relationships and how you deal with the billing and, and that's all been figured out by the partnership between TransCore and Gentex. It’s super early, but we certainly thought it was exciting one of the highlights for everybody today.

[Christopher Glynn:]

Sounds good. Thanks.

[Neil Hunn:]

Thank you.

[Operator:]

And we'll go next to Barclays and Julian Mitchell.

[Unidentified Analyst:]

Hi, this is Jason on for Julian's. Good morning.

[Neil Hunn:]

Hey, Jason.

[Unidentified Analyst:]

Maybe just a question on the Gatan add back guidance. It was sort of our impression that the annualized Gatan divestment impact would be closer to $0.60 of EPS adding back 20 just kind of wanting to reconcile the difference there just sort of the half year basis seems like it would be closer to 30. Is this sort of seasonality of earnings or are there other dynamics that plays of just lowered organic sales growth outlook? Even just as we're modeling for 2020, et cetera?

[Rob Crisci:]

I think you have too high of a number for Gatan, full year of Gatan would be. So, this is consistent with sort of what we saw for the year all along. There's certainly a lot of variability in the potential for their performance in the second half as Neil mentioned. Now, I think that their fourth quarters are generally their highest quarter of the year. There's some seasonality there. So, there should have a better fourth quarter than the third quarter.

[Unidentified Analyst:]

Understood. And then maybe moving a little bit away from the short cycle businesses to Deltek, I know it's been mentioned for a couple of quarters that there's bolt-on M&A sort of going on there. Is that still the plan for Deltek moving forward? It seems like the booking’s growth is doing quite well. I just wondering if that was still a strategic focus with the business?

[Neil Hunn:]

Sure, I mean, it has been and for a long time, it even predates our ownership Deltek sort of did one-ish bolt-on a year before we owned it for several years, we're probably at that pace or maybe just a touch higher in our ownership. And we would expect that to be the case going forward.

[Unidentified Analyst:]

Understood. And it seems like the in moving on to CCC, just in the new construction business seems like it had the expected strength that you sort of called out in previous calls. Just kind of wondering where that you view that strength of the LNG pipeline in terms of its still extremely early innings or four to six quarters, seems like a reasonable baseline timeline for that?

[Neil Hunn:]

Yeah. So, what's characterized is some of these projects that are in development are actually smaller and quicker to come online than what we may have might have seen five, seven, eight years ago. So, in the past, it would have been multiple years, so I think your four to six quarters is probably more in-line with the expectations. You might drag out a little bit longer as you know these projects do, but these are not five to 10-year projects or three to seven-year projects, they tend to be smaller record to turn on.

[Unidentified Analyst:]

Understood. Thank you very much.

[Operator:]

And we'll go next to Steve Tusa at JPMorgan.

[Stephen Tusa:]

Hey, guys, good morning.

[Neil Hunn:]

Good morning, Steve.

[Rob Crisci:]

Good morning.

[Stephen Tusa:]

Appreciate the use of the term of Socratic coaching. That was a political science major. I'm not I'm not quite sure what that means, but I kind of get it. On the software businesses, I guess, the application software business. I mean, I read all these other companies, transcripts, and I don't quite know what I'm reading but they use the term bookings a lot. How is the booking like the organic bookings growth as you guys define it for, I guess that segment?

[Neil Hunn:]

Steve, so let me Socraticly walk you through this.

[Stephen Tusa:]

I need some -- I clearly need some coaching as well. So, I just appreciate a little color.

[Neil Hunn:]

Yeah, but for the segment now, we've got to go company-by-company around bookings, right. So, I mean, that's a harder question to answer because it's -- we don't know anything up at the segment level.

[Rob Crisci:]

Maybe bookings and gap sort of bookings.

[Neil Hunn:]

Sure. So, bookings in this case is or another term, you might hear uses order intake. So, it's what is -- what businesses actually contracted in a period of time and you have to do a fair amount of, sort of equivalency between a perpetual deal and a SaaS deal. And so -- and then, and obviously, when you booked something, you could have double-digit bookings. And then if it's all SaaS, then it's going to take four quarters right to get into the run rate. So, your gap revenue will lag, could lag that a little bit. And then on perpetual, you might book something in the second quarter, and you might not be able to recognize the revenue because of some delivery in the software and it might be pushed out a quarter or two as things are being implemented. So, bookings are just a little bit more -- order intakes a little bit more of an early read of business activity that's ongoing in the company. So, in Deltek's case, which we highlighted, we had the hard comp against the wonderful second quarter of last year, which by the way is a great problem to have because we want so much business on a perpetual basis a year ago. And when we sort of normalize for the outsized perpetual growth a year ago at Deltek, bookings are up double-digits this quarter. So, the activity inside that business review is healthy.

[Stephen Tusa:]

Got it. Okay. And so that's up inside that business that was up like, I don't know, those bookings are like double-digit or like high singles, that's kind of what gives you confidence for the second half in the next year, if you will?

[Neil Hunn:]

That's right. It's a combination of the bookings. And then you're also looking out several quarters at pipeline coverage and pipeline sort of conversion rates and things but the combination between that and the near-term bookings is what give us the confidence.

[Stephen Tusa:]

Okay. Were there any businesses in that application software side that were down on revenue?

[Neil Hunn:]

Well, in that we know, your favorite topic of Sundquest is in this segment and it was down mid-singles, as we expect - it actually did modestly better here in the quarter in the first half, we thought, but other than that everything was up pretty much.

[Stephen Tusa:]

Okay, that's great. And then one last one, acquisition pipeline, standard question. Are you bullish about -- any more bullish about the second half relative to couple months ago, anything loosening up or does the kind of macro environment delayed some of the activity you may have thought you would have seen?

[Neil Hunn:]

I would say we feel the same today as we felt last quarter-to-quarter before. I mean, the market and the activity are there, its robust, there is lots of work. We're looking at lots of things as we always do, and you just never know until the very last minute in a deal if it's going to sort of one that we actually want execute, and one that we can actually lend from a value in contractual terms perspective, but it's steady as she goes on the M&A front.

[Rob Crisci:]

Yeah, there is nothing in the macro environment that -- there is nothing in the macro environment that impact these deal processes at all. They're hopping and, you know?

[Stephen Tusa:]

Okay. Super. All right, guys. Thanks a lot. Appreciate the detail.

[Neil Hunn:]

Our pleasure.

[Operator:]

And we'll go next to Joe Giordano at Cowen and Company.

[Joe Giordano:]

Hey guys, good morning.

[Neil Hunn:]

Good morning.

[Joe Giordano:]

So now that we're getting into a little bit of an industrial cycle, I guess the question that you guys typically get asked, will get asked a lot more, like, how does this make you think about some of your industrial businesses from a long-term basis. Does it become somewhat of a nuisance when 8% of your company becomes something that gets talked about more than 8% of the time as we enter these types of things, and how do you think about the positions of those businesses within the context of Roper long-term?

[Neil Hunn:]

Yeah, so its first, these businesses are amazing. I would just draw you to the profitability of both, the industrial businesses and the process segments. They're amazing businesses, they're clear leaders in their niche, they're just they're fantastic. Yeah, they have a little bit of cyclicality associated with them. But we've worked over the last decade, to meaningfully reduce the cyclicality. And it was roughly a 50% tie that these businesses these more cyclical businesses a decade ago, and now we're about 20%. And so that trend will continue as we deploy the capital going forward. We're generally deploying a thing that don't have a large cyclical component. So, continue to de-emphasize sort of the cyclical aspects, but they're great businesses and it's and we like them in the portfolio.

[Rob Crisci:]

And they're designed to be incredibly profitable at all points of the cycle right there. As you know, we're always looking at the breakeven analysis, what’s the fix cost, what’s the variable cost. Our business leaders are very, very proactive. So, they're always going to generate a lot of cash in all environments, and their position to succeed over the long-term. So, we believe we're a great owner for those businesses.

[Joe Giordano:]

Okay. Yeah, you guys have been very consistent with that answer over time. So, appreciate that. Are there any specific cost actions that you're looking at, as we enter this period, though, for them, like is there any unique cost out opportunities that you're that you now you can execute as things kind of slow for them?

[Neil Hunn:]

I wouldn't say unique, but what maybe is unique about the Roper model, and this is just building on Rob said, these businesses structurally are highly variable in their nature, they buy structural, right. So, any sort of cost actions can happen pretty quickly and without lots of sort of riff or cost to get the cost out, if you will. And so, the companies also naturally start feeling and pulsing their way when they feel softness and take the actions out, any sort of direction from us, right. And so, we're certainly talking with them and understanding what they're doing. And making sure their assumptions are aligned with our assumptions about what the future looks like. And then they go about doing what they do in managing their businesses.

[Joe Giordano:]

Okay. And maybe last for me. Just curious about your -- the outlook, maybe from your customers standpoint about some of the commercial building sectors that you're exposed to. And I know there is some nuance with some of your businesses, whereas if some construction volumes go down a little bit, it's actually good for like a business like in ConstructConnect thing that used to help and funding the work, but just generally like what are your -- are your customers, kind of getting raised antennas about the health of the or directionality of their businesses over the near-term of very robust levels?

[Neil Hunn:]

Yeah, hard to get a read across that, like you said at our ConstructConnect business, which is in the pre-construction part of commercial real estate development. We actually root for a a neutral to slightly positive, slightly bearish market, because that increases the value of what we deliver to our customers. But it's -- I don't have as we sit here today great read across or read through from ConstructConnect on broader construction themes. So far and it will help you there.

[Joe Giordano:]

Fair enough. Thanks guys.

[Neil Hunn:]

Yes. Thank you.

[Operator:]

And that does conclude our question-and-answer session for today's call. And at this time, it's my pleasure to turn the conference back over to Zack Moxcey. Please go ahead.

[Zack Moxcey:]

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

[Operator:]

And once again, ladies and gentlemen, that does conclude today's conference. And again, I'd like to thank everyone for joining us today.