Bye. Good day everyone, and welcome to the Roper Technologies second quarter 2019 financial results call. A reminder that today's call is being recorded, and now I'd like to turn the conference over to Zack Moxcey.
Good morning, and thank you all for joining us as we discuss the second quarter financial results for Roper Technologies. Joining me on the call this morning are Neil Hunn, President and Chief Executive Officer. Rob Crisci, Executive Vice President and Chief Financial Officer. Jason Conley, Vice President and Controller. Shannon O'Callaghan, Vice President of Finance. Earlier this morning, we issued a press release announcing our financial results. The press release also includes replay information for today's call. We have prepared slides to accompany today's call, which are available throughout the webcast and are also available on our website. If you would 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, in our press release, and in our SEC filings.
You should listen to today's call in the context of that information. Please turn to slide three. Today, we will discuss our results for the quarter, primarily on an adjusted non-GAAP basis. Reconciliations between GAAP and adjusted measures can be found in our press release and in the appendix of this presentation on our website. For the second quarter, the difference between our GAAP results and adjusted results consists of the following items: amortization of acquisition-related intangible assets, purchase accounting adjustments to acquire deferred revenue, transaction-related expenses for the Foundry acquisition, and lastly, an adjustment to the income tax expense related to the gain on sale of our scientific imaging businesses. If you would please turn to slide four, I will hand the call over to Neil. After our prepared remarks, we will take questions from our telephone participants. Neil?
Thanks, Zack, good morning, everyone. As usual, we'll start with our second quarter highlights. I'll then turn our call over to Rob to discuss our financial results. I'll then walk us through the segment details and outlook, followed by our Q3 and 2019 guidance. We'll open it up for Q&A. Next slide. We had another very strong quarter here at Roper. Revenue grew as expected, margin execution was strong, and operating cash flow increased 13%. It was nice to see gross margins expand 90 basis points in the quarter, increasing in both of our product segments. We always like to see leverage down to P&L, with EBITDA growing faster than revenue and cash flow outpacing that of EBITDA.
Our software segments continued their strong momentum, led by 6% organic growth in our network systems and software segment, which saw broad-based growth highlighted by DAT, iTradeNetwork, MHA, and SoftWriters. Application software grew 2% despite a difficult comp against Deltek's significant perpetual wins a year ago. Deltek continues to win in the marketplace, with bookings up double digits and SaaS adoption accelerating in the quarter. Growth in our Measurement & Analytical Solutions segment was led by high single-digit growth in our medical product businesses as new products gained traction following recent investments, and Neptune's strategic success continued with another solid quarter of growth. This was partially offset by expected declines at Gatan and a short cycle pause late in the quarter for our industrial businesses, which represents approximately 8% of our annual revenues.
We will discuss this later in the call, but we're maintaining a cautious stance and not assuming industrial improvement in the second half of the year. Process technologies continues to do an impressive job executing through expected declines in oil and gas markets. As many of you know, we closed the Foundry transaction in the quarter and onboarded the company into our operating and governance model. While very early things are off to a good start. Finally, our acquisition pipeline is quite active, and our balance sheet positions us exceptionally well to deploy capital in the second half. I'll now turn the call over to our CFO to walk you through our consolidated quarter results. Rob?
Thanks, Neil. Good morning, everybody. Turning to page six, I'd like to recap some of the numbers behind our strong second quarter financial performance. Starting with revenue. Revenue was $1.332 billion in the quarter, an increase of 3% and organic increase of 2%. This was right online, as Neil mentioned, with our internal guidance model coming into the quarter. We had organic growth in three of the four segments. The one segment that was down was our process technology segment, as expected, against the very difficult +20% comp last year. Margin expansion was very strong. Gross margins increased 90 basis points to 64%. EBITDA increased 5%, EBITDA margin up 70 basis points. Really good margin expansion for the quarter, probably a little bit better than we had anticipated coming in.
That all adds up to DEPS for the quarter of $3.70, which was a 6% increase over last year and a little bit better than our guidance coming in of $3.00-$3.04. Next slide. Turning to our asset-light business model slide. We'll look here at the net working capital as a % of the Q2 annualized revenue. Slightly different view this quarter, looking back over the past six years of the trends to give a little bit of a perspective on what's been going on with working capital here for Roper Technologies over a long period of time. If you look back and compare June 2013 quarter to the June 2019 quarter, you'll see our inventory is down 200 basis points to 4.3% of revenue. Receivables are down 240 basis points to 17.3% of revenue. Payables down a little bit to 10.5%.
Deferred revenue up 680 basis points to 13.5%. If you add all that together, you see this consistent negative working capital we talked about at Roper at minus 2.4% for the quarter, and that's over 1,000 basis point improvement versus the same period in 2013. Next slide. Speaking of cash flow compounding, excellent cash results in the quarter on page eight. Q2 operating cash flow of $301 million. That was a 13% increase versus prior year. The free cash flow was $286 million, which represented a 14% increase versus prior year. If we look now at the trailing 12 months, $1.51 billion, certainly a record, plus 23% over prior year 12-month period and representing importantly 28% of revenue.
If we look at the first half of the year, we are up 15% on cash flow, we're certainly on pace for continued double-digit compounding at Roper. Next slide. Importantly, due to the strong cash flow performance, we really see exceptional deleveraging over the past year. In between acquisitions, we generate a lot of cash. We paid down our debt very quickly, we're always well-positioned to make the next acquisition and deploy capital. If you look at the past year, gross debt down $900 million, from $5.6 billion down to $4.7 billion. Net debt is down $800 million from $5.2 billion to $4.4 billion. The TTM EBITDA is up $191 million. You can see here our gross debt to EBITDA is now down to 2.5 times. Net debt to EBITDA is down to 2.3 times.
We've recently were upgraded at Moody's, which we're very happy to see. We also have a BBB+ rating at S&P. We really are exceptionally well positioned, as we sit here today, to continue our disciplined capital deployment and really take advantage of the very high-quality pipeline of acquisition opportunities that we have in front of us. With that, I'll turn it back over to Neil.
Hey, thanks, Rob. Let's go and turn to our Application Software segment. In the quarter, the segment represented 29% of our revenue, and revenues came in at $391 million, which was plus two organic. EBITDA was $155 million, which represented a 39.7% margin. Starting with Deltek, we saw the continuation of a few trends that we've discussed over the past several quarters. First, we saw an acceleration in bookings and recurring revenues as a result of an increased mix of business towards Deltek's SaaS offerings. In fact, in the quarter, Deltek signed their largest Vantagepoint SaaS contract. As a reminder, Vantagepoint is Deltek's new enterprise software offering targeting professional service firms. Also, the business continued to see a nice balance of activity across their two macro end markets, professional services and government contracting.
To remind you, Deltek had a very difficult comp given a very large volume of perpetual deals signed a year ago. Adjusting for this, Deltek grew their bookings double digits in the quarter. Deltek's team continues to execute exceptionally well. Aderant experienced double-digit growth as a result of continued share gains and the adoption of their newer SaaS solutions targeting law firms. As you may note, we've highlighted Aderant's competitive strength over the last several quarters. Over that period of time, and since 2015, Aderant has added approximately 40,000 timekeepers to their core platform, roughly 30,000 of which have been competitively won from their largest competitor. Deane and her team at Aderant have done and continue to do a great job. At PowerPlan, we saw nice increases in recurring revenues based on continued strong retention rates and an expanding customer base.
Importantly, the PowerPlan team is working aggressively and systematically to increase the volume of new pipeline adds in their sales funnel. This is particularly important following the regulatory-driven increase in license and implementation revenues following the new lease accounting standards. We saw nice increases again at CBORD with excellent cash performance. As a reminder, CBORD is our software business that delivers integrated security and payment solutions to higher education and healthcare campuses. Finally, Strata logged another great quarter based on very strong renewal activity, the adoption of their new products, and continued market share gains for their cost accounting and decision support SaaS products for the hospital market. As we turn to the outlook for the second half, we continue to expect 4%-6% organic increases for the segment.
The comps for Deltek will normalize in the second half, we expect the segment's organic growth to be slightly better in Q4 versus that of Q3. Next slide, turning to our Network Software and Systems segment. This segment in the quarter revenue represented 28% of Roper's revenue was $368 million, which was +6% on an organic basis. EBITDA was $159 million, which represented a margin of 43.2%. The quarter was highlighted by continued growth at both of our Freight Match businesses, the U.S. and Canadian markets. In particular, we saw strength in demand for our rate data offering. MHA's performance in the quarter was highlighted by several strong trends. To remind everyone, MHA is the largest group purchasing network for the non-hospital market, with leadership positions in long-term care pharmacy, long-term care facilities, and home infusion marketplaces.
The team continues to win the market share game relative to onboarding new and startup pharmacies, so nothing new here, and a good job by the go-to-market teams. Importantly in the quarter, MHA started to see the benefits of increased customer purchasing volumes due to several new pharmaceutical products being on contract. Also, pricing appears to have stabilized, and the business' food and nutrition portfolio grew nicely in the quarter in the mid-single-digit range. Additionally, our pharmacy automation and workflow software business, SoftWriters, had a very nice quarter continuing a trend. This is an example of a wonderful software business with network effects and network financial benefits. This is a business that develops and deploys the core pharmacy automation workflow software that closed door or non-retail pharmacies use in their day-to-day operations.
The economics of this business and for our customers are unlocked as they cross-sell the recurring revenue transactional products, specifically electronic claims submission and e-prescription. As this business adds more and more pharmacies to their customer accounts, their economic model expands at a more rapid pace as the recurring revenues accelerate. Nice job by the team in Pittsburgh. iTrade grew high single digits in the quarter based on strong renewal activity and an increase in trading partner growth. Over the last couple of years, the team at iTrade has worked to structure their business model and customer contracts where iTrade benefits from volume increases from their trading partners, and we saw the benefits of this in the most recent quarter. Again, we saw strength at rf IDEAS. In fact, a record quarter for the business.
The strength is based on continued adoption of rf IDEAS core reader technology and the secure print and secure sign-on marketplaces. At TransCore, the quarter was marked by an exciting new product release. TransCore's proprietary integrated toll technology in partnership with Gentex was released in rear view mirrors in Audi's new electric SUV. Currently, other OEMs are evaluating the technology and considering timetables for potential adoption. While very early, this is another example of great innovation by a Roper business. Before we turn to the outlook for the segment, we wanted to briefly discuss our most recent acquisition, Foundry. We closed the transaction during the second quarter. Soon after, we had the opportunity to onboard the team and do our normal introduction to our governance model and CRI frameworks. Also, we're excited to announce that Jody Madden, previously Foundry's head of product, was named as their CEO.
Jody is perfectly suited for this role given her long history in the visual effects industry, as well as her specific history with Foundry. So far, it has been a very easy transition. Importantly, Jody was able to successfully close a couple of very large planned transactions with customer prospects in the early days of her new leadership role. Congrats to Jody, and welcome to the entire Foundry team. Now turning to our outlook. For the second half, we continue to see 4%-6% organic growth for this segment. For all of TransCore, the new project pipeline remains robust, although it's difficult as usual to forecast the timing of new project wins and implementation timetables. Next slide. Our measurement and analytical systems segment in the quarter represented 31% of Roper's revenue.
Revenue for the segment was $408 million, which was +2% on an organic basis. EBITDA came in at $140 million, which represented a 34.3% margin. Neptune had another record quarter. Neptune's strategy is rooted in customer intimacy. Product innovation continues to help Neptune systematically gain market share in the North American market. NDI had another great quarter. This quarter's strength was rooted in NDI's electromagnetic and optical measurement systems used by several OEMs in surgical applications. Dave and his team in Waterloo continue to do a terrific job. Verathon's growth was led by increases in their GlideScope consumables recurring revenue and demand for their next-generation bladder scan systems. The Roper board of directors is looking forward to a site visit to Verathon during an upcoming September board meeting and seeing all the progress the company's made over the past couple of years.
Our CIVCO MMI or Multi-Modality Imaging business located in Iowa City, had a very nice quarter that was highlighted by strong execution in their ultrasound guidance and infection control markets. CIVCO's ultrasound guidance products have extremely high levels of intellectual property and meaningfully aid doctors in ultrasound-assisted procedures. Of particular interest is CIVCO's most recent innovation regarding infection control. For many years, CIVCO has been a market leader in providing covers for ultrasound-assisted surgical procedures, namely image-guided biopsies. one of the risk factors of these procedures is the risk of cross-contamination of the gel that is used for ultrasound conductivity. Well, the smart team at CIVCO appears to have solved this problem. They created the first ever and IP-protected solution that does not require gel in ultrasound-guided procedures. The team is just launching the product in North America and Europe. Congrats to the team on this innovation.
We look forward to working with the team to make this become the standard of care. Our industrial businesses, which are about 25% of this segment's revenues, were impacted by a short cycle pause late in the quarter and down mid-single digits. Struers, really all of our industrial businesses, saw a slowdown in the second half of the quarter due to project pushouts and consumable destocking. As such, bookings for this group were down high single digits in the quarter. Importantly, this group did a very nice job managing margins and cash flow in the quarter. Gatan declined in the quarter as we expected. As we have announced, the agreement to sell to Thermo has been terminated over regulatory concerns. As we turn to the guidance for the second half, we see organic revenues increasing 1%-3% for the segment.
Our medical products and Neptune businesses, which are roughly 70% of the segment's revenues, are expected to increase mid-single digit plus for the balance of the year. For our shorter cycle industrial businesses, again, 25% of the segment's revenues, we expect these businesses to be down high single digits for the second half of the year. This assumes the late second quarter industrial slowdown continues for the balance of the year. For Gatan, and given the Gatan sale to Thermo was terminated in the quarter, we have now included Gatan in our full year and second half guidance. Specifically, we've added approximately $0.20 of DEPS to the second half. We expect to see modest organic declines for Gatan given their record 2018 comps. We have reengaged the sale process for Gatan. While early in the relaunch process, we have received strong interest from many parties.
Gatan is a very good business with an exceptional management team. We are committed to completing the sale process with Gatan, but if we do not receive compelling economic and contractual offers, we look forward to owning Gatan over the long term, engaging with Sander and his team, and investing for its long-term success. Next page. As we turn to our process technology segments in the quarter, this segment represented 12% of Roper's revenue. Revenue was $164 million, which was down 5% on an organic basis. EBITDA was $60 million, which represented an amazing 36.6% margin. Our upstream oil and gas businesses declined as expected against a very challenging comp, which was plus 20% from a year ago. That said, the businesses executed very nimbly in the quarter and drove outstanding margins across the segment. EBITDA margins were up 200 basis points in the quarter.
Relative to CCC, we continue to see strength in their LNG project pipeline. Finally, Metrix delivered a record quarter based on strong demand for their vibration monitoring systems and controls across multiple end markets. Turning to the outlook. We see -1% to 3% organic growth for the segment for the balance of the year and do see easing comps in Q4 versus Q3. As we have discussed, the potential for upside may exist based on expanded takeaway capacity and/or higher oil prices, but we have not assumed this is going to happen in our outlook for the second half. Let's turn to our guidance update. We're updating our DEPS guidance to a range of $12.94-$13.06, compared to our prior guidance of $12.70-$13.
This increase to our guidance range primarily relates to the inclusion of Gatan, which we expect to add approximately $0.20 to second half DEPS. Given the dynamics around the divestiture process, we do expect there could be greater than normal variability in Gatan's second half results. Our DEPS and organic growth guidance assume that the short cycle industrial pause that we saw late in the second quarter continues for the remainder of the year. While recent trends may just be a soft patch, we do not have visibility into a second half recovery for our industrial businesses. More importantly, we do not want our business leaders to assume a bounce back occurs. Accordingly, we're lowering our revenue assumptions for those businesses and expect our industrial business leaders to focus on continuing to deliver high margins and strong cash flow.
Should industrial trends improve, our guidance for those businesses could prove conservative. As it should be clear from the content of our remarks on this call, the vast majority, approximately 80%, of our enterprise continues to have strong momentum, growing roughly 5% on an organic basis. Relative to our tax rate, we assume the rate for the second half will be approximately 21%. Finally, we're establishing our Q3 adjusted DEPS guidance to be in the range of $3.16-$3.20. Let's turn to the Q2 summary. We saw great execution and cash performance across the enterprise. EBITDA increased 5%, margins expanded, and free cash flow grew 14% in the quarter. Importantly, our CRI discipline and proven business models continue to provide a scalable platform for long-term, systematic growth. Turning to capital deployment.
First, as the primary source for our capital deployment funding, our excellent cash performance will continue. With leverage approaching 2x trailing EBITDA, our balance sheet is very well positioned to be offensive. To the extent we're able to successfully complete the sale of Gatan, we will be even better positioned to accelerate our cash flow compound. It was nice to see the Moody's upgrade to Baa2 and the sustained S&P BBB+ ratings for our bonds. Relative to the outlook for acquisitions in our pipeline commentary, we continue to see a very large number of very high-quality assets. We will always remain patient, we are very active in maturing a number of opportunities in the pipeline. Importantly, it's always good to remind everyone that our CRI orientation and M&A processes help us identify and execute on the very best acquisition ideas.
As we turn to questions, I want to remind everyone that what we do is very simple. We compound cash flow by running a portfolio of operating businesses that have market-leading position and niche industries. We provide the business leaders with Socratic coaching about what great looks like for all of the strategy, operations, innovation, and talent development. We incent our management teams based on growth. We have a culture of mutual trust and transparency. Finally, we take our excess free cash flow and deploy it to buy businesses that have better cash returns than our existing company. These simple ideas deliver powerful results. Let's go ahead and turn it over to the questions.
Thank you. Now we'll begin the question and answer session of the call. If you would like to ask a question, please press *1 on your touch-tone phone. A reminder that if you're joining us via speakerphone today, make sure your mute function is turned off to allow the signal to reach our equipment. We do ask that you limit yourself to one question and one follow-up question. Moving first to Deane Dray at RBC Capital Markets.
Thank you. Good morning, everyone.
Morning, Deane.
Morning.
Hey, I don't normally have the opportunity or the responsibility of asking you about short cycle industrial softness in the quarter. It's not typically something that we're talking about, but it's presenting itself here. Can you provide some more color on the kind of the cadence in the quarter, the push-outs, some of the destocking, and what visibility do you have? If you can get it by business, that might give us some context. Start there, please.
Deane, appreciate the question. I'll give you some thoughts and ask Rob if he has any additional. At first, we've got to note that it's 8% of our business. It's six or seven businesses of our 45 that we're talking about, and we're maybe not the best read-across to other things, but I'll tell you what we saw. April was just fine. Really no issues there. May saw a little bit of weakness, and June saw a lot of weakness. Interestingly, it was across really all of the industrial businesses that we have. It was across geographies. Europe might have been a little bit weaker than North America, but nothing discernible and really across different various end markets. It wasn't isolated to one end market. What we saw also was projects push and then a bit of consumable or spare sort of destocking, right?
It was really across both the capital piece and the recurring piece. Interestingly, the first three weeks or so in July, we saw a pretty meaningful recovery, but we don't yet know enough if that's just a bounce back from June, or what the real root cause was for why we saw the declination across the quarter. If it was window dressing for the quarter, or if it was something around trade tensions or some folks waiting for lower interest rates. We don't yet know the root cause. It's just a little too early for us to call a specific direction. We chose to be what we think is relatively conservative here. We saw it down mid-singles in the second quarter. Our assumption is down high singles for the balance of the year. We're managing the businesses assuming that that occurs, right?
We don't want our leaders in these businesses to get sort of caught assuming a recovery, and then it doesn't happen, then you have a margin problem. That's a bit of the color. I don't know if, Rob, if you want to add any additional.
Just to clearly size it, as Neil mentioned, it's 8% of the company's revenue, about 25% of that segment. This does not include Neptune. Neptune continues to grow at exactly the same sort of mid-single digit plus. It's just the businesses that Neil mentioned. The bookings were down sort of high single digits, and therefore, we're assuming the second half of the year is high single digit declines where we used to have flat. It's about $25 million of revenue that comes out of the second half. That's really the only sort of change in the entire company in what we're seeing at this point versus three months ago.
That's helpful. If I'm looking to calibrate how the slowing on the organic side ripples through into your guidance, just to make sure I've got the right pieces here. Gatan adding back $0.20, it looks like the tax rate a bit lower is adding $0.08 versus our estimate. When I look at the midpoint raise, it does look like there's a second half lower operating guidance. It's something in the high teens sense, if that's right. Maybe provide some context there.
Yeah. The tax rate is slightly lower. That's offset by a higher share count, a little bit higher interest. We are losing some proceeds from Gatan that impacts the interest. Those other things sort of cancel each other out. It's really around this $0.10 on industrial is the big change.
That's helpful. Just last one from me. On Gatan, was there any loss of momentum in the sales process? You mentioned some slowing, but it sounded like those were tough comps. Is there any momentum loss in the business as it's brought back into Roper?
The team at Gatan really should be applauded for how well they've executed and performed over what has been a really long drawn out, I don't know, 12 to 18-month process here. The business performed amazingly well last year with sort of the new product cycle. As expected with Gatan, you sort of drive up a new product cycle, then you moderate for a little bit, then you drive up on another product cycle. We're just in that moderation phase. The team is just A+ across the board with the distraction of the sales process, which was immense given the sort of the CMA sort of process here the last six months. Great remarks to the team there, and we certainly have momentum to try to remarket the business now and have a better outcome.
I would just add that they did perform very well in the second quarter.
Yeah.
Good performance.
Thank you.
Yeah, thank you.
Thank you. I'm moving next to Robert McCarthy at Stephens. Sir?
Hi, guys. Good morning. Sorry, I'm bat jumping from call to call. I guess the first question is, building on Deane's excellent questions, in terms of the short cycle, you're not planning for any kind of contemplated balancing guidance here. You're telling your business has to kind of focus on cash and margin, which is sensible. You said, I think six or seven of your segments or your companies within the broader ambit are kind of affected. Have you highlighted in the past exactly which one of these companies, which one of these segments or sub-segments these are? Could you just kind of highlight what you're seeing with that kind of level of granularity?
The thing I should have mentioned relevant to Deane's question is this is Struers, it's Alpha, it's Dynisco, it's Hardy. There's four or five other that are much smaller, but the trends that I just talked about are consistent across all of those. They're not isolated to one. It was very consistent read across our seven or eight companies here on the trends that we said. It's the industrial complex, that 8% of revenue that we have.
Yeah. With respect to Gatan, I was under the impression that there were not that many natural buyers or potentially, I guess, private equity. Could you talk about the fact that you think you've got a lot of interest? That doesn't square with what I've heard in the marketplace. Maybe I'm just an idiot. I'll leave it there.
Well, hey, we know what Gatan is, right? It's a clear market leader.
Yeah.
It has great growth prospects over a long arc of time, got a great team, and amazing cash flow. As a result, there's a lot of people that are interested in a business like that, strategics and sponsors alike.
Okay, the final question is, I was going to ask about, obviously, the Foundry acquisition. It sounds like you answered the question, and it sounds with this elevation of, is it of Jody Madden?
Yeah.
That you've kind of taken the key man risk or the key creative soul risk out of the equation. Obviously, you think about companies with this nexus of technology and entertainment, you think about Steve Jobs or Jim Henson or whoever the case may be. You don't want that person walking out the door. Would you say she rises to that level? Are there other people within the company or the organization that you've made a real strong push to just retain? Obviously, at the end of the day, this is probably much more of a human capital business than some of the others.
Well, first I would say Foundry, really like all of our software businesses, is just a really boring software business, right? They create software that enables creatives to then do amazing work, right? We're not the creative part of the ecosystem or supply chain in visual effects. We're the enabling toolkit that allows that to happen. Is sort of maybe the first statement that's highly consistent characteristics with really every Roper business, not just the product software businesses, but the product businesses. The team, I think we mentioned last quarter that the totality of the Foundry team that we met in the diligence process and confirmed here in the first little bit of ownership, the breadth of that team, the DEPS of that team is quite strong.
When we sat down and did the onboarding and started to engage with the team about our long-term orientation, multi-year product strategy, multi-year go-to-market strategies, it just became very clear to the incumbent CEO, Jody, ourselves, that the most natural fit for the long-term success inside of our framework was Jody. She's fantastic. She, for the last four or five years, has been the face of the company relative to the product. We're expecting her to do great things with the business.
Thanks for entertaining my questions. Congratulations on the great quarter.
Thank you.
We'll go next to Christopher Glynn at Oppenheimer.
Thanks. Good morning.
Good morning.
Hey, I had a question about some of the pipeline dynamics that seem to come up a lot where you have kind of a surfeit of actionable deals, but opportunity cost dynamics are always at play. I'm wondering how that works as a partial gate to timing of deal flow. As a curiosity, when was the last time you had kind of an air pocket in actionable pipeline dynamics?
I've been at Roper for eight years, and I cannot recall a real air pocket in terms of the pipeline. It's always a steady drumbeat, multiple deals presented at near final stages to our board five times a year. Air pockets are I can't recall. I'm looking at Rob, he's agreeing with me. Relative to, we're always, to your first question about opportunity cost, it's a debate we have on every transaction, right? You're coming across one that looks really good, right? It has all the characteristics we look for: niche, leadership, great team, accretive CRI, accretive organic growth rate, you know the list. Are like, and the price might be X, and we're like: that really looks good, but is there something better that's just right around the corner?
We're always having the opportunity cost discussion. It's one of those things that we've sort of honed over the years, and we do the best we can relative to that decision. It's obviously an opportunity cost decisions one, where you don't have perfect information about what's around the corner. We're always steeped at what gives us real confidence in, ultimately, everything we do is we're just steeped in the cash return methodology. There's always that buffer built in day one when we buy a company relative to the value it's created for shareholders. That's at least how we think about it. Rob, you want to add any color to that?
No. There's always an opportunity, and it's just a matter of finding the best deals at the right price and getting them done.
Okay, thanks. Follow-up is on TransCore, the product implementing with Audi. That seems pretty groundbreaking for TransCore. Maybe I'm wrong, but could you elaborate on that thought?
Hey, it's very early. We got a great partner in Gentex. They're the clear market share leader in the smart mirror technology, and so it's been a nice collaboration with them. Yes, I do believe it has the potential to be groundbreaking. Think about cars 10 years ago or five years ago, you didn't have auto-sensing, lane departure systems and whatnot. Now they're almost standard. I don't know if this technology becomes standard like that, but it's certainly our hope that it would. It's great to have Audi as the first partner. There's a lot of work that had to be done, not just in the technology that goes in the car, but also how you deal with intra-tolling agency and customer relationships and how you deal with the billing, and that's all been figured out by the partnership between TransCore and Gentex.
It's super early, but we certainly thought it was exciting and wanted to highlight it for everybody today.
Sounds good. Thanks.
Thank you.
We'll go next to Barclays and Julian Mitchell.
Hi, this is Jason Makishi for Julian. Good morning.
Hey, Jason.
Maybe just a question on the Gatan add-back guidance. It was sort of our impression that the annualized Gatan divestment impact would be closer to $0.60 of EPS, adding back $0.20, just kind of wanting to reconcile the difference there, just sort of the half year basis seems like it would be closer to $0.30. Is this sort of seasonality of earnings or is there other dynamics at play, such as the lowered organic sales growth outlook, even just as we're modeling for 2020, et cetera?
Yeah, no, I think you have too high of a number for what a full year of Gatan would be. This is consistent with sort of what we saw for the year all along. There's certainly a lot of variability in the potential for their performance in the second half, as Neil mentioned. No, I think their fourth quarters are generally their highest quarter of the year. There's some seasonality there, they should have a better fourth quarter than the third quarter.
Understood. Maybe moving a little bit away from the short cycle businesses to Deltek. I know it's been mentioned for a couple of quarters that there's bolt-on M&A sort of going on there. Is that still the plan for Deltek moving forward? It seems like the bookings growth is doing quite well. Just wondering if that was still a strategic focus of the business.
Sure. It has been, and for a long time, it even predates our ownership. Deltek sort of did one-ish bolt-on a year before we owned it for several years. We're probably at that pace or maybe just a touch higher in our ownership. We would expect that to be the case going forward.
Understood. It seems like in moving on to CCC, just in the new construction business, seems like it had the expected strength that you sort of called out in previous calls. Just kind of wondering where that you view that strength of the LNG pipeline in terms of, is it still extremely early innings or 4-6 quarters seems like a reasonable baseline timeline for that?
What's characterized is some of these projects that are in development are actually smaller and quicker to come online than what we might have seen five and eight years ago. In the past, it would've been multiple years. I think your four to six quarters is probably more in line with the expectations here. Might drag out a little bit longer, as you know, these projects do, but these are not 5-10-year projects or 3-7-year projects. They tend to be smaller and quicker to turn on.
Understood. Thank you very much.
Thanks.
We'll go next to Steve Tusa at J.P. Morgan.
Hey, guys. Good morning.
Morning, Steve.
Morning.
Appreciate the use of the term Socratic coaching. I was a political science major. I'm not quite sure what that means, but I kind of get it. On the software businesses, I guess the application software business, I read all these other companies' transcripts, and I don't quite know what I'm reading, but they use the term bookings a lot. How is the booking, like the organic bookings growth, as you guys define it for, I guess, that segment?
Oh, Steve, let me Socratically walk you through this.
I clearly need some coaching as well, so I just appreciate the little call.
For the segment, man, we got to go company by company around bookings, right? That's a harder question to answer because we don't roll anything up at the segment level.
Maybe explain the difference between bookings and GAAP sort of bookings.
Yeah.
New.
Sure. Bookings in this case is, or another term you might hear us use is order intake. It's what business is actually contracted in a period of time. You have to do a fair amount of sort of equivalency between a perpetual deal and a SaaS deal. Obviously when you book something, you could have double-digit bookings, and then if it's all SaaS, then it's going to take four quarters for that to get into the run rate. Your GAAP revenue could lag that a little bit. On perpetual, you might book something in the second quarter, and you might not be able to recognize the revenue because of some delivery in the software, and it might be pushed out a quarter or two as things are being implemented.
Bookings is just a little bit more, or order intake's a little bit more of an early read of the business activity that's ongoing in the company. In Deltek's case, which we highlighted, we had the hard comp against the wonderful second quarter of last year, which by the way, is a great problem to have because we won so much business on a perpetual basis a year ago. When you sort of normalize for the outsized perpetual growth, a year ago at Deltek, bookings were up double digits this quarter. The activity inside that business we view as healthy.
Got it. Okay. Inside that business, that was up like, I don't know, those bookings are up like double digit or high singles? That's kind of what gives you confidence for the second half?
Yeah
The next year, if you will?
That's right. It's a combination of the bookings, and then you're also looking out several quarters at pipeline coverage and pipeline.
Right
sort of conversion rates and things. The combination between that and the near-term bookings is what gives us the confidence.
Okay. Was there any businesses in that application software side that were down?
Well-
On revenue.
In that we know your favorite topic of Sunquest is in this segment, and it was down mid-singles, as we expect. It actually did modestly better here in the quarter, in the first half than we thought. Other than that, everything was up pretty much.
Okay, that's great. One last one. Acquisition pipeline.
Yep
standard question. Are you any more bullish about the second half relative to a couple of months ago? Anything loosening up? Does the kind of macro environment delay some of the activity you may have thought you would've seen?
I would say we feel the same today as we felt last quarter and the quarter before. I mean, the market and the activity is there, it's robust. There's lots of work. We're looking at lots of things as we always do, and you just never know until the very last minute in a deal if it's one that we actually want to execute and one that we can actually win from a value and contractual terms perspective. It's steady as she goes on the M&A front.
Yeah, there's nothing in the macro environment that impacts these deal processes at all. They're humming and we're working.
Super. All right, guys. Thanks a lot. Appreciate the detail.
Our pleasure.
We'll go next to Joe Giordano at Cowen and Company.
Hey, guys. Morning.
Good morning.
Morning.
Now that we're getting into a little bit of an industrial cycle, I guess the question that you guys typically get asked, will get asked a lot more, how does this make you think about some of your industrial businesses from a long-term basis? Does it become somewhat of a nuisance when 8% of your company becomes something that gets talked about more than 8% of the time as we enter these types of things? How do you think about the positions of those businesses within the context of Roper long term?
Yeah. First, these businesses are amazing. I would just draw you to the profitability of both the industrial businesses and the process segment, right? They're amazing businesses. They're clear leaders in their niche. They're fantastic. Yeah, they have a little bit of cyclicality associated with them, but we've worked over the last decade to meaningfully reduce the cyclicality. We're roughly at a 50% tied to these businesses, these more cyclical businesses a decade ago, and now we're about 20%. That trend will continue as we deploy the capital going forward. We're generally deploying it things that don't have a large cyclical component. We'll continue to de-emphasize sort of the cyclical aspects, but they're great businesses. We like them in the portfolio.
They're designed to be incredibly profitable at all points of the cycle, right? As you know, we're always looking at the break even analysis. What's the fixed cost? What's the variable cost? Our business leaders are very proactive, they're always going to generate a lot of cash in all environments and they're positioned to succeed over the long term. We believe we're a great owner for those businesses.
Okay. Yeah, you guys have been very consistent with that answer over time. Appreciate that. Are there any specific cost actions that you're looking at as we enter this period, though, for them? Is there any unique cost out opportunities that now you can execute as things kind of slow for them?
I wouldn't say unique, but what maybe is unique about the Roper model, and this is just building on what Rob said, is these businesses structurally are highly variable in their nature, by structural, right? Any sort of cost actions can happen pretty quickly and without lots of sort of risk or cost to get the cost out, if you will. The companies also naturally start feeling and pulsing their way when they feel softness and take the actions without any sort of direction from us, right? We're certainly talking with them and understanding what they're doing and making sure their assumptions are aligned with our assumptions about what the future looks like. They go about doing what they do and managing their businesses.
Okay. Maybe last from me, just curious about the outlook, maybe from your customer standpoint about some of the commercial building sectors that you're exposed to. I know there's some nuance with some of your businesses, whereas if some construction volumes go down a little bit, it actually is good for a business like ConstructConnect because they might need the help in finding the work. Just generally, are your customers kind of getting raised antennas about the health or directionality of their businesses over the near term off very robust levels?
Yeah, hard to get a read across that. Like you said, at our ConstructConnect business, which is in the pre-construction part of commercial real estate development, we actually root for a neutral to slightly positive, slightly bearish market because that increases the value of what we deliver to our customers. I don't have, as we sit here today, a great read across or read through from ConstructConnect on broader construction themes. Sorry I'm not able to help you there.
Yep, fair enough. Thanks, guys.
Yep. Thank you.
That does conclude our question and answer session for today's call. At this time, it is my pleasure to turn the conference back over to Zack Moxcey. Please go ahead.
Thank you everyone for joining us today, and we look forward to speaking with you during our next earnings call.
Once again, ladies and gentlemen, that does conclude today's conference, and again, I'd like to thank everyone for joining us today.