Earnings Call: Q1 2019

Apr 25, 2019

For Technologies First Quarter 2019 Financial Results Conference Call. Today's call is being recorded. I will now turn the call over to Zack Moxie. Good morning, and thank you all for joining us as we discuss the Q1 financial results for Roper Technologies. Joining me on the call this morning are Neil Hunn, President and Chief Executive Officer Rob Crisci, Executive Vice President and Chief Financial Officer Jason Conley, Vice President and Controller and Shannon O'Callaghan, Vice President of Finance. Earlier this morning, we issued a press release announcing our financial results. The press release also includes replay information for today's call. We have prepared slides to accompany today's call, which are available through the webcast and are also available on our website. Now if you will please turn to Slide 2. 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. And now please turn to Slide 3. 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 Q1, the difference between our GAAP results and adjusted results consists of the following items: amortization of acquisition related intangible assets purchase accounting adjustments to acquired deferred revenue and lastly, we have adjusted our income statement to exclude the gain on sale from the divestiture of our Scientific Imaging businesses. We've also adjusted our cash flow statement to exclude the cash taxes paid as a result of the sale. GAAP requires this payment to be classified as an operating cash flow item even though it is related to the divestiture. And now, if you'll please turn to Slide 4, I will hand the call over to Neil. After our prepared remarks, we will take questions from our telephone participants. Neil? Thanks, Zach, and good morning, everyone. We'll start our call today with the enterprise highlights and financial results for the quarter. We'll then turn to our segment detail and outlook, followed by an update to our 2019 guidance and the establishment of our Q2 guidance and then turn it over to questions. Next page. We characterize the Q1 here as a strong start to the year with strong organic growth, operating leverage and cash flow as well as capital deployment. Revenue grew 7% to $1,290,000,000 with organic growth coming in at 6%. EBITDA improved 13% to $438,000,000 and margins expanded 170 basis points to 34%. Importantly, we saw margin expansion across all four segments, which indicates the breadth of the strength of the quarter. Free cash flow improved 15% to $312,000,000 or 24% of revenue. It's always great to see the expansion down the P and L. Revenue grew 7, EBITDA 13, free cash flow grew 15. So the leverage and expansion down the P and L is always something we'd like to see. Also in the quarter, we announced our new segmentation and we'll talk about that in a few slides. Importantly, we completed the sale of our Scientific Imaging businesses on February 5, and we also completed the acquisition of Foundry earlier this month. Certainly a good quarter. And now I'll turn it over to Rob to walk us through the P and L. Thanks, Neil. Good morning, everyone. Turning to the income statement page. Revenue grew 7%, 6% organically, as Neil mentioned, to $1,288,000,000 dollars We had our 3 largest segments, each grew organically between 6% 9%. Our smallest segment, Process Technologies, grew 1%, which did exceed our expectations for the quarter. Gross margin expanded 50 basis points to 63.0 percent as we continue to benefit from our increased mix of high margin software businesses. So we are very well positioned should any macro headwinds build around tariffs or material cost inflation or anything like that, really would have minimal impacts for Roper as they have historically had very minimal impact. EBITDA grew 13% with EBITDA margin expanding to 30 point 0 percent. We really had very high leverage in the quarter aided by a couple of items: the timing of some perpetual software license wins where revenue is recognized at the time of delivery and also some compliance payments at our GPO network business that really come in at close to 100% margin. So that impacted the leverage in the quarter, which was very strong. Earnings before taxes grew 15%. As you can see, our tax rate was lower than expected at 9.7%. This includes a $43,000,000 or $0.41 discrete benefit due to trade our foreign cash. And as a result, we will be able to realize some net operating losses in the future. So overall, our DEPS of $3.30 was an increase of 26%. If we adjust out for the tax item, we were still at $2.89 which was a very strong quarter for Roper overall. Moving on to the next slide, always one of our favorites, the asset light business model. So the net working capital position at the end of the first quarter, inventory 4.5 percent of revenue receivables 16.6 percent payables 10.8 percent deferred revenue grew to 13.5%. So deferred revenue grew 19% on a year over year basis ending the quarter at 6 $94,000,000 So if you add that all together, we had negative 3% working capital really for the Q1 3 years in a row down to 3.3%. Foundry, our recent acquisition, which we'll talk more about shortly, has a significant negative net working capital balance that will further enhance our position and continue to expand our ability to compound cash flow moving forward. So network capital for Roper remains a source of cash. Next slide. On compounding cash flow, so aided by our negative net working capital, organic growth, disciplined capital employment, we continue to produce excellent cash flow results and excellent cash flow compounding. The Q1 operating cash flow was $330,000,000 an increase of 17% versus prior year. As Zach mentioned at the beginning of the call, this excludes the $39,000,000 cash payment related to the Scientific Imaging divestiture completed during the quarter. Free cash flow, as Neil mentioned, grew 15%, represented 24% of revenue. So if you look at it on nearly $1,500,000,000 of operating cash flow, up 30% versus prior year, really fantastic results, and that represented 28% of revenue over the previous 12 months. So certainly, we believe that cash remains the best measure of performance. Next slide. So moving to the strong financial position in the balance sheet slide. We ended the Q1 with our gross debt of $4,500,000,000 net debt of $4,100,000,000 against TTM EBITDA now approaching $1,900,000,000 So our gross debt to EBITDA of $2,400,000,000 and our net debt to EBITDA down all the way to 2.2x at the end of the quarter. Subsequent to the end of the quarter, we did close and fund the Foundry acquisition where we really used a combination of cash and debt. So if we adjust for the Foundry acquisition, we are still down to 2.4x net debt. Furthermore, the Gatan divestiture would bring an additional $700,000,000 of cash when that is closed. We're assuming the end of the second quarter in the guidance. And so that would further decrease our leverage position. So in summary, we remain very well positioned to continue to deploy capital moving forward towards our pipeline of high quality acquisition targets. So with that, I'll turn it back to Neil to review the segment. Thanks, Rob. If we can turn now to Page 11, where we're summarizing our new segments. Earlier in the quarter, we did announce the new segments. To remind everyone, our resegmentation process was not a portfolio or business review. Also, the resegmentation does not have anything to do with how we run or operate our governance model, but rather how we summarize the activities of our 45 businesses in a manner that is more easily understood by investors and is more consistent with our strategy. So to this end, we chose to re segment based on a business model construct versus end market. As you know, as we deploy capital, we are not constrained by end market as we're in pursuit of acquiring the best business models available, the essence of our cash return on investment led strategy. Hence, it makes the most sense to organize in this manner. Starting with application software, this is the first of our 2 software segments. This segment has businesses that are delivering software applications to customers. You can see the businesses included in this segment, Aderant, Deltek, PowerPlan, Strata, to name a few. Perhaps the easiest to understand is Aderant. Aderant delivers enterprise application software to law firms. These customers run their business on Aderant Software. This segment represented 28 percent of our 2018 revenues, has gross margins of 67% and EBITDA margins of 40%. Now turning to our Network, Software and Systems segment. This is our 2nd software segment. These businesses are ones that have a network component to their business model. Think of situations where the customers drive benefit not only from our software, but also being part of a broader network. An example of a network business is DAT. DAT is our 2 sided network that matches thousands of brokers and tens of thousands of carriers in the full truckload spot freight market. This segment represented 26% of our 2018 revenues, has gross margins of 68% and EBITDA margins of 43%. On the bottom left is our Measurement and Analytical Solutions segment. Think of this segment as one of our 2 product segments, is diversified in terms of end markets and has quite stable long term growth. This segment has our medical product portfolio as well as our industrial test and measurement type businesses. This segment represented 33% of our 2018 revenues at gross margins of 59% and EBITDA margins of 33%. And finally, on the bottom right is our Process Technologies segment, by far our smallest segment and our 2nd product segment. This segment 10 businesses that are largely indexed to the oil and gas end markets. While this segment represents only 13% of our revenues last year, they have incredible business models, 56% gross margins and 36% EBITDA margin. Clearly, they are still our collection of assets in this space. Turning to the next page, application software. Revenue in the quarter, which represented 30% of our first quarter results, was 382,000,000 dollars an increase of 7% organically. EBITDA was $149,000,000 which grew 23% versus the prior year and represented a 39% margin. We saw continued strong performance at Deltek. They turned in high single digit revenue growth with great operating leverage and multiple enterprise or large customer wins in the quarter. Importantly, we saw continued double digit growth in their SaaS and subscription revenue streams based on acquiring net new customers and having successful conversions from on premise to SaaS. One thing we may not talk enough about with Deltek is really the balance and durability of their growth drivers. There are many growth drivers for this business. They attack the small, medium sized businesses as well as large enterprise businesses. They have their government contracting business, their product lines as well as serve the professional services markets. They have North American focus and a European and rest of world focus. They certainly have an on premise capability and a SaaS capability. So the business has had a great run of growth and it's not leveraged to 1 or a small number of growth vectors. It's really tied to a large breadth of opportunity. So, great job by the team at Deltek. We also saw in the quarter outstanding growth at Strata, which was led by strength in its hospital decision support SaaS bookings. We don't talk a lot about Strata, just to remind you what they do is this is a core solution used by hospitals and health systems, in particular the CFO's office, to model the changing nature of hospital economics. Over the last several years, hospitals have had to be more risk bearing in terms of the care they deliver. And as a result, they need to more intimately understand the connections between risk based revenue contracts and Strata sell software that provides visibility to that for hospital CFOs and our financial staff. So, great job by Dan and John and the entire team at Strata for the growth they've turned in. We also continue to see share gains in large law coupled with a very successful attach rate of the new staff billing product at Aderant. Great job with the continuation of the execution there. Power Plans focused on building pipeline in their core product offerings following a very strong lease accounting software demand over the past several quarters. And finally, we'll highlight Seaboard's growth in their food and nutrition software sales to their healthcare end market. As we turn to the outlook, for the balance of the year, we see 4% to 6% organic growth in this segment. The 2nd quarter EBITDA margins we see coming in similar to that of the first quarter as we expect a greater mix of SaaS versus perpetual in the second quarter as compared to last year. This is particularly driven by our strategy of pacing our SaaS conversions at the pace that our customers desire. So the results in some will vary quarter to quarter or have some fluctuations quarter to quarter based on the mix between SaaS and on premise. For instance, Deltek had very strong perpetual in the Q2 of last year and the Q1 of this year. So before we turn to the next slide, last quarter, we talked generically about our SaaS or cloud migration strategy. The long term benefits that will be enjoyed by our customers and the positive implications for our business model. To briefly summarize, first and importantly, we asked our businesses to move at the pace of our customers versus forcing the conversion on our timetable. Time and time again, this has proven to be the winning strategy. In several cases, we've been the benefactor of competitors' decisions to force the timetable as our customers have migrated to our solutions. Next, we believe the SaaS deployment model has many inherent benefits for the customer, easier enablement of upgrades and new features, lower cost of total ownership, elimination of technical operations and a single throat to choke to name a few. Relative to our business model, the cloud transition enhances the ability to sell and deploy add on products, deploy new features more broadly and at a faster pace, drive increased back office and tech stack efficiencies, improve cash return on investment, all while being a net growth driver. Also, let's not forget that all our software solutions are very specific built for purpose solutions targeted at solving very specific customer pain points, the essence of our niche strategy. All of our software businesses are in some phase of their cloud migration, again paced by our customers' interest in moving to the cloud. One example, a good example of our cloud migration experience could be highlighted with Deltek. Deltek launched its cloud offering in 2011, over 8 years ago. Over this period, they deployed over 10,000 customers to their cloud offering. Importantly, during Roper's ownership, we've invested significantly north of 15% of revenue on R and D, much of which has been centered on user experience, building and launching new products such as VantagePoint and the continual migration of our tech stack to the cloud. By pacing at their clients' desire to move to the cloud, Deltek has been quite successful at keeping a very modern code base and tech stack, while building new products and delivering new product features. All of this has resulted in consistent high single digit organic growth, an increase in recurring revenue to be approximately 70% and the continuation of very high customer retention rates. Next slide, please. Network software and systems revenue in the quarter represented 27% of Roper's revenue and was 346,000,000 which indicated a 9% increase organically. EBITDA was $150,000,000 and represented a 43.3% margin. In the quarter, we saw just excellent growth at DAT from continued net subscriber adds and increased revenue per customer. It's important to note that this network has value to its constituents in different macroeconomic environments. Regardless, the value is very strong, whether the trucking and shipping market is running hot, there's value to the participants or if it cooled off a little bit as we saw in the Q2, it still has tremendous value as shippers and carriers are trying to match networks for the loads. So we saw very nice growth in the quarter at the DAT business. We also saw strong performance at MHA from market share gains and vendor contract compliance. To remind you, MHA is our network that connects thousands of healthcare providers to hundreds of vendors in the marketplace in a procurement network, and so it's great to see the strong performance in MHA. Itrade grew based on strong renewal activity and net subscriber additions. And late in the Q1, Itrade announced a blockchain initiative with the goal to increase safety, sustainability and visibility of the food supply chain. Using blockchain or a decentralized ledger, Itrade will more easily enable interested parties to gain access to the relevant data. Itree will leverage its network of over 5,000 growers, retailers, distributors, restaurant operators and logistics providers in building the network. Importantly, most of the data needed for this farm to fork traceability blockchain already exists natively within the Itrade applications. The Itrade blockchain is designed for interoperability using the same industry standards utilized by IBM Food Trust and others. This is a great example of the leadership position that many of our businesses take within their industry niche. We saw double digit growth from RFIDeas in a secure print and identity management solution. This is a business we acquired a number of years ago. It's really a fantastic business. What they do is think of the security badge you have to get into your building from a physical perspective. RFIDIA makes an integrated reader that reads the hundreds of protocols for the security badges and the reader is used in non security situations. So imagine Secure Print, the printer companies, OEMs embed our reader in the printers and then you can go use any of these security protocols to then credential you to have a secure print or in the healthcare setting, think about secure sign on for doctors and nurses relative to electronic medical records. Instead of having to type their name and password in, they can use their credential and allows them to see more patients. So the company has done a great job at working with scores of OEMs to embed their technology into their end application, and we've seen great growth over several quarters in RFIDeas. When we turn to TransCore, they had, again, excellent execution in the back office software and services, and they always do a great job with the tolling project execution, and we saw low single digit growth in that business. And as we mentioned earlier, we completed the acquisition of Foundry last week. That business as a network, we'll describe that here shortly, will be housed into our Network Software and Systems segment. So we turn to the outlook for the 2Q through 4Q. We see 4% to 6% organic growth for the segment for the balance of the year. We also see Q2 2019 EBITDA margins to be similar to that at Q1. And before we turn to the next slide and specific to a targeted TransCore pursuit, we'd be honored if we were to be selected to be the technology and implementation partner for the Manhattan Congestion Pricing Initiative. While still in procurement, TransCore has deployed its very best team and look forward to working with the authority if given the opportunity. Next slide. The Foundry acquisition. Boy, this is just a great acquisition for us and it meets all of our criteria. Starting, it has tremendous cash flow characteristics and negative net working capital, so it checks the box clearly and unambiguously from a cash return point of view. The management team that we met is really stellar. Oftentimes, sure about sure about. In this case, the entire team was just fantastic from top to bottom. We're excited to work with them. In a minute, we'll talk about in detail the niche orientation they have and the clear leadership position they have in that niche, but they are clearly the standard in what they do. And as a result, they have super deep domain experience, high recurring revenues given their long tenure and what they do and then multiple opportunities to grow. The purchase price was $410,000,000 and we view it to be immediately cash accretive. For the 1st 12 months of ownership, we there to be about $75,000,000 of revenue, come in roughly at 40 percent EBITDA margins. There will be about $25,000,000 of unlevered free cash flow, and we view this as a high single digit organic grower. Foundry is a great niche software business that enjoys several network benefits and we're excited to have them join the Roper family. But first, what do they do? Foundry software is used to composite or combine visual effects, animation and 3 d content in the media, entertainment and digital design industry. So what does this mean? By way of examples and if you're a Game of Thrones fan and no spoilers here, the compositing or combining of all the period scenes with computer generated dragons, with live action fire, with the computer generated legions of soldiers is enabled and completed by Foundry Software Solutions. With its 20 years of history, Foundry has become the standard for compositing in the media and entertainment industry. In digital design, Foundry addresses the gap in the market for artist friendly 3 d software used in design. With Foundry Software, their clients are able to create photo ready designs of new product concepts that massively reduce new product development timetables with lower supply chain risk. Foundry's customers range from Pixar to Mercedes to New Balance. Importantly, the business has over 30,000 customers and has deeply embedded global ecosystem or network of evangelists. The vast majority of computer graphic arts students are trained in college on Foundry's applications. They learn to composite using Foundry. Given the increase in computer generated visual effects in virtually all media productions, the supply chain has developed in such a manner that foundry is the communication standard for the outsourcing of visual effects. Foundry, again, is the standard tool used across the media and entertainment industry used for compositing. In fact, Foundry has been used on every VFX Oscar award winning film for the past decade. We believe Roper's long term ownership and investment model will help extend Foundry's network effects and industry leading position. Foundry is another great net software business for Roper. Next slide. When turning to our Measurement and Analytical Solutions segment. The revenues represented 31% of our aggregate revenues across the enterprise in the quarter and were $402,000,000 an increase of 6% organically. EBITDA came in at $128,000,000 and represented a 31.9% margin. We'll start, as we always do, with highlighting Neptune's continued high single digit growth from their continued share gains driven by their customer focused innovation. No weather impact there. Verathon had very solid execution of its new product launch for its next generation GlideScope systems. It's off to a good start from the launch perspective, but it's still early and we'll watch closely as how it unfolds for the balance of the year. We had a record quarter in Northern Digital, driven by optical measurement systems and consumables growth. From time to time, we talk about Northern Digital, but just to remind you, this is our measurement science business that has 2 core technologies, electromagnetics and optical, that's used principally in healthcare applications and embedded in OEMs solutions. And they measure with great precision where the tip of a surgeon's instrument might be in brain surgery or where the tip of a catheter might be in the cardiac procedure and many others. So it's just a fantastic business. They're clearly the world's best at what they do. And so we see it in the financial results and consistent. So really great job by Dave and team up in Canada for doing a great job, not just this quarter, but over a long period of time. CIVCO Medical Solutions had very broad based growth driven by channel investments that we made over the course of last year. So it's great to see that business get even more intimate with the customers and see the results financially. Struers growth came from sales of equipment and consumables to multiple industrial end markets. And to remind you, Struers is our industrial materials prep and analysis business. Gatan saw double digit growth from delivery of its next generation cryo EM backlog. And as we mentioned at the onset of the call, we completed the divestiture of our scientific imaging businesses, but we did so a bit earlier than expected, actually provided between a $0.02 and a $0.03 headwind or impact versus what we thought was happened simply based on closing that transaction a bit earlier than we thought. As we turn to the outlook, we see segment revenues plus 4% to 6% organically for the balance of the year. However, for the Q2, we expect low single digit growth due to the timing of Gatan shipments pushing out of the 2nd quarter. This is a $0.05 depth negative impact as compared to our expectation from a quarter ago. Finally, we continue to assume Gatan's sale to thermal will close at the end of the Q2. Next slide. Process Technologies, which represented 12% of our revenue in the quarter. Revenue was $158,000,000 or an increase of 1% organic and EBITDA was $53,000,000 or a margin of 33.5%, just spectacular businesses here. Cornell grew double digits from great performance in its industrial end markets, and we saw particular strength in its aftermarket activity. As we've highlighted in past quarters, CCC grew in this quarter high single digits from execution against new LNG construction projects. Currently, there's 11 projects slated for construction around the globe. We're spec'd for 10 of them and have a chance to be spec'd in the final upstream oil and gas businesses due principally to prior comps. From our upstream oil and gas businesses due principally to prior comps in the prior period. Percent of the segment. Based on this quarter's slightly better performance versus our expectation and our quarterly views with our businesses, modestly increasing our outlook to be down 1% to 3% organically for the balance of the year versus down 1% to 5% for the whole year. We expect the Q2 to be roughly sequentially flattish to that of the Q1. This equates to the 2nd quarter being down high single digits, which is consistent with For the second half, we see the business roughly flat on a year over year basis based on easing comps. So we remain cautious in our outlook here. The planned takeaway capacity comes online as expected and or energy prices remain higher than there may be some second half upside. We'll have to wait and see. Now let's turn to our guidance. We continue to be positioned for a strong 2019, and as such, we're raising our full year 2019 guidance. Adjusted DEPS is now $12.70 to $13 where previously it was $12 to 12.40 dollars This includes the Foundry acquisition, which closed on April 18. The guidance continues to assume a June 30 Gatan close. We're also improving our organic growth outlook to be 4% to 5%, where previously it was 3% to 5%. Our tax rate, we assume, is approximately 22% for the balance of the year. Also, we're establishing our Q2 2019 guidance with adjusted DEPS in the range of $3 to $3.04 Turning to the Q1 summary. Again, a great start. Our diversified portfolio business delivered another excellent quarter, Record first quarter results, we saw organic revenue grow 6%, EBITDA grew 13% and importantly margins expanded in all 4 of our segments, so very broad execution. Free cash flow grew 15% to $312,000,000 which represented 24% of revenue. So great to see the leverage down the P and L, again, organic revenue plus 6, EBITDA plus 13, and free cash flow of plus 15. It always starts with our CRI discipline and we believe our proven business model provides a very scalable platform for continued growth. To this end, following our announcement of Satish Maripuri last quarter, we're delighted to share that Harold Flynn recently joined the Roper leadership team. Harold will focus his efforts on providing group leadership to a number of our product businesses. Harold is a very seasoned executive with experience at IDEXX Laboratories, Abbott and Zimmer. The combination of Jeff Paulson, Chris Kreps and Harold will provide leadership to our portfolio of product companies. Like Satish, Harold deeply understands Roper, our model, our approach. We're very excited to welcome Harold to our leadership team. Now turning to capital deployment. We're excited to have closed the Foundry transaction earlier this month. As we described earlier, we view this to be a near perfect fit against our niche strategy and our network strategy and are excited to welcome Craig, Martin, Jody and the entire foundry team to the Roper family. Setting foundry aside, we continue to be excited about our capital deployment prospects in 2019. As Rob mentioned, our balance sheet remains super well positioned for strong capital deployment for the balance of the year. The number of very high quality assets we've seen in the last several months continues to be encouraging and our pipeline is quite full. Importantly, our CRI orientation and M and A process help us identify the very best businesses to acquire. Now as we turn to questions, we 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 positions in niche industries. We provide the business leaders with Socratic coaching about what great looks like relative to strategy, operations, innovation and talent development. We incent our management teams based on growth. We have a culture of mutual trust and transparency. And 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. We'll now turn it over to questions. Thank you. We will now go to our question and answer portion of the call. We'll take our first question from Deane Dray with RBC Capital Markets. Thank you. Good morning, everyone. Good morning, Deane. Good morning. Hey, I want to just start off with a comment that we appreciate all the hard work that went into the re segmentation. And as promised, this recasting just makes a lot sense and it's easier to see and explain the portfolio. So thank you for all getting that to the finish line. And on foundry, just your comments this morning, just to let you know you had me at Game of Thrones, so that actually worked for us. So first question is on Deltek. And it was interesting that you recently had a big database software cloud provider actually call out Deltek as an opportunity for them. Our experience has been the good businesses with attractive margins can attract new competitors. But what do you make of this? And maybe some comments about the moat that Deltek has and how you expect this to play out? Thanks. Yes, I appreciate the question. We read the same comments. There is a series of companies that were listed. So we'll talk specifically about Deltek. I can't comment at all about the other companies that were listed. And we certainly highlighted a number of those when we went through the our SaaS strategy with Deltek. But I think perhaps the most important thing to start with is that not just Deltek, but all of our businesses are in niches and have very specific built for purpose software aimed at a specific user. And so if you think about Deltek, government contracting, right? It is a we are the acts in that space from a software perspective. Virtually every large enterprise uses our software because of it does what it does so well. You don't have to customize it or tweak it or tune it. It's both on premise and in the cloud. And then you have a considerable amount of R and D resources that are just 100% focused on making that product better. Same thing can be said for the professional services end market. Deltek does not attack professional services broadly. They attack architects. They attack engineering firms. They attack marketing services firms, accounting firms. So very targeted. And the way those businesses run their business are not just generic to professional services. And so you buy our software out of the box and a normal marketing services firm can actually deploy without any customizations at all in any way shape or form where the larger places you have to go through an SI layer and do sort of customizations then you have to worry about upgradability of those and whatnot. So the core of what we do is preferred by our customers And that's seen time and time again with win rates in excess of 50% when you go head to head for net new opportunities against the larger players. And then from a code based tech stack cloud strategy, I think we're as current as anybody can be in that business. That's all really helpful. Appreciate it. And then just as a follow-up, can you clarify what the drivers are on the boost to the low end of organic revenue growth for the year? Yes. Sure. Good morning. This is Rob. I think overall we certainly had some outperformance in the Q1. And I think if we look at all of our segments, we see sort of at least as good as originally planned or a little bit better. I think specifically in Process Technology segment, which is the smallest segment, we upped our outlook there where we're not seeing sort of a downside as bad as we saw coming in. And so we're just up the bottom of the range a little bit. I'd say overall a little bit of outperformance everywhere and a little bit of a better outlook everywhere. Good to hear. Thank you. Yes. Thank you. And we'll take our next question from Christopher Glynn with Oppenheimer. So some of the businesses you acquire or lots of them always interesting to think about the network effect. Clearly, foundry seems prohibitive of competitive risk. I'm wondering, particularly with the network segment, if any of these stronger results are kind of kicking into a higher gear potentially or accelerating a network effect breakout and I'll anchor the question around MHA and Itrade maybe suggest that dynamic? So I'll start broadly and then try to get specific to Itrade and MHA. So I would not characterize that it's like this breakout of networks, right? We've seen that consistently at DAT. It's truly a 2 sided network where both sides incrementally gain more value as the size of network improves. ConstructConnect, Itrade are examples we'll call one-sided networks where you need sort of the anchor tenants and ConstructConnect, the general contractors and then in Itrade, the retailers to be in the network and then it drives supply chain efficiency through. So we've seen just good solid execution across those businesses. So it's not it has a network effect, but it's not one where it's driven because of the execution of the software and the sales and the distribution capabilities of the business. On MHA, this is our group purchasing organization. They've continually done a great job of retaining their customers, adding customers, adding new products to the portfolio that our providers, health care providers can buy. And then there's what we call compliance activities, both Rob and I called it out. This is where you just constantly monitoring, make sure that both sides of the network pay what they need to pay the network. And there was a large amount of that activity in the quarter. So it's nice to see that. Thank you. Yes. And with JPMorgan, we'll hear from Steve Tusa. Hi, guys. Thanks for taking my question. This is actually Pat Bamin on for Steve Tusa. Quick follow-up to Dean's question on the bridge on the organic raise. Can you bridge us on the EPS raise for the year as well, the $0.65 at the midpoint? Sure. So the $0.41 discrete tax item we mentioned, if you look at M and A, we've got around $0.07 or so net of incremental M and A. While we had the, call it around $0.14 for foundry, as Neil mentioned, we lost $0.02 or $0.03 from the imaging transaction closing sooner than expected that actually hit in the Q1. And then there's around $0.05 for the Gatan shipments that are slipping to the period where we don't expect to own the business anymore. So if you net all of that together, you get $0.07 and then the remainder $0.17 or so that's your sort of just better operations, better margins and better organic growth throughout the portfolio. Got you. That's really helpful. Thanks for the color. And then maybe circling back to a lot of obviously commentary on Deltek given the comments from that large company. You said it was up high single digit organically in the quarter. Just wanted to kind of step back and if you could offer some perspective on how has that business grown organically since you bought it back in 2016? I think you were kind of alluding to a high single digit type growth rate, but just wanted to confirm that. And then No, that's right. Yes, it's been high single digit organic since we bought it, which is better than we expected. We expected mid single. Yes. And we highlighted that when we talked about the Deltek SaaS migration that's resulted in that high single digit growth since we found it. Yes, yes. And then also just wondering, have you guys done any deals there since acquiring it? Just curious like what kind of deals you've done to try to bolster the business if at all? There's been a couple of bolt ons. Now the high single digit we talk about is organic, right? So the growth there is not It's quite a bit higher if you include the M and A that we've done. We've done several acquisitions also to add to that business. Small tuck ins generally characterized as products that can be sold to the existing customer base. We talked about concept share and workbook in the past to name a couple. So what is the revenue base now, if you don't mind sharing some color on that? I mean, we don't like to give exact revenue numbers on our businesses, but I think we said it'd be $550,000,000 the 1st year we owned it, it's way over $100,000,000 on top of that $550,000,000 Okay, great. Thanks for the color and congrats on results. Thank you. Next is Julian Mitchell with Barclays. Hey, good morning. This is Lee Vanquist on for Julian. You highlighted double digit SaaS growth in application software. How big is the SaaS business today? And secondly, could you just provide a little bit of color about the margin differential here versus other software models in your own portfolio? So, I'll take the first part of this, then let Rob follow-up. So we talked about the double digit SaaS at Deltek. I just don't want to be clear in our commentary there. That's not a broad Roper statement. And I'll let Rob talk about the percentage of the total revenue of Roper that's software and SaaS. Yes. So I mean where we sit today of the software revenue is pretty evenly split from a SaaS subscription model and a license on prem model and that's been moving more towards SaaS and we expect that to continue. But as we sit here today, the business models are roughly the same, about even. And then as we've talked about in the past, EBITDA, software EBITDA for Ropers is in excess of 50% at this point in time. Okay. And then compressor controls has put together several nice quarters in a row now. How far below peak are we? And then secondly, how large is the LNG exposure since you called it out in that business? Yes. So, compressor controls is historically a late cycle business. So, it just bottomed out later than the rest of the oil and gas businesses and has begun growing since sometime late last year. And I think it's an opportunity there with a lot of and Neil mentioned a lot of LNG opportunities out there that we expect to get our fair share of. So this business is the size that it's roughly 20% of our Process Technology segment. So I think of our Process Technology segment. So I think those upside sort of tailwind opportunities are exciting. But again, it's a reasonably small part of the overall Roper portfolio and a small part of the segment. Yes. And I would add, it's obviously highly indexed to LNG. It's what they do. But it's not just tied to new. I mean, there's a lot of retrofit brownfield activity as well that they consistently add channel capacity to identify it and the capability to drive upgrades there. Great. Thanks a lot. Thanks. And we'll hear from Robert McCarthy with Stephens. Hi. This is Robert McCarthy on for Robert McCarthy. How are you today? Thank you for joining. Yes. No. Well, I think a lot of people are tapped in, looking across a lot of land mines right now across a bunch of different calls. So one thing I wanted to catch up on in all seriousness is, and I apologize if I missed this in your prepared remarks. What is the update you can provide with respect to Gatan and the potential divestiture there? So the update is, as we talked about, it's in our guidance through the end of the second quarter. We're in along with Thermo, we've been working through the regulatory process with the UK CMA and we're hopeful that concludes here at the end of the second quarter. Okay. So there's still confidence that this can be done? Certainly, there's lots of resources working on clearing the CMA's objections. Okay. No, thank you for that color. And then maybe you could talk about, I think you mentioned, is it Harold Flynn? Yes. Yes. Maybe you could just amplify kind of what he's going to bring to the table, talk about his background, his experience and what you're really looking for, 2 or 3 key things that you think is really going to help you kind of use him to enhance the governance and kind of coaching across the platform? Sure. So first, what is the role of the group executive here, right? The role is to help coach both the companies to become great and achieve greatness and help the leaders in the businesses become great leaders, right? And we think about that across many dimensions, but three principal ones are how do you develop strategy? We want that to be very much outside in and focus on answering 2 questions, where to play and how to win. We care a lot about how that strategy is executed. We want it to not be a project of the leadership teams at a company. So we want it to be process enabling and so that it can endure a long period of time. 3rd thing is we care a lot about how our teams develop their talent, engage their talent and run a talent offense. And so the group executive layer is focused on those three things strategy, strategy deployment and talent broadly speaking in addition to the day to day and week to week things that come up. So Harold, and it's not just Harold, but in the product businesses, Chris and Jeff that I mentioned, their job is to do that. In Harold's case and I would say this the case for all our group people, they're very growth and process oriented. They have a strong orientation towards talent. They're super strong cultural fit. There's probably nothing more important in our vetting exercise here. We're only 50 people in this office or 55 people in Sarasota. There's only a handful of these group executives and we need that cultural fit to be really tight, which it is with Harold. And then the thing about Harold and again, I wouldn't isolate him, I Satish is this way and the other team as well is I would consider them sort of learning executives. So they're constantly learning and adapting their style and understanding what Roper is about, right? We want to Roperize them and have them take the Roper governance system out to the companies. And then you certainly have to be successful here, you'd have to be financially savvy. That's how I characterize the role and Harold and the team that he works with. If I could just sneak one more in since I showed up in person. Maybe you could just talk about level setting our expectations for acquisitions in terms of firepower opportunity set and maybe you could comment on the pricing of assets in the competitive environment? Okay. So as Rob and I both mentioned, foundry is just the beginning. We have a very strong balance sheet. We've worked hard to get the balance sheet to be offensively positioned, which clearly is. And so we feel great about that. The pipeline, we've said it now for several quarters. It's very robust. The quality of the assets is quite high. As you know, we're always trying to buy things that are a little bit better than what we are. It's been the hallmark of our strategy for a long period of time. So relative to the pricing, with the assets we want, the things that have all the defensive characteristics, network characteristics, great management teams, the negative networking cash flow, mid- to high single digit organic growers, low capital intensity, those assets are not inexpensive. But in our CRI orientation, there's always value to be gained by our shareholders by deploying capital against those type of assets. So we feel very good about it. We feel very confident about our future here for deploying capital. And on the balance sheet, I think we both mentioned in our comments earlier that the balance sheet is very well positioned. So in the low 2s from a net debt to EBITDA standpoint, we're obviously deeply committed to investment grade, but we also have TTM EBITDA approaching 2,000,000,000 So we also have $700,000,000 that would come in as the Gatan deal closes. So with or without that $700,000,000 we could easily deploy $1,500,000,000 or more on M and A whenever the opportunity arises. Yes. And from a competitive situation, I would say it's largely unchanged. If there is a super strategic that's going to bear a lot of synergies, we are not and have never been a viable competitor for that target. We're almost always the feedstock of targets for us, principally comes out of private equity. And then at the finish line, we're normally competing against private equity. And so and in the assets that we described or the management teams are builders and growers and are attracted to our model, we tend to compete and win at a very high clip when all the things line up. Thanks very much. And I think you're going to get a nice flight to quality bid today. Congrats on the quarter. Thank you so much. Thanks, Rob. And we'll hear from Joe Giordano with Cowen and Company. Hey, guys. Good morning. Good morning. So I think when you announced foundry, when you go through the financials of it, it clearly fits the profile. But I think there was at least some thought of, okay, now we're getting into like Pixar and some things that we're not used to. Like, can you maybe just talk about how you guys conceptualize these things internally as there almost seems like there is no bridge that's too far when you're looking at it strictly from a financial standpoint. But how do you get comfortable with key man risk at those individual businesses and your ability to be able to run those businesses and that kind of framework things like that? Sure. So I might have misunderstood a part of that question, but I'll just I'll clarify it so it's on the record. So it's not a bridge too far financially. I mean, so these are always in our process. No, definitely not. Definitely not. It's not just financial. Okay. I understand. So we'll go through our process, right? So the process is, does it meet our CRI threshold? Yes or no. This one clearly does. Then it's about does the management team, are they going to really thrive in our environment? And an easy simple way to think about that is, are they fundamentally about intrinsically motivated about building their business? So when we engage with this team, which we are able to do a couple of times before the process started, it's very clear that this team is completely passionate about what they do. They've been doing it for a very long period of time. The technology officers in this business actually have personal awards for what they've done in this animation sort of compositing space. And so they are built for purpose for this business. Then we get into, is it a business we like and that's is it in a niche, is it a leader, network effects, all the things we've been through many, many times. And so one of the things we did as a team think through is, hey, it's meeting all these criteria, but is it does it do something that's sort of sexy? And do we not like it because of that? And at the end of the day, because it met all their criteria so perfectly, we're like, hey, it's a software business at the end of the day. And what they do is they do things that you can see on HBO and other places unlike things, the other things in Roper, but it's really at the end of the day a pretty boring software business. Is there maybe if I ask that a different way without naming anything specific obviously, are there examples that you could tell us of companies that have met the financial criteria, but when you guys get in a room, you're like, do we really even understand what's going on here at this business and maybe we're not the right owners? All the time, right? And so we see scores of amazing CRI businesses and then we start doing the work. I would say the number one reason we walk away if it meets our financial criteria is just the management team. For one reason or another, they're just not about builders, so there's not good chemistry or you're worried that they're going to leave in a short period of time. And then if you're still comfortable there, if there's a product that we're worried about, could there be if there's if we view there's any sort of 0 in the Monte Carlo analysis, then we generally are walking away, right? Being long term owners, we don't want to onboard any of that risk. So it's been a lot of time And if we don't yet know the industry well, we do a ton of work around the industry with outside consultants And there's a lot, a lot of work that goes on. There's many readouts. And if anything, scares us away, we just say no, we walk away. And that happens all the time. Thanks guys. Yes. Thank you. And we'll next hear from Joshua Aguilar of Morningstar. Hey, gents. Can you hear me? Yes. Good morning. Yes. How's it going? Hey, we were so I wanted to go back a little bit to like the annual contract values. I think you recently said at a conference that you've been reporting like 50% higher annual contract values in ConstructConnect and just the 1st year, 1.5 years of ownership alone. And so some of the internal debate we had was really around like was this more to maybe perhaps they were underpricing their product at the time or were you looking to cover the cost of the purchase sooner? Or like where would you push back on somebody who would insert something like that? Yes. So appreciate the question on ConstructConnect. So as I think we've talked about a couple of times in the past, ConstructConnect, again, to set the context, is our network that connects general contractors and subcontractors to building product manufacturers in this large network. And the strategy since we've owned this business since the Q4 of 2016 has been to basically drive habitualization of the core product to the contractor community. And to do that, we had to actually build and we've worked to do this a number of software elements that go on top of and interleaf with the content that we have. And so the increase in revenue per user at ConstructConnect early gains of our new product launches because we just have more value to sell is what it is. So it's not the construct like you said to try to cover purchase price or anything like that. It's just a continuation of the strategy and the commitment we have to the long term ownership of the assets. Great. Thanks for that. And then I guess, a little bit on TransCore. You're talking about that being more of a nationally interoperable solution coming online this year. Is how what's the progress there? And maybe you can give me a little bit insight there, if that's okay. Thanks. I think it's quite good. I think that's that can reflect it in the recent wins we've had and the tolling projects that are ongoing. It's been good execution by the team. And last one for me, sorry about that. In terms of just like the organic growth guidance, is that just a function of the lower end of Process Solutions sorry, yes, Process Solutions is kind of moving up? Or is there something else there that I should be looking at in terms of the segments? Yes. I think it's a combination of that and a combination of the outperformance in the Q1, building that into the full year numbers. Maybe a little bit net, more good guys than bad guys if you look everywhere else, but that's the majority of it. Thanks, guys. Congrats. Appreciate the questions. Thank you. We'll next hear from Alex Blanton with Clear Harbor Asset Management. Yes. Hi, can you hear me? Yes, sir. Yes. Good morning, Alex. Yes. What was the dollar amount you paid for foundry? You give it in pounds, but I wanted to know what it was in dollars. Yes. So it converted to $5.30 or so in dollars, dollars 5.35 in dollars. $535,000,000 Okay. And on compressor controls, you mentioned that it's well below the peak. Is that right? I mean, certainly, if you look at the performance of the business over the past several years, they're just sort of on the way back up, given the fact there was no new construction for several quarters and now the new construction business is starting to come back. As Neel mentioned, they've done well on retrofits and brownfield activity and doing a great job covering their installed base and doing a lot of great things for customers. But the new construction projects are just now starting to ramp up with LNG taking the lead. How much is that of the total? When that when you acquired that business in 1992, most almost all the business was retrofit because none of the OEMs were using their software. People would buy their compressors using the OEM software and then they would retrofit it with CCC. So but it sounds to me like that has changed and that you're getting a lot of business now with the OEMs delivering your software with their compressors. Is that the case? Yes. So Alex, I would say that the team over many years has built it's an incredible capability of getting into this feed and this getting pre feed and really specking projects very, very, very early. It's mid as you know, it's a multiple year process to get specked in these new projects. It's a true core capability of that business now. And what percentage is pipeline? You used to do a lot of business on gas pipelines. In fact, it was the original Yes, it's a pretty small percentage. I don't have the exact number, but it's pretty small. Because when you acquired the business, the first huge contract you got was to equip Gazprom pipeline with your stuff. So that's pretty small now in relation to total? Yes. Yes. Okay. Yes. All right. Thank you. Thanks, Adam. That will end our question and answer session for this call. We now return back to Zack Moxie for closing remarks. Thank you everyone for joining us today and we look forward to speaking with you during our next earnings call. This concludes today's conference. Thank you for your participation. You may now disconnect.