Excellent. So we'll get started. Thank you everyone for joining us. My name's Keith Weiss. I run the U.S. software research franchise here at Morgan Stanley. And very pleased to be hosting from Roper Technologies both President and CEO Neil Hunn, as well as Jason Conley, EVP and CFO. So, thank you, gentlemen, for joining me. Roper, to me, is a fascinating company, in that you guys really lean into what, throughout my career, like, I look at as some of the strongest attributes of software companies, right? The stickiness of the software companies, the ability to continually sort of innovate against sort of those process improvements, and yield really good margins on the back of it, really creating the flywheel. And you created a whole company that really leverages that flywheel and leans into that flywheel.
Maybe just a good starting point for investors that might be a little bit newer to the story. It's not your typical software story. So, Neil, can you walk us through maybe a little bit of, like, the Roper 101? What's the kind of principle that you organize this company around? What's this based on?
Sure. Thanks for having us. Enjoyed our time last year. Appreciate the opportunity to be here. Yeah, I think the Roper 101, if I had to put a moniker on it, we're a software compounder, right? Our whole mindset is how do we compound our cash flows over a long arc of time in the mid-teens and hopefully higher. We do that sort of three ways. We have this portfolio that you just talked about. It's 28 companies, 75% of which are software, 25% of which are technology-enabled products. It's a portfolio of businesses that, while they're in different end markets, have remarkably similar characteristics. Small markets, leaders in small markets compete on intimacy, have because we're mission-critical to our customers. There's high value delivered to our customers.
So we have high gross margins that translates all the way down through the P&L to cash flow, competitive intensities observable, generally lower, and not a lot of disruptive forces. That's the nature of the portfolio. We operate a highly decentralized structure, like super decentralized, you know, 19,000 or so people in the organization. There's less than 100 in the corporate office, because we compete on this intimacy. So we organize on a speed coefficient. But we're not passive owners. So the second thing is we have a methodology of how to make these businesses better over a long arc of time. And then finally, all these businesses are blessed business models, and they generate a tremendous amount of cash flow. And then what do you do with it?
We then run a very centralized capital deployment engine where we take all but a small dividend payment and redeploy it into buying the 29th and 30th company, and continue the cash flow compounding flywheel going.
Got it. It's going a little bit off-script already. But one of the things that when I first came into this business 20 years ago, I came from a software company. And working in the finance department of a software company, you start to understand that flywheel and the durability of the cash flows. And coming into, like, a role on Wall Street, it always surprised me at the time how little private equity there was in this space, given how durable the free cash flows were on a go-forward basis, which is exactly what you guys are taking advantage of. I would say over the past 10 years, we've seen private equity come into this space in a big way. Does that create a kind of a competitive dynamic for Roper and sort of the strategy that you guys are trying to pursue?
I actually don't think so. I mean, there's so much innovation that happens, right? I'm really at the private equity is the sourcing engine, the farm system, if you will, that sort of identifies great, good or great founder-driven businesses, matures the business model, extends the business model, and then we get the pick from the very best of those. And so, yeah, it is. At any given transaction, we're competing against a handful of sponsors for sure. But wasn't for the community, we wouldn't have the things to look at. So I think on net, it's a good feeding system, good feed system.
Got it. So, so given the dynamics of what you guys are aiming for, it sounds like you're coming off of another solid year, 15% revenue growth, 8% organic, driving 16% EBITDA growth, and sustaining that really high 32% free cash flow margin. You're doing this in a spending backdrop that a lot of other companies have been struggling with, particularly in enterprise software. What is it about the Roper portfolio that enables your company to exhibit what I would call almost like an anti-cyclical type of characteristic?
Well, the recent history of Roper is we organize around this principle of becoming as uncyclical or as anti-cyclical as possible, not to be counter-cyclical, but just take the cyclicality out of the portfolio. You know, we divested 40% of our 2018 businesses and revenue that was highly cyclical, highly industrial. So what's left is this very stable set of companies, very durable. But there's sort of three attributes that sort of mute the cyclicality, if you will. The first is that our end customers we serve are generally in less cyclical end markets: healthcare, education, insurance, both life and property and casualty, government contracting, legal. They're generally insulated end markets. The second is that we're deeply mission-critical. Like, our customers run their business on what we do.
And if so, as long as they're in business, if you will, it's not a discretionary item. And third, the vast majority, not all of, but the vast majority of our revenue stream is subscription-based, not volume-based, right? So there's sort of three layers of insulation between cyclicality and the end markets and what actually manifests on our P&L. I don't know if you want to add to that.
Got it. Maybe from the other side of the equation, a weaker overall spending environment, I can see how that could actually help on the expense side of the equation, because the other thing we've heard is hiring has gotten easier. Is that something that you guys have witnessed through your portfolio?
For sure. I mean, it was the last summer-ish. It was almost like a light switch in terms of our companies struggling to fully staff and then going to how do we then, top-grade or upgrade talent.
Got it. So, the business model, you throw off the free cash flow. Some of it goes to dividends. Some of it becomes a pool of capital to be redeployed. Can you talk us through that use of M&A to build the company? And what are the attributes you're looking through or you're looking for? And then what's the competitive advantage you bring to the equation that enables you to do the M&A so effectively?
Well, Jason, I'll take this one together. Let me start. So, it's first of all, unlike a lot of companies, I mean, we M&A, for us, capital deployment is a motion. It's a highly engineered process. It has telemetry. We meet. It's not dissimilar to that of a private equity firm. I mean, we have our investment committee. We meet every Monday for multiple hours. We sort of have a funnel that we're prosecuting and a whole process to mature things through the pipeline. So it's, it's a thing. It's part of what we do. It's in the growth algorithm of Roper. The profile we look for is we're business pickers, right? We're not we're not thematic pickers. We're not trying to find fast, fast, the fastest-growing markets and get there before everybody else for fear of being wrong.
We found over 20 years, if the attributes of the business I talked about earlier, you know, small markets, leaders, you know, not cyclical, compete on intimacy, competitive intensity lower, that, that formula leads to have high gross retention, higher, modest to high net retention, very stable platform to build upon. So that's what we focus on. And then we have our whole valuation methodologies around that. What would you like to add?
I think just adding to that, I think our competitive advantage against private equity is our cost of capital just over a long arc of time. And that's especially true right now. And then also just the way we look at businesses, we have a forever home for them. So we were just actually talking to a sponsor, partner last night about, hey, if you're looking at deals that you might not have an edge in 3-5 years, but you can see 7-10 years, that's 7-10 years and beyond, that's, that's where we're going to we're going to look at a business and model it out. And we'll, we'll tend to have an advantage there because we're going to invest for the long term in that business, whereas they have a shorter cycle to shorter window to sort of create value.
One thing, if I may add, is we have a pretty unique story for our management team that we're recruiting through an M&A process. If they want to roll to a sponsor and sort of invest in a sideways or invest for a couple of years and have to harvest that, which they've done for a couple of cycles, they can do that. They generally get a little tired of that after a couple of cycles. So we offer something where you get the long arc of time, but also you're not being capital-integrated. So what the company is, the identity, will remain intact. And so we have this pretty unique swim lane where we have the best of the strategics and the best of the sponsor world. And oftentimes, we're able to win management in the process.
If you win management, the tie is going to go to where management wants to go from a valuation point of view. That happens more often than not in the businesses that we acquire.
Got it. And there's also a dynamic within the business of where some of the acquired companies are now filling in functionality with acquisitions of their own. I'm assuming that's a different process than sort of the core process that you are running where you're bringing in the portfolio companies there.
Yeah, just to step back on bolt-ons, right? So historically, it's been a vast minority of what our capital deployment. It's been about 10% of our capital deployment. We've taken the strategic decision a year and a half or two years ago where we want to increase our allocation of our available capital to do bolt-on activities. Why? It's in pursuit of one and one reason only. It's to improve the organic growth rate of the underlying portfolio of businesses. So finding an adjacency where we have a right to win so after a year, it becomes organic. So that's why we want to pursue a little bit more bolt-on activity. That said, all capital deployment decisions are made in the corporate office by a very small group of five of us, right? CFO, general counsel, head of M&A, myself, head of FP&A.
Like, that's the investment committee. At Roper, obviously, we go to the board for every transaction. So the board has the ultimate approval and authority of that. But, so we go shoulder-to-shoulder. The process is very similar. We do shoulder-to-shoulder on diligence. But we, we do not sort of abdicate or allocate capital for a business to deploy, and then they just give us a report card. We do not do that. It's always going to be center-led.
Got it. So, like, Deltek wants to make a bolt-on acquisition. Do they propose the idea, or do you suggest it to them, and then it goes through your, your same centralized process?
It's a little bit of both. They have, for instance, a partnerships executive who always has his antenna and radar up for partners that want to partner with the Deltek ecosystem. And some of those partners might be good acquisition candidates, for instance. So we could get ideas from that. Also, we have, you know, Janet Glazer, who looks after all of our investment strategy and M&A efforts. Her and her team sort of are also talking with sponsors all the time and identifying opportunities that way. So a little bit of meet in the middle. In a go-forward way, our organization, our companies' strategies, the 28 Roper companies we have today, they have an organic strategy. They'll add over the course of 2-3 years as we work through the portfolio an inorganic strategy.
Once we have that all mapped out, then it gives Jan and her team, like, this is sort of what's been pre-identified as strategically important, and we can be very specific to that.
Okay. Makes sense. I want to talk about kind of recent events. You deployed another $2.1 billion in capital this year, the biggest acquisition being Procare, $1.75 billion for early childhood education solutions. Can you talk to us a little bit about what was interesting in this asset and what makes it a good fit for Roper?
So I'll go through it, but you might hear some you might hear a bit of repetition. But that's what we are, right? If anything, we're boring. We just we know what we want to do, and we stay focused and dedicated to that. So Procare is early childhood education. Think zero to four years old. The industry itself is, again, our TAMs are small. This is about a $750 million TAM, so a small TAM. But the TAM's growing about 10% a year. As young parents who are both working and want to have higher educational content in the zero to four-year-old versus just sort of baby or taking care of the child, and as a result, tuition is increasing to it. The amount that families are willing to invest in this period of time is increasing. Tuition's increasing.
As a result, the market's growing a little bit faster. So it's a double-digit growing market. In Procare's case, it is the leader. So it has 1.5x relative market share from the to the next closest, really in a space that is has I'll call it 2.5 including Procare, 2.5 competitors. So it's, as we've talked about, the basis of competition is somewhat, is known and limited compared to other end markets. This business is, is growing in the mid-teens area, has growth retention in the mid-90s, net retention sort of including the payment stream in the 110+ range, so good fundamental, healthy dynamics. It competes on intimacy, right?
It solves a very specific problem for what it takes to run one of these early childhood education centers, from recruiting parents to onboarding and recruiting staff to, you know, paying staff to curriculum management to communicating with the parents to processing invoices and ultimately the payments attached to it.
Got it. Got it. So as we head into 2024, how does the M&A pipeline look in terms of the expectations of multiples from the potential acquirees and the willingness of them to sell? And, how are you feeling about your firepower heading into the year in terms of what you have in capital?
Yeah, we feel good about the pipeline. I mean, and this is we've talked about the last few quarters. It's incrementally got better. And then I think we're just seeing, you know, Neil's talked about this, just sort of this air pocket right now where sponsors need to, need to provide liquidity back to their LPs. And they need that to be able to raise funds. And so a lot's coming to market. We've got a good balance sheet, relative to the competition. And, you know, we still have, you know, $4 billion or more of M&A that we can do over, you know, over the foreseeable future. Obviously, we're committed to solid investment grade. If we ever did spike up, we would de-lever as we have with some large deals like Deltek and Vertafore over the last 5 or 6 years.
You know, I think we're in a good position.
Got it. So does the current interest rate environment, that actually would that help you competitively, like, in terms of the M&A strategy?
I think so. I think it's, yeah, at the margin. It's certainly helpful. That plus just this dynamic of more net sellers than buyers is probably the biggest, you know, current tailwind. But yeah, over a long arc of time, certainly cost of capital is an advantage for us.
Yeah. I think in a higher-rate environment, it's even more of an advantage, right? Our better credits have lower, lower relative interest rates versus more riskier credits in a higher-rate environment, for sure.
Got it. Got it. Shifting gears a little bit, I want to talk a little bit about generative AI. I feel like I'm contractually obligated to talk about that in every presentation this week. But in your case, I do think there's an interesting debate that investors are having on sort of vertical software versus horizontal software and where generative AI could be more impactful. And there's, like, the argument goes of everybody's talking about the depth of data sets and sort of how broad the business process you're automating is what's going to drive more value in the generative AI solution. Then you think about, like, just your description of Procare, right? It does everything from sort of soup to nuts for them. And it has probably more sort of data about how you run one of these early education centers than any kind of core horizontal solution.
It seems like vertical software would be a great area to apply some of these innovations.
We agree. I mean, I think it's not just the data. It's the depth and the longitudinal and the history of the data that you have in a vertical software business. But it's also what the specificity of the problem that you're trying to solve, right? I think generative AI, at least in our world, we're solving very specific problems. Like, in our legal software business, like, how do you get a highly perfectly compliant invoice to your client on the first pass? That is a remarkably complicated thing to do. It doesn't. It's not. It doesn't. It's unheard of. And so generative AI, we can now know what, in this case, for instance, the lawyer is typing, reviewing what the email traffic is, what the Zoom call content is, what the team call content is.
All of a sudden, we know what that attorney did. We can create, based on the rules that are pre-established from all the clients, you know, Google has rules that are different than Roper's rules, that are different than Amazon's rules on how you can present a bill. So we can be interpreting all of that in context of how to create what did this attorney just do for the last hour? It's perfectly compliant in concept. It is a horizontal anybody is not thinking in that level of specificity that are nuanced to this application. So it's not just the content. It's the problem that's trying to be solved.
Got it. So where are you in terms of identifying these protection use cases and kind of rolling out these innovations into the company?
Yeah. So, we're on the grand scheme of things, we're still early. We've spent a lot of time in the last nine months or so educating our 28 businesses and the leaders, you know, a year ago talking about what this is to now get increasingly more specific on both internal productivity uses and then how it can these tools and technologies can make their way into the product stack and ultimately be monetized with our customers. So we're early days. Like, I think in any sort of new technology, the early hype is way ahead of the reality. And we're just catching up with the potential. But this is going to be, I believe, a very meaningful tailwind for us, but for years to come, not quarters to come.
Got it. That brings up another kind of interesting question about the decentralized operating structure within Roper. It seems like there would be some, like, puts and takes in terms of the ability to create, like, centers of excellence and push out innovations. Like, how do you look to sort of become more of a force multiplier with something like an innovation cycle like this? Like, there's an innovation cycle coming on. What can you do as that centralized hub to help all the portfolio companies coordinate and perhaps act a little bit more efficiently against these cycles?
Yeah. So we're definitely maturing in this regard. As I mentioned in the very opening, you know, we have this portfolio that's solid and durable. But then we have this methodology and view of how to make the businesses better. So that's where this really sits about how we do that, right? So, in something like GenAI, we just have now we've evolved from the corporate centers and some outside experts explaining what GenAI is and the application potential to now our companies are teaching it to each other, right? But we structure the forum and the forums. And we have them on the calendar basically every two or three weeks for the next six months or whatever it is. And everybody's up on a very slightly different, nuanced topic.
We found that when business unit leaders talk to themselves, it sticks as opposed to being an outside person or somebody from the center sort of professing to them. They'll listen to us. But if it's, like, super applied, like, this is how we're using it in our shop, and here's the mistakes we made or the inefficiencies we're identifying or the problems we solved, then it has a better stick sort of attribute to it. So that's the way we approach a lot of this stuff.
Got it. You want to add anything to that?
No. I just add that, like, there was one last Friday on product management. One of the CTOs led it. And it was the presentation was one thing. But the Q&A back and forth was where you got the real rich dialogue that'll probably span out to new workgroups on specific things that they're trying to solve because it is so nuanced. But that's what we're trying to foster is just that community where they can learn from each other.
Right. And I have to just put a wrapper on that. We have to choose to honor this high-trust autonomy, right? So we have to actively choose to lean into this autonomous structure because we need the businesses to act quickly and nimbly to compete and win in a marketplace without sort of looking to the center corporate for permission or, "What do I do?" And so as a result, things like GenAI, when we want to introduce a new concept, it takes a little longer for us to get it in. But once it's in, it's in. It sticks because everybody's acting in their own self-interest. And so that's an active trade-off we make in our culture.
Yeah.
One of the interesting things about GenAI from, like, as a software analyst is that there's a lot of focus on the top-line implications. But it seems like there's, like, big bottom-line implications or productivity implications for software companies overall. So Jason, maybe a question for you. Have you started to sort of push that into your organization? Or do you see those kind of room for efficiencies of code generation tools or doing customer service more efficiently? Like, that could actually drive higher kind of leverage, higher margins within the businesses?
Yeah. I mean, I think where we're seeing it first is in customer support. It's just more mature. Probably second order would be product development. And I think with all of these, though, as you can appreciate, it's all about the change management and the pacing of that. So there's tools out there. Folks are certainly experimenting and getting some good pilots. But then how do you extrapolate that to the population is the real question. So I'm not pushing any agenda on that. I've actually talked to an expert this morning where he's got a bunch of financial sponsor clients that are really trying to jam initiatives down. And they're really spinning their wheels. So we're trying to take a more pragmatic, measured approach to that.
Yeah. I would also say just the guidance to the extent we give any loose guidance, to the extent we can generate near-term productivity or, say, 30% or whatever increase in code generation productivity or customer support or turning the portals to the customers where they do a lot of the tier one themselves, we're going to try to take as much of that productivity savings to the product roadmap as we can, right, to extend our advantage. So we run at 40% EBITDA margins, 31%, 32%, 30%-32% cash flow margins. So this is about how do we continue to accelerate the growth rate of the enterprise over time if we, you know, maybe some of that'll leak into the bottom line. But the short term is how do we take the productivity gains and extend competitive advantage.
Got it. Yeah. So it's actually a great segue into talking about that cost structure. And really, the question is in both directions. One, what's the key to sort of, amongst 28 portfolio companies, maintaining that strict efficiency? 40% EBITDA margins are super impressive, right? 32% free cash flow margins are super impressive. And two, is there any flexibility in that? Is there any point in time where you'd say, "Hey, listen, the opportunities are more robust. So we're going to take down margins a little bit and invest more aggressively"? Or perhaps the other way around? Or is it just, like, 40% is the target number? You got to have some rules in mind.
It's not a target. I mean, 40% is more of a byproduct of the portfolio composition. It's not like we'd said, "We want to be at 40%." The 40% is a very natural number for us, right? So I think it first starts with what we even talked about with Procare. I mean, all of our businesses are the leader. And they're a small market. So we have a relative market share advantage in the classic RMS, ROS sort of trade-off or curve we experience, right? So we just have structurally because we're larger, we have structurally better margins than our competitors across the portfolio. That's the first thing. The second thing is to appreciate what our incentive system is, right? So we incent all of our leaders and all of our companies for one and one thing only.
And it's to grow organic EBITDA, right, so over a long arc of time. There's both 1-year and 3-year metrics on that. So you have to sort of throttle both the near-term and the medium-term for compensation. So if you're focused on organic EBITDA growth over a long period of time, you're making the right trade-offs and investments to do that. Then to your last point, maybe the third thing is, from time to time, there'll be a situation where you could surge go-to-market or you could surge R&D. And yeah, if it makes sense to do that, if there's an opportunity in the marketplace where there's a gap for us to sort of exploit, then we're certainly going to make that investment and sort of figure out a way to deal with that in our incentive system. We've done that.
In the portfolio of 28 companies, there's, I don't know, two or three of those in a given year that we're working through.
One thing I'd add is that paid based on organic EBITDA growth. But we screen for leaders that are builders over a long period of time. So, you know, they're going to do it the right way. And that's what we and we test for that. We have group executives to make sure they're not lighting the furniture on fire. And we don't ever see that. And they're also paid in Roper stock. So they know that if they do anything that's going to be short-term, they may get a short-term payout. But, you know, it's ultimately going to impact the share price.
That's right. Importantly, like, is the commitment we've made to them is we pay them on an organic growth curve. As they improve their organic growth rate, we're not going to move the curve up on them, right? So if you can structurally improve your organic growth rate from X to X times, you know, 1.5 or whatever, then that leadership team is going to make a lot of money into perpetuity as long as they sustain that organic growth rate.
Yeah. So it sounds like that incentive structure is pretty key in having all the boats because there's 28 boats, like, all rowing in the same direction.
Absolutely.
Yep. It's also for yes, period. But the exclamation point is that it's more about a cultural thing than it is an incentive thing. So companies that, in our view, pay based on budget attainment, if we did that, we would give an incentive to all 28 leaderships to lie to us. And then we would have a filter not to believe a thing they say. And in that case, that's for 12 months a year. So if we're paying in that system, if it's June and there's a company that says, "Oh, I've got a problem," then we think immediately, "Oh, they're looking for bonus relief or compensation relief." When that happens now, it's like, "OK, there's a real problem. How does everybody pitch in and try to solve that problem?" Right? It allows. Our compensation system allows bad news to travel faster than good news.
It allows for authenticity and vulnerability of problems. It allows for our leaders, when they get into our leadership summit, to talk about major mistakes they made in their organization and then how they corrected them, right? And so it's as much of a cultural thing or more of a cultural thing than an incentive thing.
Got it. Got it. I have a couple more questions. But I want to make sure we take any questions from the audience. If there's any questions from anyone else.
Just on the free cash flow, the mid-teens kind of plus free cash flow growth profile, you know, I get that higher rates are a competitive advantage. But it's hard to believe that higher cost of capital doesn't put some sort of a headwind on that kind of a growth profile. It just costs more to use money. So can you speak to why that profile would stay the same in a higher-rate environment?
Yeah. The counterbalance to that is the asset prices come down, right? So we're able to buy more cash flow on a relative basis at a lower price on an unlevered basis. So it's this teeter-totter effect between low cost of capital, high asset prices, and higher cost of capital, lower asset prices. And that's just starting to normalize now.
OK. Is there a period where in other portfolio areas I focus on, there's been a severe lag in terms of private valuations coming down? Has that been your experience as well?
Completely right. The last 18 months was on the slower side. So we really had to work hard to do the ±$4 billion in capital deployment, a big bolt-on into one of our businesses called Syntellis. So we're able to sort of solve this value gap because we brought a lot of synergies to the table. So that sort of worked. And then with the Procare deal, it's a first sort of pin in the map where there's been more normalization of valuations on a straight-up basis. Anything you want to add to that?
No.
I mean, is there any flexibility in sort of the model that you're using or sort of the aperture of what you'd look to in terms of M&A? Do you ever get more aggressive or less aggressive in terms of what types of multiples you're willing to pay or, like, what stage of company? Or do you keep that very strict?
So we've always been extraordinarily analytical and mathematical in our approach to buying companies. It's all about continuing the cash flow compounding. At the end of the day, if we have to pay a price that's too high to keep the cash flow flywheel moving, then we just will wait until we can find a higher-quality asset or a lower price. That's essentially what we did for the last 18 months. So yes, on that one. In terms of the profile, we have made a strategic decision a year and a half or so ago where we're going to deploy our capital increasingly in the future into three archetypes that are slightly modified to where we can capture a little bit more value out of capital deployment. One is bolt-ons. The second one is what we're calling a maturing leader, which is the Procare case.
This is a business that is the industry itself is growing a little bit faster. The company has the maturing leader persona has staked this claim as the leader. But there's still a long way to go between SAM and TAM. There's still the SAM is chewing up the TAM. And then the third archetype is a profit upsider. And this is a business where the prior owners have just run it at a structurally lower margins profile than what we think we can run it at. We've not executed this third one. We have executed three bolt-ons since we changed the strategy in Syntellis, Replicon, and ProPricer, and then the one maturing leader in Procare.
Got it.
Verification on the free cash flow growth also. Is that true on a per-share basis? Or are you using equity in some cases to do deals?
It's the same as if you look historically, it's maybe been 700,000, 800,000 of share creep a year. That's in the base model when you think about compounding.
We've not used equity in the past for acquisitions.
There's been a bunch of prior to the current software downturn, there's a bunch of IPOs of private equity-backed companies. One was just in this room before you guys that have a large shareholder that can't get out. There's low float. They're kind of stranded or trapped public companies. Some of them are trading in multiples below what you're buying private companies at have attributes that look a lot like what you look for. Have you started to kind of sift through that group of companies?
We've always looked at the cohort of vertical software businesses in the public and the private. We continue to look at the public ones. We're certainly aware of the cohort that you're aware of that are essentially private companies in a public chassis given their ownership profile and the sponsors. It just boils down to value. There's still relatively better values in the private market, right? As public markets have come down, so have the private. It's just worth the best value opportunity. We look at them all for sure.
So I guess just kind of to build on that point, I think if you just look across the last five years, you have tons of these public software companies that are maybe $10-$20 billion. They've just only been focused on revenue growth. And now they're kind of having to pivot to maybe being more mature and have to focus on efficiency. They don't have any boards that are set up for that. Do you think there's opportunities to maybe look at larger deals that might have to be equity-funded but could really benefit from your focus on efficiency and capital allocation in these businesses that don't have the executive teams or anyone there to do that?
So let me take the size out of it, you know, for a second. So but the intent of your question, that really is this third archetype, this product, this profit upsider case. So an example might be, you know, maybe there's a company whose natural growth rate is 15%. But the current leadership team or board or owners are trying to run it at 30%. And you've got to put 20% or 30% points of revenue into go-to-market to make that happen where you could pare that back and have structurally higher margins. So that concept of reverting that 30% hypothetical grower to 15% and taking margins higher, that is the definition of this profit upsider, that sort of persona that we're considering.
Any additional questions?
I thought maybe we could just wrap up on digging in a little bit into two of the larger units within Roper, Deltek, and Vertafore. Maybe just a brief update on how those two assets have been performing over the last year.
Yeah. So Deltek, for those that are newer to the story, it's one of our largest software businesses. It serves two constituents: U.S. federal government contractors and then other professional services and markets. I think architects, engineers, building contractors, marketing services firms, some consulting firms. The core of this is they're project-based businesses. So the bill of materials is project-based versus a BOM, if you will, a product BOM. The company has continued to. It's a very good business. All the attributes: the growth rates improved, the recurring revenue percentage of total revenues improved, the margins improved, the gross retentions improved over the last, you know, 6 or 8 over our ownership period, sort of 8 or so years.
Last year specifically, we talked about on earnings call, I mean, Deltek struggled a little bit, still grew, but struggled a little bit, grew below its normalized growth rate because of the enterprise segment, the very, very largest customers in the government contracting part of the business. Pretty obvious why. So much government spending uncertainty throughout all of last year, it just became very cautious. Q4 was a bit better. But one data point doesn't make a trend. And so we need to see how that performs this year. We've assumed it continues to be slower, that enterprise segment slower this year. So we'll see. Vertafore, software for property and casualty insurance agencies. They're the duopoly, essentially, split the market with one competitor.
Again, it's a mid-single- to mid-single-digit plus organic growth business, 85% or so or north of recurring revenue, you know, mid- to high 40%, but down margins structurally aligned with its competitor in that regard. It's been a, you know, the team there has done a great job. It's been a slightly different since we've owned it; there's been an evolution in the market where the customers have consolidated. So we used to just have extra large, large, medium, and small customers. Now it's like an extra, extra, extra large customer. And so how Vertafore sort of delivers the firm to this very large customer has been a strategic and operational sort of pivot. But they've adjusted well to that.
Got it. Excellent. Maybe I'll take the last two minutes to do a little bit of a channel check. I know your businesses aren't meant to sort of plow through any kind of macro environment. But how are you feeling just overall about the software spending environment right now as we head into 2024?
You know, we get this question a lot. We're unfortunately not the best barometer because we're in all these nooks and crannies, right? So government contracting and legal doesn't really apply. And what's happening in P&C, property and casualty insurance, doesn't really spin across. What I would say we said at the last quarterly call and sort of summarized last year, what we thought was going to happen last year heading into an expected an anticipated slowdown or at least behavioral changes in anticipation of a slowdown is we thought our gross retention would be higher because there's going to be less activity. And it was. And we thought net retention would be a little bit lower than our normal because there's not as much activity and expansion with our customers. That pretty much panned out exactly as we anticipated.
Then just to expand on the Deltek point, at the enterprise level across Deltek, our small health care IT business and our education business, the enterprise-class customers were just slower last year. That's we hope will correct this year. Customer activity pipeline build looks very encouraging. Pipeline build isn't revenue and bookings, as you know. We need to see how that plays out this year. Anything you want to add to that?
Yeah. I just I think our presidents coming into our planning cycle, we're feeling just again, it was informed by pipeline, was informed by activity. We're feeling better coming into this year just from a bookings perspective. Obviously, that won't have as much of a P&L impact this year. But just momentum-wise, it felt a little better than a year ago.
That's right.
Outstanding. Neil, Jason, thank you so much for joining us.
Yeah. Thank you for having us. That was great.