Jason, welcome. Jason's been at the company since 2006. Zack and I worked together at Microsoft. I worked with him at Microsoft when he was there for many years, and you've been with the company for now.
Seven.
Seven years. So, anyway, thanks, gentlemen, for being here.
Our pleasure.
Yeah. You know, maybe, I think everyone, the kind of big picture. Maybe just start with 2024 top priorities for you, how that changes versus last year, and we'll kick off there.
No, that's great. Well, I appreciate the invite this year. It's our second year here, so it's been great. So, you know, for us, we're pretty consistent year-to-year, to your point, in terms of volatility. Like, we've had a consistent strategy for the last 20 years, almost 20 years that I've been here. You know, today we sit at, you know, $7 billion in revenue, as you mentioned, 40% EBITDA margin, north of 30% free cash flow margin. So we're sort of a Rule of 40 when you think about it from a free cash flow perspective, since that, you know, captures the capital deployment piece of it. And, you know, we have many ways to grow. We have two ways to grow, which is organic growth. And, we do that through owning, you know, great businesses in defensible niches.
We're the market leader in those businesses. We've been improving the organic growth over time. We can talk about that. Then also just M&A. And, you know, I think for us, it's we have a very consistent and sustainable and repeatable process that I think, you know, software investors are starting to now appreciate. It's been, you know, well known in the industrial space, you know, for a long time in terms of compounding model. But it's, you know, we're bringing that to the software world. Then so for us, like, kind of what are our priorities this year? We've talked a little bit about different deal archetypes that we're looking at, so capturing a little bit more value out of our M&A. That's through buying businesses that have, you know, some sort of margin upside potential. We call 'em Profit Upsiders.
So think of a business that's maybe 75%, you know, gross margin, 15% EBITDA margin, and has some areas that we can optimize from a cost perspective. And then probably more so, businesses that are a little earlier in their lifecycle, that we're calling Maturing Leaders. So think of it as not, you know, the, the businesses we've bought in the last 5 years, which have maybe been through more turns of private equity, a little bit more optimized, but maybe they're, like I said, earlier in their lifecycle. The SAM and TAM hasn't yet converged, so there's still more white space, to get after. And Procare that we just, acquired is a perfect example of that where, you know, 40% of the market's unvended, and there's multiple opportunities for growth, for us to capture. So we've been super busy on that.
The other part of M&A we've been busy on is on bolt-ons. So if you look at Roper for the last 20 years, about 10% of our capital's been deployed to bolt-ons. It's actually been a lot more than that over the last 9-12 months. We've done. It's been about half of our $3.7 billion we've deployed. We'd love to get that up to, say, a quarter or a third of our capital deployed in the future. And we're, you know, sort of we're backing that up. We've made some significant investments. We can continue to make that in people. So we've added on. They'll start in the third quarter, three investment partners that are coming from the asset management world.
They'll help us really think about, from our platform businesses, how do we increase the organic growth, first of all? So there's the organic piece, and then the inorganic piece. Where do we have a strategic right to win from an adjacency standpoint? And then how do we help cultivate and reach back into the market more proactively to then target and then ultimately acquire more bolt-ons? Again, through the lens of, obviously, they're good value creation opportunities. We usually get some cost synergies, but ultimately to increase the organic growth for those platform businesses.
When you say bolt-on, what’s your characterization of a bolt-on?
So we have 28 businesses today that are platforms. And almost all of them now are turned on, for lack of a better word, for M&A. A business that would be turned off right now is our Strata business because we just acquired Syntellis last year, and it's basically a merger vehicle. So they're digesting that. But it would be something that is in the same, you know, sort of in the same market, in the same sort of vector, and has probably, you know, just some similar synergies to a bolt-on or to a platform that we own today. So it would be tucked in, fully integrated to one of our existing 28 businesses.
Is there a size of deal that you would be beholden to?
Exactly. I mean, we've done one as small as last year. We did one that was $14 million, and Syntellis was, you know, you know, whatever it was, $1.6 billion, something like in that range.
That doesn't sound like a bolt-on.
It was merger vehicles.
Okay. Got it. Okay. The bolt-on is a wide range.
It's a very wide range.
Wide range of deal volume.
Correct.
Okay. Got it. Okay. Cool.
Yeah.
Just wanna make sure I get it, I get it correct. So the elephant in the room, and this is my number one question I get at Roper, which is like, "I can't believe I don't know the story yet." And they're excited after they learn it. But then they say, "Well, they go, M&A is coming. You're a little bit behind. We got high rates. We've had, at least till recently, valuations going higher. Maybe now we're going lower. Maybe it's a better environment." But, you know, do you have to go after supersized M&A, or is it, "Hey, we're sticking to our M&A playbook"? How do you, how do you think about?
Yeah. We don't think about this like, you know, we're behind or we're ahead. Like, we try to think of things through a very long-term lens. I mean, that's been our history, and that's gonna be our go-forward view, that we just, you know, we're a compounder by nature. We want investors are gonna be with us for the long haul, to stay with us and to compound. And so we just think about trying to buy the best businesses we can that fit our criteria, you know, in a market leading in a niche market, high right to win in many respects, you know, great free cash flow margins. So, that's sort of our lens, and that's our discipline that we've had for forever since I've been here. And that's what we'll continue to do.
And so, that's just, you know, and in any market, right? We've actually had more success in more disruptive, dislocated markets than we have when it's frothy, right? So if you look at 2016, we acquired Deltek, which was the largest deal we'd ever done at the time. And then in that environment, you know, the sort of the energy sector was whipsawed us around a bit. And then in 2020, obviously, we did our largest acquisition of Vertafore at the height of the pandemic. And so, we see those periods as opportunity for us, more so than a challenge. And then.
And when you think about, you know, sizing, you wanna put roughly, what, $4 billion to work a year in capital. Can you stretch that, or are you saying, "Hey, we're staying true to that playbook"?
Look, it's all about, you know, we're gonna generate $2 billion+ of free cash flow this year. Investment-grade leverage is always, we wanna be solid investment grade. So that's sort of our upper limit. But back to what I said, you know, in Deltek and Vertafore, we both stretched up 4.5x-5 x and then, you know, had the commitment to our rating agencies to delever, and we would still have that commitment if we were to do that. So, $4 billion sort of, what we have, you know, in the next 12 months or so is we've talked about in Q1. But, it's really just about that sort of cash flow and leverage and investment-grade leverage. That's our sort of our boundaries there.
Maybe the baby elephant in the room is we got high rates. It's gonna cost you more to borrow to get these deals done. The risk profile goes higher. Many of us, maybe that's why the stock is lagging, 'cause your return profile maybe hasn't been as good as in the past on deals. Can you address that?
Yeah. I mean, I think, well, first of all, I think our cost of capital is an advantage against private equity, you know, when we're looking at deals. So, you know, right now, our revolver's probably at, you know, 6%, whereas their cost of capital or cost of debt, it's at 13%. So we have an advantage there.
Why, why is that?
Why is that? Just because they run an LBO model. So we're investment grade. So our access to investment-grade markets allows us to have superior rates. Plus, we're off the entire Roper balance sheet. We don't finance a deal individually like private equity does. So they have to inherently have more risk against each asset in their portfolio. So that's, I think, that's the big difference.
You know, if you think about, like, just sort of near-term dilution, I would, if we see enough of a compelling value proposition as in a Procare, like, the long-term value creation is so compelling there that I, you know, I don't like the near-term dilution as a CFO, but I really like the long-term value creation that it can present in times of high rates and dislocation in the market.
So it's not a win that you're. It's not a crosswind, sidewind, headwind to it. It's just.
I think all things being.
That's part of what you do.
Yeah. I think all things being equal over a longer period of time, higher rates are better for us because we can compete, because it's gonna impact rates, and that's gonna impact asset prices. And we compete with private equity, and we have a superior cost of capital.
I'm glad higher rates are helping you 'cause they're not helping anyone else in this room right now.
I think over a long term.
Yeah. Okay. Thanks. Yeah. And we're, we're all still learning the mechanics of your business because, I think as many, many in this room probably are new to the story. So sorry for the,
No, it's great.
One-on-one one-on-one questions. We'll get to 202 class here in a minute. The M&A environment, frothy or more reasonable?
I would say it's continuing to be more reasonable. Definitely not frothy. It's just, you know, we had an 18 to 18-month to 2-year period of almost no activity. You have assets that have not traded. You have LPs that need distributions back. So the DPI drumbeat is beating higher. You haven't seen a lot transact, but I would just tell you the sort of the leading indicators are high. Our conversations with bankers, direct conversations with sponsors, you know, we need to get distributions back to our LPs. We need to do that so that we can raise a new fund.
So there's just an air pocket of opportunity, we think, in the next I don't know how long it's gonna last, 6, 12, 18 months, but certainly seeing a lot more opportunity, a lot more assets come into market than we have in, you know, since I've been with Roper.
Okay. What do you think has happened on the PE side? Are the PEs how would you characterize? And not asking for names, but just high level, how would you characterize?
Yeah.
Are they trying to clean out to go to the next round, or are they? Well, how would you characterize?
It's really firm-specific. I mean, some have had some really good raises the last couple of years, so they're fine. Others are in this period where they need to kind of return money back. So it really is kind of firm-specific. So I couldn't give you, like, a broad brush, and I don't wanna go into any specific firms, but you can see where capital raises have happened. But I mean, I think overall, it's okay. It's fine. It's not great. I would characterize it as that being the environment for PE right now.
Okay. Another big question I get as we try to tell your story, which is a great story, but it's also complex, which is you own one stock, but you own 28 companies. So, like, they come to me, and they're like, "Well, how do you do work in 28 companies?" I'm like, "We can't.
Yeah.
Let's focus on the stars. Like, there's, I know there's a lot of you like your children equally, but let's talk about the core stars in that 28. Who are the couple that you'd like to focus on and maybe tell us a little bit more about what they do, why they're doing so well, and what.
Sure. Yeah. And I mean, I think that that's. I think that's the benefit of owning Roper, is you can own great companies that you otherwise couldn't invest in in the public markets, right? And we provide in, in my opinion, we provide a, a place for them to grow over the long period of time, right? So, and some of our bigger investors or those that are doing work on us will sometimes do their own channel checks to, to get that. We can say everything we want, but, you know, that's the proof is, is in that. So but anyway, just getting into that, I think, you know, when you look across our portfolio, our Aderant business is doing exceptionally well there. Think of them as the ERP for large law firms.
It's Aderant. They've had tremendous success over the past few years in terms of share gains. But additionally, the bolt-ons, and this is, again, back to why bolt-ons, we think, could unlock more organic growth for us down the road. But just being able to sell point solutions into their chassis and attach it to their ERP system, their LPM system, has provided tremendous growth for them, whether it's through billing solutions, HR solutions, the like. So, that cross-sell motion is really strong. And they've actually, so they had sort of this jump ball situation with another competitor as their competitor wanted to move all their customers to the cloud. So there was a kind of a time stamp on that.
Well, since that date has passed, there's been a couple of good indications we might actually convert some of those that have committed to the cloud version of their customer solution. So anyway, just lots of momentum in that business, just kind of pivoting over to one of our product businesses, a business called Verathon. So they're basically provide two solutions. One is, well, it's three solutions, but I'll talk about the Bladder Scan business, which basically allows any nurse practitioner to scan the content in your bladder. And it's a pretty mature, I'd say, product category. But we've had just a really tremendous product releases over the last three or four years that's allowed us to gain quite a bit of share and against a smaller part of Verathon, but something we don't talk about much.
But they've done a great job on that side of the business. And then the other side is our visualization side of the business, which is our GlideScope product. So if you have to intubate a patient, open up the airway passage, we benefited tremendously in that through COVID. So we had this sort of spike in 2020 and 2021. The business came down for a while, but it's now a standard of care. So anytime you intubate a patient, they're gonna use a video monitor to enable that. And then probably the most exciting part, and this is why, you know, Verathon's been a multi-year success story, is they've invested in their product capability over time and have released a new bronchoscope product a few years ago that is quickly becoming one of the leaders in its category.
So it's basically able to take the same; it's using the same screen to look down into the lungs with a different, what's called a bronchoscope, so not an intubation. So just taking the extension of what they did and developing new products. So we feel really good about that business going from kind of low single-digit growth to now low double-digit growth for a sustainable period of time. There's new products in that chassis. So lots that I could probably talk about more businesses, but that's, you know, just a couple to name off.
Well, one we get is, you're in the water business. And so everyone's interested. Like, I think over 75% of your assets are vertically aligned SaaS, I believe.
Yep.
But the water asset, I don't believe, belongs there, correct? That's.
Correct. So it's 75% software, 25% product.
Yep.
Our Neptune business, which is a water meter business, water meter and water meter technology, I should say, business, is a big part of that.
WaaS, water as a service?
Yeah. Water as a service. I like it.
You heard the call here at first.
We do have software in that business, by the way, if you.
That's what we wanna talk about. So just I get a lot of questions, so I just wanna make sure I understand it too. So walk us through quickly, Neptune, what it does, like, where, why it's so important.
Yeah. So we've owned Neptune for 21 years now. And what it is, it's what it sounds like. It's providing meter reading technology for municipalities all across, primarily North America. And it's basically a very understood market. There's three players in the market. We play in the sort of small to midsize municipality market, which is super attractive because we can understand the dynamic needs of different municipalities and really kind of adjust our product offering to go up and down the stack depending on what they need. And so that's what's, I think, differentiated Neptune over many years.
The first inning of Neptune was all about automatic meter reading technology, where instead of going having somebody go right to the meter and write it down, they could just drive through a neighborhood and pick up all the signals from the meter through RF technology. Increasingly, it's now moved to fixed networks. So you're mounting things on different areas and not having to have anyone drive around. So that's been the sort of the next advance. And now it's through cellular versus proprietary communication. So growing through a cellular sort of algorithm. And then lastly, I'd say, is now moving from mechanical meter, which degrades over time. You think about moving parts in a meter to now moving to an ultrasonic solid-state meter. So that has been in the last 2 or 3 years a big growth driver for Neptune. And so we like that direction of travel.
Anytime you have a new technology that's introduced, it's gonna be, you know, 10, 15 years for that to roll out. And it's coming at a, you know, at a higher ASP. So we like the direction of travel with that business. It's, it's really for us about, you know, it like I said, it's a very understood market, but just introducing new, new technologies into that marketplace. And lastly, talking about software, they if you think about, how is how is your municipality going to read all of the meter data and process that into a billing application? We have something called a meter data management solution, and that's, that's the part of software we do today. We've had a move from on-prem to cloud over the last few years that's resulted in, you know, double-digit growth for that business.
The business actually has deferred revenue, which is pretty cool. So they've got deferred revenue through their cellular product offering, service offering, and then through the meter data management solution. So we basically use that to fund their CapEx. That's how we think about it. Pretty cool.
Is in the margin profile of that business?
It's good.
It's good?
Yeah. Yeah.
Good.
I mean, the segment overall is like mid-30s EBITDA margin, right? So.
Water.
We gotta have it.
Yep. No, it's great. All right. Financial profile. High single-digit growth, organic. It's okay?
Mid-single-digit plus, right?
It's mid-single-digit plus.
Where our ultimate goal is, you know, again, because we're in these niches, we're never gonna be a 15% grower. But if we're high single-digit, redeploy the free cash flow, continue to buy businesses that grow faster than the fleet average, you know, mid-teens, free cash flow is sort of the ultimate destination. And Neil will say with the, you know, the target to be, you know, high teens. But I always he and I have that debate all the time. But he's high teens. I'm mid-teens. But I will I'll take high teens if we can get there.
And 40% plus margins, you.
40%.
Feel like that's an altitude you can keep?
I do. I mean, if you think about our margin profile, our gross margins, especially for software, you know, 70%-80%. So it still gives a lot of room left in the P&L to reinvest. But if we were to grow, let's say, 9% organic, those incremental margins might be in the 40s. If we're more at 7-ish%, we'll probably be more like 45. So that trade-off for higher organic growth, we would make.
Software's in a funk right now. Workday, back office, funky. Salesforce, front office, funky. Something's going on, right? So is it too much shelf, too much cloudware, if you will? We're digesting what we bought in the pandemic. Is AI taken away? Are higher rates? Or there's a bunch of different factors we're, like, trying to piece it all together. So what if, if those companies are all seeing it and there's been, like, one or two companies at this conference that say they're not seeing it, but everyone else is seeing it, kind of what, what's your sense? Are your, your businesses in more stable, steady markets where you, you don't really feel the sensitivity of these what, what we're seeing in some of the others, or?
I think that's right. I mean, we typically have a narrower range of outcomes than some of these other companies you're listing. So, you know, we talked about last year on the enterprise software businesses have had a sort of a not a slowdown, but just not an acceleration of bookings last year. If you look at our bookings, enterprise software bookings, they were, you know, up maybe low single digits, 2023 versus 2022. And we expect it to be better this year. But we haven't seen, you know, like a budget flush or anything like that happened last year for some of these other businesses. It's been kind of steady as she goes for us. The one area we've talked about has been our Deltek business. So Deltek's our largest business.
60% of that is government contractor software. And a good portion of that is a large kind of large enterprise customers. And, you know, because of everything that's been going on with, you know, the deficit and, and, just sort of, you know, debt ceilings, they've had a lot of belt tightening there. And so, we haven't expected that to get better this year. If it does, it'll be upside. But that's been the probably the biggest weak spot in terms of CTOs not making decisions on software.
Best thing that we don't know about you guys that you see every day as you go to work that we can't smell breathe here?
Yeah. That's a good question. I think, and so I've been with the company a long time. And I think just the quality of the people that we are putting into the companies is just demonstrably better in the last three or four years than they were at any time in the past because we've increased the expectation level for our leaders in our business. And as a result of that, we expect them to deliver excellence. And so, I think we're seeing that it takes a long time to do that, right? You gotta hire somebody. They've gotta assess their team. They've gotta work on processes. But I really like what we're seeing from that perspective. And we did. We hired with a sort of a very intentional lens.
We used a lot of profiling. We've used different, you know, hiring assessments to do this. So we've been very scientific in the type of leaders we want to bring on board. And I think it's intangible for you, but it's very tangible for us in terms of the quality of the strategic plans, the sort of rigor around the execution to execute against those plans. We see that in our planning cycle. And so I'm very encouraged by that.
Awesome. Thank you, Jason, for coming. Appreciate your time.
Thank you.