Roper Technologies, Inc.
Q2 2016 Earnings Call Transcript

Published: 25 Jul 2016

[Operator:]

The Roper Technologies' Second Quarter 2016 Financial Results Conference Call will now begin. I will now turn the call over to John Humphrey, Chief Financial Officer.

[John Humphrey:]

Thank you, Matt, and thank you all for joining us this morning as we discuss our second quarter financial results. Earlier this morning, we issued a press release announcing our results. Press release also includes replay information for today's call. We have slides to accompany today's call, which are available through the webcast and also on our website at www.ropertech.com. If we please turn to slide 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 and as further detailed in on our SEC filings. You should listen to today's call in the context of that information. Next slide. Today, we will be discussing our results for the quarter primarily on an adjusted non-GAAP basis. A full reconciliation between GAAP and adjusted measures is in our press release this morning and also as a part of this presentation on our website. For the second quarter, the difference between our GAAP results and adjusted results consist of two items. First, the $2.5 million purchase accounting adjustment to acquire deferred revenue or software acquisitions that we've made. This represents revenue that those companies would have recognized, if not for our acquisition. Second, a small inventory step up expense, related to the acquisition of RF IDeas last year in the fourth quarter. Now, if you please turn to slide four, I'll turn the call over to Brian Jellison, Chairman, President and Chief Executive Officer. After his remarks, we'll take questions from our telephone participants. Brian?

[Brian D. Jellison:]

Thank you, John. Good morning, everybody. We'll take a quick look at sort of summary of the enterprise financial results here in the quarter, and then look at individual performance of the segments and the outlook for each segments and then turn to the guidance for the remainder of the year and go to Q&A. So, next slide is simply the introduction to the Q2 enterprise results; next slide is the explanation of those. So, orders were actually up to a record $956 million. They were up 9% in the quarter and our book-to-bill for the enterprise was 1.02. Revenue was up 5% to $934 million versus last year's first quarter. Organic revenue was down 2%. We had the divestiture that's still in our numbers through the third quarter, the ABEL divestiture, which pulls 1% away and acquisitions were up 8%. We had really terrific growth in medical and in software, and water, we'll talk more about that within those respective segments. But the oil and gas declines were actually worse than we expected. We went into the year thinking that we'd be down maybe in the high-teens to 20%. In the quarter, we were down 25%, but in the upstream areas, we were down dramatically more, 44%, 51%, 52% numbers that really were amazing for us. Those are across all businesses, so they all are directly EPS-type businesses because they don't have much in a way of non-cash amortization. The toll and traffic project delay was also a little bit of a disappointment that Saudi is rolling out their program slowly. We're on track with everything we do, but their rate of initiation of new zones has been slow. Our gross margin was another record, up 90 basis points to 61% and EBITDA was up to $314 million, 33.6% of revenue. Our DEPS number at $1.56 was disappointing from our perspective, because it did hit the low end of the range, but in a quarter where we had record orders or record sales, record backlog and record EBITDA and operating profit, we've just came up a little light on the revenue side from the oil and gas and project delays, each of which probably cost us $6 million to $7 million of revenue and that's why we were at $1.56 million at the low range instead of being up at the higher end of $1.61. Our operating cash flow was $170 million, which was strong in Q2. Year-to-date our operating cash flow has been $414 million which is 23% of revenue and that's a particularly pleasing number when you're going through the sort of oil and gas decline that you could still maintain these kind of ratios. Our recent acquisitions are performing well. We have an extremely strong pipeline, which is very active. We'll talk about it in a little bit. So it was a solid quarter, but we did have to adjust our outlook for the economic realities that we see in the second half of the year and we'll talk about that when we get to guidance. Next slide, here we're looking at the Q2 income statement. As you can see orders up 9%, book-to-bill

[Operator:]

Thank you. We will now go to our question-and-answer portion of the call. We will take our first question from Deane Dray with RBC Capital Markets.

[Deane Dray:]

Thanks. Good morning, everyone.

[Brian D. Jellison:]

Hey. Good morning, Deane.

[Deane Dray:]

Hey, Brian or John, I was hoping, you could start with bridging the guidance for third quarter and fourth quarter, just looks like the guidance cut here this morning is weighing higher obviously on the third quarter, down 12% versus consensus, but you're not as severe in the fourth quarter. And maybe is there some seasonality, is it the comps getting easier, better visibility on these product launches, but just some color there on the difference here, assumptions in the third quarter and fourth quarter?

[John Humphrey:]

Yeah, Deane. So, you did touch on it. So one of the things that we're expecting for this year is maybe not historically strong from a seasonality perspective but stronger than what we saw last year. And that's not just on the Energy businesses, but also on some of the other Industrial businesses that have some more seasonal activity as customers flush out some of their budgets. So we do expect that for the fourth quarter and that's why, you see slightly higher in the fourth quarter than the third quarter as we look forward to this. My answer must have left everyone dumbfounded. Are we still live on the call here?

[Operator:]

Yes, you're still live.

[John Humphrey:]

Okay.

[Brian D. Jellison:]

All right. Next question.

[John Humphrey:]

So next question, Matt.

[Operator:]

We will now hear from Robert McCarthy with Stifel, Nicolaus & Company.

[Robert McCarthy:]

Deane must have dropped the mic. Good morning, everyone. How're you doing?

[Brian D. Jellison:]

Hey.

[John Humphrey:]

He must have. And well, if he comes back we'll insert him back into the queue.

[Robert McCarthy:]

Okay. In any event, maybe you can talk about the Medical business in terms of maybe amplifying your comments around the product launches, the favorable compares to MHA. And then what drives to 6% organic growth versus the 9% organic growth kind of for the back half?

[Brian D. Jellison:]

So we had – give Neil Hunn a chance – he's responsible for the Medical and software businesses there an opportunity to explain. The pipeline is growing candidly more rapidly than we could have even hoped for. And he can tell you a little bit about what these new launches at Sunquest are designed to do, so Neil with that fire away.

[Laurence Neil Hunn:]

Good morning. Yeah, the second half is – have strength across the board. I'll break it down by product and software. On the product side, there's new products at Verathon that continue to gain traction. On the software side, a number of – I think we've talked about before, a number of faster-growing software businesses turned organic, Strata, Data Innovations, SoftWriters, SHP. And then with the second half really at MHA, we see likely, well they are easier comps and then the market conditions around new customer adds give us an opportunity to do better in the second half than the first half.

[Brian D. Jellison:]

But I think people are more interested with Sunquest, so let's just talk about the launch of the new – you've got four major offerings and then you've got mid-teens in terms of enhancements and upgrades at Matt's group are putting in place that we're already starting to solicit revenue. So you might explain what those things do.

[Laurence Neil Hunn:]

Well, Sunquest, very excited about Sunquest. The reality of the Sunquest is we have worked very hard for the last 18 months on a series of new products. We've talked about those number of new products that are being brand new or material upgrades or enhancement increases being in the high-teens. We're on track for all of that. We've just come off a great user conference at Sunquest, where the customers were excited about the roadmap and what was happening. We've seen a pretty meaningful increase in the pipeline, the sales pipeline, the sales funnel activities that you'd expect to see coming behind a large number of new products. We'd like to see that pipeline convert in the second half. We expect it to convert in the second half. So, we'll see bookings momentum and then that will give us the momentum heading into 2017 for Sunquest that we've talked about in the past.

[Robert McCarthy:]

And switching gears to M&A capital redeployment. I think the messaging maybe up until this call has been a little more muted in kind of the second quarter given where public valuations are for a lot of companies, given where the cost of funds is. Maybe can you just talk about – do you think it's a difficult environment to transact deals, just given political uncertainly, a tentatively rising stock market, with an improving valuations and public fundamentals kind of bleeding into private fundamentals? And then kind of perhaps some of your companies thinking about the alternative route for initial public offerings. Could you just talk about how you look at this environment, and how do you think Roper's going to be able to transact in this environment and what kind of cadence you guys can transact in?

[Brian D. Jellison:]

Well, I think for us, it's kind of a perfect environment, although you're right about the pricing of assets and the expectation of sellers, is pretty high. But fortunately for us, we're not buying public companies and paying a premium for it. So, we're buying private companies that if they were public would trade at a higher value than they do trade in the private marketplace, which gives us always some beneficial arbitrage. There are as many things available in the acquisition market as I've ever seen. We have looked at billions of dollars of transactions this year, and we're directly engaged with a couple now that have a higher likelihood of closing, I think than the ones that we were looking at earlier in the year because of the quality of the business. Lot of the people that are running these private companies aren't interested in becoming public. They would much rather join our firm – at the public equity in our firm that and not have the quarterly calls and all of the things that you have to do with investors and banks. So we remain a very attractive home for people. And I think that the acquisitions we've made in the last couple of years give us a wider variety of things that we can look at. Application software has a huge number of potential verticals and there are lot of niches within them that the largest people that are, roll-up people aren't going to be interested in, so it's still a very favorable hunting ground for us. Now, the challenge I think for the multi-industry guys in buying things is they tend to not buy things that are as high a quality as what we're buying. And if you're in a marketplace where you're looking for synergies that are going to be driven by overhead absorption or business consolidation or administrative synergies or something, those businesses are trading at a disproportionately high price than where they normally would because the interest rates are so low. The highest quality businesses oddly enough, trade at a much deeper discount to public comps. People will look at Roper and, oh my gosh, look, they pay 12 times for something. Well, if you looked at the public company comp, it was trading at 25 times or 26 times. So, I think that people are focused on product-oriented, more asset intensive businesses that are trading at 12 times or 13 times because of very low interest rates and people are buying them for 12 times or 13 times or 14 times, we're not in that space. We're in a space where we're buying stuff at 12 times or 13 times or 14 times that if it were public would trade at a higher number because of our willingness and experience and how to effectuate those companies joining our public family.

[Robert McCarthy:]

If you indulge me to one last question and I apologize at the offset to be a little impolite, but do you think this is the last guidance cut we're going to face for 2016?

[Brian D. Jellison:]

I do. I've bet money on that.

[Robert McCarthy:]

I'll leave it there. Maybe Deane will get back upon his seat.

[Brian D. Jellison:]

Yes.

[Operator:]

We will now hear from Joe Giordano with Cowen & Company.

[Joseph Giordano:]

Hey, guys. Thanks for taking my questions here. When you – I don't want to beat on Sunquest too much, you've really talked about it, but can you kind of get into a little bit more detail what these new products are actually? Like what actually are they, how are they expanding the platform and maybe talk a bit about the competitive dynamics in that market versus you guys and that bit of concern, how that's been progressing over the last maybe 12 months or something like that?

[Brian D. Jellison:]

Yeah, it's a great question Joe. So Neil, why don't you kind of explain these four core products and then all the enhancements.

[Laurence Neil Hunn:]

Sure. Well, I appreciate the opportunity. So let me give you a 30 seconds on the importance of what Sunquest does for our customers. So Sunquest customers are the largest, most complicated laboratories in the United States. These are laboratories that do millions of tests a year. And what our software does is automate from start to finish the laboratory processes. So you get super high quality results at low cost to operate the labs. So what Sunquest, the new – the turn of products ready at Sunquest is to extend that capability that's been steeped in the blood side or the fluid side of the lab and extend it to the other parts of laboratory. So first is a major product that is the integration of the pathologies inside a hospital. So it integrates the blood and to the tissue, to the molecular genetics, very important product for us and for our customers as they deliver medicine inside of their institutions. The second one is a completely refreshed view about how do you collect samples at the bed side. It's mobile enabled, it's integrated into a nurse workflow, important in terms of getting the draws correct, at the right location, with the right patient and get it to the laboratory as quickly as possible. The third category of new products is helping the hospitals extend their reach into the communities, importantly in the changing reimbursement landscape in U.S. healthcare, hospitals want the laboratory samples that are in the community, meaning where the physicians that feeds patients into their hospitals, they want the blood tests that are collected and all the laboratory tests that are collected in the physicians' offices to be routed into the hospitals or laboratory not just to drive volume in laboratory but to get the clinical information. And so we have a series of tools that integrate into the electronic medical records at the physicians' offices for ordering and resulting. And then finally, the laboratory space has been vacant of any meaningful analytics about how they run the operations, how they benchmark themselves against their peers and improve the operations. So we have a large analytics release that's happening in the second half of this year. Those are four net new opportunities. As we talked about earlier, there's a series of other meaningful upgrades. We've just released a major upgrade to our core clinical policy and our core blood bank. We've seen the opportunities associated with those upgrades number in the hundreds and so we're very excited about what the teams be able to build on a product perspective at Sunquest.

[Joseph Giordano:]

Thanks for the color, it's really helpful. One, just kind of going with that, typically we see a pretty steep margin ramp in the second half for that segment overall and guessing most of us are probably in that boat right now. So, can you kind of talk us through what drives that historically, and is that something we should still think is applicable for this year?

[John Humphrey:]

Yeah. It really is. It's something that we're expecting as well and it's truly volume driven. So, it's a – and this segment has our highest gross margins across the enterprise with gross margins that are north of 70%. Some of our businesses here even have gross margins above that. And so, as we see incremental growth on the top side, we expect that to fall through. And so that really is what drives the margin improvement as we go throughout the year. And, that's true on not only the software-type businesses like Neil was just talking about, but, also our products businesses and particularly at Gatan and some of our imaging business where they have very high gross margins because of all the technology and all the R&D that we invest there. It does result in high gross margin. So, if the volume increases, we expect that fall-through to improve, and that results in a higher margin in the fourth quarter than what we had throughout the first part of the year.

[Joseph Giordano:]

Okay, good. And then, just last from me quick. On the order growth at RF Tech, is that driven more by TransCore, is that software related? I just want to kind of link that with your comments on who becomes president on the infrastructure side. It does seem like a lot of the road builders and those kind of guys see pretty positive outlooks right now. So, I want to see what you guys are thinking about that business in the U.S., particularly in the second half?

[John Humphrey:]

Well, as far as the numbers are concerned – I'll turn it over to Brian on the commentary around the business outlook. But the order quarter growth was both on the toll and traffic side where the book-to-bill ratio was very strong 1.14 I believe. But it was also on the software side. Now, a little bit of that is seasonal, is our CBORD business, in particular, which serves the college, the university market. They have a lot of their renewals and upgrades and security applications that are booked in the second quarter and then delivered or recognized as revenue throughout the year. And so a little bit of that is seasonal, but we saw a fundamental growth on the software orders as well, but the largest reason for the book-to-bill being well above 1 is the backlog that's building on the toll and traffic side. Even though we've seen delays there, we still see fundamental growth happening there in the second half.

[Joseph Giordano:]

Thanks guys.

[Operator:]

Our next question comes from Joe Ritchie with Goldman Sachs.

[Joe Ritchie:]

Thank you. Good morning guys.

[John Humphrey:]

Good morning Joe.

[Joe Ritchie:]

So, my first question's on the portfolio. Brian, clearly Energy's surprised to the downside, Industrial remains weak. But – and you guys are continuing to evolve as a technology company. I'm just wondering whether any of the end-market dynamics have kind of changed your view about the portfolio, wonder if there's any potential divestitures that you guys are considering.

[Brian D. Jellison:]

No. I'd say the answer is no. You know what, we went into the year thinking that we'd be down about $100 million on oil and gas, which comes in a little bit into Industrial, mostly into Energy. I'm sorry, thought we'd be down about $75 million, now we're going to be down $100 million. So, that $25 million extra negative situation on revenue is disappointing because it comes in at 50% or frankly 60% contribution. So, it's a big EPS number. It doesn't really diminish our cash performance by much at all. And, those businesses at the moment are just a free shot on goal for 2017 and 2018. They're on the books for well – extremely low basis. So, the only way if you were going to do something with them, you'd want to do either a straight spin or a sponsored spin or you'd want to do an RMT with somebody. It'd be safe to say that our phone's been ringing off the hook with people who want to do those kind of things. But we actually think there are substantial upside in those business, just not this year, and probably not in the first three quarters of next year. But, if they start cranking just modestly in 2018, we're going to have windfall kind of results. So, we'd prefer to hold on to them, continue to invest. The Industrial business was 26% EBITDA in the quarter for heaven sake. And, the Energy business, we got 31% in Industrial and 26% in Energy. So, I mean these are really good businesses. Most of our investors, when we talk to the long guys, their fear is, gee, if you put those someplace, how could we trust they can run them as well as you can. And, we always humbly say, well, maybe right. So, these are great businesses. They're just in a situation where if somebody's off 44% to 52%, it's incredible, but they're still able to perform at the levels they are because they're so nimble. So, I don't really see those as necessary sales. We know how to run, we know how to run them well. If they didn't have this extra $25 million headwind in the second half, our guidance reduction wouldn't have been so great. And then no one could predict what happened with what's going on in Saudi is certainly an interesting time and it's effected several of our businesses revenues in the second quarter, so. I think the underlying pieces for us is we've got some cash cow businesses that are at their absolute nadir. They're going to continue to drive a lot of performance over the years and they're a great annuity value for our investors.

[Joe Ritchie:]

Got you. That's helpful color, Brian. Maybe switching gears, John, one quick question for you on the Medical and Scientific Imaging margins. In the first half of the year, down 250 plus basis points year-over-year. It looks like the D&A as a percentage of sales was roughly the same as last year. So I'm just wondering, were there any mix issues that impacted the first half as well beyond just the M&A?

[John Humphrey:]

Sure. I mean, the M&A does have an impact here, right, because we acquired CliniSys, which on an operating profit basis is below the segment average. And frankly, even on an EBITDA basis, it's below the segment average, right. Remember, the segment average here is in the low-40% EBITDA margin range. So the fact that CliniSys comes in at only in the 35%, maybe a little bit less than that EBITDA margin range even drags it down. So that is a contributor. And then the other piece is, frankly, the relative mix between – so our Medical growth so far this year. And in fact for the remainder of the year as well, although not as much in the fourth quarter has been driven more by product, Medical product sales, still terrific businesses and great margin but not the highest margin businesses inside the segment, which is really more of the software and services side. So it's more of a mix issue, but we see that mix issue actually moderating as we go throughout the year and to an earlier question that's why we see some fall through in margin expansion in the fourth quarter.

[Joe Ritchie:]

Got it. Thanks, guys. I'll get back in queue.

[Operator:]

Our next participant is Christopher Glynn with Oppenheimer.

[Christopher Glynn:]

Thanks. Good morning.

[John Humphrey:]

Morning.

[Christopher Glynn:]

If we look at the tolling and traffic timing, maybe dive into that a little bit more. I think you called out another $25 million or so second half headwind. I guess that's a mix of Riyadh and non-Riyadh pieces, but – is just a – does this project strength into the first half of in 2017, is that the best way to think about that?

[Brian D. Jellison:]

Well, there is no question about this.

[John Humphrey:]

Yeah.

[Brian D. Jellison:]

I mean, yeah that – the decision process – I mean look that decision's made, it's done, we've started, but we would have expected it to be in the thirties of millions of dollars and totally offset some of the issues with Puerto Rico. It's going to be above $10 million. How much above that is hard to say. If you'd really – they're doing a massive transit system over there. They've got lots of priorities. They're extremely happy with our performance. We're happy with the relationship. It's going to be extremely valuable over a long period of time, but in the short run, we're going to likely get at least $20 million less than we expected in the beginning of the year. And we've got somewhat less in the quarter. In this quarter and all of our numbers issues are really just around the severity of the upstream being far worse than we thought and the toll and traffic kind of stuff, if you look at the quarter is pretty significant. When you look at the year, it's easier to calibrate now.

[Christopher Glynn:]

Okay. And then the non...?

[Brian D. Jellison:]

You know just so you understand it's true, the projects are just getting pushed out. So if we're not having them now, they'll come in, whether they come in in the fourth quarter or they come in in the first quarter, they're going to come in.

[Christopher Glynn:]

Okay. And that holds for Riyadh and non-Riyadh, correct?

[Brian D. Jellison:]

Absolutely correct.

[Christopher Glynn:]

Okay. And then the Neptune growth was really standout. Any lumpy there or is that just broad-based rich execution?

[Brian D. Jellison:]

Well, I think it's a combination of market share growth and all the normalized stuff and then them getting what we knew would be the lion share of new business from a customer that they didn't do much business with for the last couple of years. So, other people were talking about big revenue, we're showing big revenue.

[Christopher Glynn:]

Okay. And then, Energy Systems, you alluded to the – what's baked into the guidance is a weak 4Q seasonal ramp like last year, but you dangled positive surprise prospects in there. What's the kind of thought process behind dangling that?

[Brian D. Jellison:]

Well, we just don't know. Last year was – normally you get – basically because people have a lot of MRO left at the end of the year, but we didn't see any benefit of that because people just shutdown. This year, all year along anybody who's in the upstream business would know that people are cannibalizing what they've got, nobody is buying anything, rental fleets are in distress. But there're an increasing number of signals that would say that the cannibalization of all the stacked horsepower business out there, at some point will turn into new orders in revenue. We just have no idea where it will be. We do expect a modest improvement in the fourth quarter of this year, versus last year and could it be even better, I don't know.

[Christopher Glynn:]

Okay. Thank you.

[Brian D. Jellison:]

Yeah.

[Operator:]

Next we will hear from Richard Eastman with Robert W. Baird.

[Richard Eastman:]

Yes, good morning.

[Brian D. Jellison:]

Hey, good morning.

[Richard Eastman:]

Brian or John, could you just speak for a second, the order number that you've put up there, what was the core order number in the quarter?

[John Humphrey:]

Organically, orders were up 2%.

[Richard Eastman:]

Plus 2%, okay. And then, the assumption would be that that's pretty much driven by Med-Scientific is that reasonable core order?

[John Humphrey:]

So the core – so the organic orders, I wanted to give that to you by segment. So, in the Medical segment it was plus 2%. In RF it was plus 9%. It was plus 2% in Industrial and minus 11% in Energy.

[Richard Eastman:]

Energy, okay. All right, I see. Okay. And then, also within the Med-Scientific piece of the business, could you just maybe sift through the core revenue growth, local currency was plus 4%. How did the Medical products do versus the software and SaaS business? Is it – I was just trying to pick up on the cadence there. The software and SaaS business effectively much better in the second half, how was it relative to the 4% core growth this quarter?

[John Humphrey:]

Yeah. So, the Medical products was up, I know it was in the 9% or 10% range, with the medical, software and services up I think 1%. And so, as we go throughout the year, that relative mix probably changes a little bit out if it goes to 8.2% or if it goes to 7.3%, but it's in that range. Maybe even it stays at 8% then the medical, software and services comes up a little bit. But that's the relative contribution right there. There's also little bit of what we were talking about with the margin impact and the outlook for the rest of the year.

[Richard Eastman:]

I understand. Okay. And then, just one last question for Brian. You had mentioned earlier in the M&A pipeline, it was full, the application software businesses. There were a lot of those prospects in there. Is there anything that Roper could do in that application software area that would have more scale? We've seen good success with Sunquest and MHA, and tucking in some related businesses at Sunquest, at CliniSys and GeneInsight and Atlas. And I'm curious, do we stay on that path with the – more of the bolt-ons to Sunquest and MHA or is there something in there with some scale that we could pull in?

[Brian D. Jellison:]

So, it's a really good question. The answer is yes and yes. So, one of the incredible things about Sunquest and MHA is their platform status. So, if they allow us to do these incredibly attractive small acquisitions that we wouldn't do on our own. I mean, things like SoftWriters and Strata, and they're just really amazing. I mean, these are very high growth businesses and hopefully, we'll continue like that even though they're on a small base. If you look at the last large transaction was Aderant. There are a lot of things that are sort of the size of Aderant. And Aderant also offers us an opportunity for some bolt-on acquisitions to kind of grow its platform status. I would hope that the next acquisition we have is more like that where it's meaningful, it's something that we know how to do. People would be confident that we're already doing those kind of things. So that is likely what the next thing would be. Now, that said, this year we've looked at a number of very large transactions, and...

[Richard Eastman:]

Okay.

[Brian D. Jellison:]

...those are always an interest. We're incredibly conservative and careful around those. But I would be disappointed in the next two years or three years if we didn't do a quite large transaction.

[Richard Eastman:]

So, are there opportunities or targets in the pipeline that are not Medical-Scientific? I know Aderant was an exception there. But I'm thinking, anything literally it's a bad word these days, but something on the Industrial side that would be more software or SaaS, is there any of those opportunities in the pipeline?

[Brian D. Jellison:]

Well, there aren't a lot of Industrial situations. There are a few, but there are a lot of things that are not medical, that are vertical, just like Aderant is certainly not a Medical business.

[Richard Eastman:]

Yes.

[Brian D. Jellison:]

Some of the other acquisitions we've made are not Medical at all. I think that you're likely to see some acquisitions that are not Medical at all, that's why we're kind of suggesting...

[Richard Eastman:]

Okay.

[Brian D. Jellison:]

...there's a lot of attractive application software businesses that are immediately in front of us.

[Richard Eastman:]

Okay.

[Brian D. Jellison:]

And there are project management businesses that are out there. Quite a few of those that are very interesting, some which are sort of horizontal opportunities and others that are small vertical. So...

[Richard Eastman:]

Okay.

[Brian D. Jellison:]

We have enough internal intellectual capital to handle a large acquisition that would not be in the Medical space.

[Richard Eastman:]

Okay. Very good. Thank you.

[Brian D. Jellison:]

Welcome.

[Operator:]

That will end our question-and-answer session for this call. We now return back to John Humphrey for any closing remarks.

[John Humphrey:]

Thank you, Matt and thank you all this morning. And we look forward to talking to you again in October.

[Operator:]

That concludes today's conference. Thank you for your participation. You may now disconnect.