That's right. That's right. All right. This is the first time doing one of these. Welcome, everyone. We have Jason here, CFO of Roper Technologies, as well as Zack, who's head of IR. I guess maybe just to start off, we'd love to just hear a little bit more about the story, maybe introduce the company to people that are a little less familiar, and then we'll take it from there.
Great. Thanks, Michael. Thanks for having us. Sorry, Joe got caught up in the bus, the bus system here. Yeah, thanks for having us. Roper, you know, at the top level, it's a very simple story. We're a vertical market software and technology compounder. We sort of sustainably can compound cash flow in the mid-teens over a longer time. We've done that historically. We plan to do that going forward. Really, just like a lot of diversified industrials, not so many diversified software companies have this motion as we've got two ways to achieve that growth objective. One is through organic growth. Today we own 28 businesses or so, depending on how you count it, that are sort of vertical market leaders in their respective markets.
We love these small tans that they participated in because we can grow with our customers, and there's just plenty of opportunity. It is very protected. We like that, but there's also a lot of opportunity when you have market leadership. Today they're sort of in the mid-single digit plus organic growth area, but obviously very cash efficient businesses, negative working capital, very little CapEx. That sort of converts to high single digit organic cash flow. We take all of that cash flow plus just some investment grade leverage to redeploy that to the next great vertical market software business, the most recent one being CentralReach, which I'm sure we'll talk about. With that, you just sort of get this continuous flywheel of cash flow compounding over time. I think the interesting part is these are wonderful businesses.
I think Joe does a good job of when we buy a business, he'll research it and kind of fact check how good is the business we own. I think he could probably attest that they are good businesses. I think we buy these reasonable businesses that you can't really otherwise own in public markets, right? They're too small. They're not going to go public. We tend to, we make these businesses better over time. I think that's sort of an underappreciated part of our story. I think we're sort of garpy investors, if you think about it. Like we're going to buy good businesses, but we're going to pay a reasonable price. They're going to grow in our environment. I think we're really in the early innings of increasing the organic growth for our businesses. We'll probably talk about that today.
Our objectives are to capture more value out of capital deployment and then increase the organic growth of the businesses. We're sort of on that journey. It's not an overnight thing that happens, but we're certainly making a lot of progress there.
Great. I think that's a great segue, actually, to your first question. Roper has been going through a software evolution over a long time. You had mentioned previously too that you're trying to change the organic growth profile of the business. We'd love to understand a little bit better from the existing business, as well as you mentioned, inorganic capital deployment is a huge part of the story. How are we trying to increase the organic profile of the business over time?
Sure. Yeah. I mean, just maybe to level set, Roper was able to sort of compound TSR in the high teens over a long, long time without really asking their businesses to grow faster. As we set our strategy probably back in 2019, we said to sort of going forward, in order to accomplish our TSR objectives, which is really through free cash flow, we're going to want more organic growth out of the businesses and increased capital deployment effectiveness. On organic growth, I think the reality is we did a deep dive strategy on the businesses, and there's still a lot of latent potential in the businesses. We never really asked our leaders to do this. We really set higher expectations. That was sort of the first step along this journey. It was around putting in new leaders, right?
When you set that higher objective of leaders that really want to grow their business, they want to build their business. They're going to have their competitors. They're going to be super dynamic. They're going to be learners. So we've defined what a great leader looks like. And then we ended up basically over the last five years, we've put in 16 new leaders, I think. Is that right, Zack?
Mm-hmm.
Over that time. We have profiled what that leader looks like. We sort of use selection criteria against that. We use an outside selection tool to do that. Then we have eight or nine of us interview. Anyway, we feel like we have a great set of leaders on the field. Now they are starting to hire great leaders, right? Based on year-over-year growth, we have now put a higher incentive for long-term organic growth. We have aligned incentives against their performance. We also had a lot of incentives that were more tied to Roper sort of time-based Roper stocks, and now it is more based on their performance. I think we put all the ingredients together. We are doing much more deep clinical review on strategy now, much more data-informed. Now we have got the strategy. Now it is all about execution.
I think we're on that journey of how do we make our businesses better. We're doing that through things like how do we harness the power of Roper where we get pricing excellence. We have cloud ops excellence. We've got product velocity excellence. That is sort of the ending that we're at now. We've stood up a continuous improvement function within Roper and think of them as a resource to the businesses to help them improve their processes. All of these things take time, right? It's not just one quick fix. The business has to identify where their growth factors are going to be in the next three to four years. How are they going to build capabilities around that? How are they going to build processes around that?
What you've seen, I think the results of that have been we were kind of in the 5%-6% organic growth range about four or five years ago. There's been some noise with COVID. We've sort of posted some eights and some nines. We've been in the seven range. That's just because of some of that COVID noise. We think we're kind of in the 7%-7.5% range today with aspirations to grow to high single digits over time. Clicking into the businesses that we're looking to acquire, really if you think about it, what we had bought in the last decade had been businesses that were maybe three or four, three terms private equity, call it. They had been pretty optimized. They were sort of mid-single digit plus growth, had some margin expansion opportunity, but not a ton.
What we're looking at today is to kind of go a click earlier, buying businesses that may be one turn out of private equity, growing in a little bit of a faster market, still have all the characteristics of a more optimized business, but just earlier in its life cycle so that we can sort of enjoy the growth in that business. You get both sort of the growth aspect, and then you typically get margin expansion as a result of that. The last two maturing leaders that we've acquired, that's what we're calling them, maturing leaders, was Procare. It was the beginning of 2024. Then we just recently acquired CentralReach. You're going to get margin expansion from those businesses just from growth. That's the first archetype. The second is, and it's really one we've done quite a bit historically, but just more bolt-ons.
Bolt-ons have been a story for Roper probably for the last 10 years, but not as strategic, I would say. We're really looking at every business, what's their organic and inorganic strategy, where's an adjacency that we'd have a high right to win. We're cultivating and targeting those lists. Just being much more intentional about our bolt-ons. The whole goal of the bolt-on is to increase the organic growth for the platform. It's not to do some sort of multiple arbitrage or what have you. As a result of those bolt-ons, obviously we get a lot of cost synergies or some cost synergies as a result. They're definitely higher return deals too. Those are like the two that we've mainly been pivoting towards.
Great. I think that sort of lends itself to different margin opportunities as well. You mentioned maybe acquiring companies a little bit earlier in the life cycle. Joe, welcome to the stage.
Coming in hot.
Feel free to take us away.
You can keep, let me catch my breath.
Sure. We're tactically victim of New Jersey transit. In terms of buying opportunities potentially a little bit earlier in the life cycle, perhaps margins aren't optimized at that point, and scaling would help with those margins. Is there any appetite from acquiring a business maybe has a little bit more of a turnaround potential to it, whether it's an early stage or later stage type business? What are your thoughts regarding anything like that?
Yeah. I think we always look at sort of cost synergies through a risk lens. I mean, obviously it kind of starts with what's the lowest risk. It's G&A. Then you sort of move on to maybe sales and marketing or marketing and then sales. I think if you're looking at something that's a turnaround, especially if it's a product rewrite, we have no interest in that. There's just too much risk to onboard. Even if you can get it from a reasonable multiple, you just have too much tail risk on that. The synergies that we've mainly been able to realize have been through the bolt-ons. We've had some very successful sort of combinations, if you will, with Strattion and TELUS a couple of years ago. Last year we combined Transact with Seaboard. That's where I see probably the most margin opportunity.
These maturing leaders, like I said, they get margin expansion through scale. We think that's just sort of a better way to get margin.
Then maybe on that point, just take us through CentralReach. How'd you identify that deal? What did you like about it specifically? And what hurdles did you have to get past to make the move there?
Yeah. Really excited to close on CentralReach last month. It sort of checks all the boxes for Roper. It is mission critical. Let me back up. CentralReach is a leader in providing software solutions for the autism spectrum disorder market. It has about 200,000 professionals that use the software every day. What it is doing is really allowing these clinics to be more efficient in the way they, from the time they set up a patient all the way through reimbursement, there is digitization. Through all of those workflows, there is AI-enabled digitization as well, which we really liked about the business. It is a great business in that it is increasing efficiency. It is helping realize more revenue for the business. It is in a great market.
If you think about the sort of the tailwind there is really around, there's so much more demand than there is supply. There are fewer therapists than there are individuals that need the treatment. You are talking about 900 million, just to scale it, 900 million hours of demand and 300 million hours of supply today. We think that sort of tailwind can go for the next decade. You also have reimbursement that is available, both commercial and Medicaid. Those are all positive parts about the market. CentralReach, like many of our other businesses, is the market leader. With consolidation, we tend to kind of win with the winners, if you will. We see benefit there. In terms of, there are just multiple paths to growth, so we like that.
In terms of both cross-sells, there's a bunch of AI solutions that have been released in the last 12 months, and we're seeing tons of traction there. That's through scheduling. That's through sort of claims adjudication, note taking, right? Translating the notes from the session in a Gen AI format to make it much more seamless. Just like I said, just kind of growing with the market. Really excited about that. This is a business that we looked at, oh, probably for the last year. It's just really part of the cultivation work that we're doing, that we have been doing, but we're doing increasingly more the last few years with sort of increasing the talent in our M&A department to really go deep with a lot of sponsors on the portfolio and find out areas that we can get a first look at.
This was one where we had developed a relationship with the management team and really did a lot of our homework. It really matters when you do your homework and you ask good questions that kind of wins over the other side. We were able to just sort of move swiftly as we do and close on the deal.
Yeah. Like to me, that's a very down the middle Roper deal, right? Like a niche software platform. I could see where the growth paths. You've also started to do a little bit more bolt-ons now, and you mentioned that when I ran in here. What allowed you to shift that strategy a little bit? Now if you're weighing two bolt-ons versus one big one, where's the preference if there is one?
Sure. My preference, I mean, it depends on the value, right? You probably have to do five for one. I would prefer to do bolt-ons just because you sort of increase the organic growth of the platform, as I said, and you get some synergy opportunity. It is low risk. I mean, I think everything we do is low risk, but you even get more sort of certainty there with bolt-ons. I would say kind of pre-Neil CEO days, the bolt-ons were sort of opportunistic. They were, I would say, probably more on the arbitrage side of things, not as strategic. What we learned even acquiring Deltek and some of these other software players, we had real opportunity to do some add-ons to another one where we had real opportunity to buy product into the distribution that we have.
We got comfortable and confident as we saw success there that we really should be more intentional about this. Because prior, we kind of let the businesses sort of do it on their own, and we did not really say, "You should have an inorganic strategy." Now we have that for every single business. We just see that there is a ton of opportunity to capture there. That was really the confidence, the capability. Now we have a pretty well-worn M&A process and diligence process around that such that we sort of reduce risk on any bolt-on that we do.
Is that being driven a little bit more by the central function than it used to be on the bolt-on side?
I would say we've initiated it more, but it's a partnership, right? It's a monthly call that Janet and her team will have with each of the businesses around, "Okay, here, after we've selected the targets, who's sort of on first in terms of the conversations we want to have with the right stakeholders, be it the founder or whoever it is," such that we're sort of keeping things warm. The coordination's really important there because you don't want to trip over each other. Once we get into diligence, it's definitely a partnership. We'll do all the compliance-related diligence. Businesses will typically, they'll own the financial model, they'll own the commercial side of it with our support.
You originally did a couple of them for DAT with Trucker Tools and Outco. Maybe how did those, what was the impetus for those? Then take us through kind of that process.
Yeah. No, it's a great example where we've sort of set the strategy for DAT. We have a great new leadership team. Jeff Clements, he became the CEO just probably, I don't know, half a year ago, a year ago. He joined us as a product leader and then transitioned to the CEO. They have taken a real strategic view. By the way, Jeff has a huge network background. He worked at eBay. He stood up the e-commerce at Walmart. He really understands network. We really did a deep dive on how can we increase sort of the network value for all stakeholders and just sort of realize more in this because we've got this captive audience of brokers and carriers. How do we sort of increase that?
This was specifically around what are some of the pain points for, in this case, it's brokers, right? With Trucker Tools, there's a lot of fraud in the spot. There's a lot of fraud in the spot market. Shippers want to know where their cargo is. They're going to the broker saying, "You need to tell me where your trucks are." The broker's like, "I don't have that information." With Trucker Tools, they do have the information, and they're able to sort of track that. That's a key. Just again, it's an enabler. We recently acquired a business called Outco. This is a fintech company basically enabling factoring to happen in the spot market. It really helps carriers get cash faster.
If you think about it, they go into the load board, they already see that Outco, they can click on the Outco and they can go right in. It is just kind of like a one-stop shop.
Outco is the financing mechanism itself?
It is today. At some point, it'll come onto our balance sheet for a little while, but we'll assume to get a partner. We're not sort of funding that. Super excited about the tech. We had partners that we used for this before for factoring. We had sort of a rev share agreement. We saw tremendous growth with those. Those partners saw tremendous growth with us. We're really excited about owning this part of the ecosystem now.
Yeah, that makes sense. I mean, just since I've covered the company, the portfolio has changed quite a bit. I know you talked about it with Michael before I got here on the move towards software. You still have a decent amount of larger product businesses. You've divested some similar types of things in the past. How do you see those businesses within the context of the current portfolio?
I mean, I think they're great vertical market technology businesses, right? I mean, a lot of it's tech-enabled products. To us, we see similar sort of characteristics in terms of there's a lot of recurring revenue. The businesses are growing tremendously. They're winning in their markets. To us, the whole point of divesting the energy and industrial businesses was to remove the cyclicality out of the portfolio. I think we've effectively done that. We're delighted to, as long as investors are happy with it, we're happy with it. We'll just continue to own them because they're a key part of our growth and they're just wonderful businesses. Anything to add there?
No, I'm good.
I mean, to that point though, you're kind of in an interesting spot, right? When I launched a new, it's an industrial company, now it's a software company, but you kind of have the benefits of dual-class ownership essentially across multiple verticals. I guess, how do you weigh a potential divestment of something versus losing the ability of some portion of your investor class to be allowed to invest in you?
Yeah, I guess I do not think of it that way. I just look at it through the lens of how do we optimize free cash flow compounding. I mean, frankly, I think if we can get to the generalist portfolio manager, I think they will be, in my view, you can challenge me on this, but they will be fairly indifferent to what sector. It is more about the model and sort of how we build businesses and the types of businesses we own versus sort of what the portfolio is made up of. As long as there is certain industrial logic, which I think to me is the market leadership, the high margins, all those things are sort of continuous throughout the portfolio.
I'd be curious for the next context.
Yeah. No, I would agree. I think we've never defined ourselves by our end businesses first. I mean, our businesses obviously matter a lot to us, but at our core, we're a cash flow compounder. That resonates with all audiences. I think what we've done is there's parts of our story that you might have to emphasize a certain aspect of it a little bit differently. Certain metrics you hear us talk about a little bit more as it relates to software investors. We're talking more about gross retention and sort of bookings growth, that sort of a thing. I think we can highlight different parts of our businesses to speak the language of the respective audiences. I agree with Jason in the end, there's not a huge divide in terms of it.
With my role going to a lot of these conferences, I can tell you there are "technology-focused investors" going to more multi-industry conferences and vice versa. I was at one yesterday. It was a tech conference and there were industrial investors there. I think that we'll talk to people wherever they are and whatever their focus might be. I think there's less of a hard line between the two in our experience.
It is more just using appropriate verbiage for the people that you are talking to, I guess, to tell the same story.
Yep.
Fair enough. Cash flow, you mentioned at your core, you're a cash flow compounder. I know that we've written about that. We've talked about it a lot. I guess I've heard CRI mentioned less over the last several years. I know it's still kind of like the way you operate, but is that intentional? How should we think of, was there kind of a shift nuance there?
I think it's a nuanced shift. I think cash, return on investment, cash is still there. Cash is so important. Cash flow growth is super important. The CRI strategy, which was super effective and still is a big part of our ethos, was to buy businesses that have sort of better, more negative sort of working capital than the businesses we own. That was the strategy up until we kind of got into this realm where how many more negative companies that pay annually, customers pay annually in advance, can we buy? That sort of can naturally just limit the amount of businesses you can look at. As long as they are sort of generating cash as they grow, we're good with that.
That is really the shift. CRI was able to, and by the way, the strategy of doing that was to re-rate the multiple, which we did. We still think there might be a little bit of multiple re-rate if we increase organic growth, but really now it is all about cash flow growth, right? Just as we grow cash flow, then the stock price will increase. That is really the, so everything, every business we look at from a deal perspective, we do go through CRI. We look at it as a key input, but it does not have to drive the whole decision.
Okay. So I mean, I know the object in the past was to buy things that would move the CRI up the curve to re-rate to that point, right? So now it's less, it has to be more CRI. It doesn't have to necessarily create the CRI, it just has to be attractive to CRI and compound the cash flow.
That's right. It's all about kind of year five, EBITDA multiples, and sort of how we think about returns.
When did that really kind of click that we're moving off of that a little bit?
Oh, it's around the, I would say 2021 timeframe. Yep.
I guess we should talk AI, and it's probably the biggest question we get. A couple of years ago when we started with the whole AI boom, it was honestly one of the reasons we downgraded at the time was the questions we were getting from people. We didn't agree with them, but I was like, "If I'm going to have to answer these questions every day, stock's going to have a hard time working." I think the thesis back then, and we've subsequently upgraded, it's one of our top picks just to be clear on the same page, but that AI was going to eat your businesses. That was the thesis. Just let's start there. How do you respond? How did you respond to that? What have you seen over the last couple of years?
I mean, I think everybody was still trying to figure out what this could mean for all markets 18 months ago. I think we were all experimenting at the time. I think what we came to learn and got conviction about is that the tech has been democratized around being able to do, if we're going to be disrupted, we have the right to win before anybody else, right? Because the tech's available. I think being a vertical market software player, you've got access to the data, you've got the context. It's really our markets to win. I think if anything now, we're more convicted about the TAM expansion opportunity because of the agentic workflows that we can help to monetize, right, through labor replacement and the like.
We're getting more convicted as we're seeing more, as we're seeing the technology evolve, and the closer we are to it, the closer we are to our business models, the ability to develop products, that we're in a very good spot there. Yeah.
What are maybe a couple of examples of how you're utilizing this as a tool to help you make these businesses better rather than being a threat from an outsider?
Yeah, look, I mean, for us, first it was education and now it's really like harnessing the power of collectively across Roper. Every week, Neil is sharing kind of new thoughts about how different business models can be disrupted. All of our businesses are now going through and kind of reimagining not only what their business is going to look like, but their customer's business is going to look like and how they're going to participate in that. They are all re-underwriting that just from a business strategy standpoint. We have agreements with all the major enterprise players now. All of our businesses are in and working in a shell of a Roper environment, but they have their own sort of instance. We are leaning in heavily to that. Now we are starting to share use cases across Roper.
I think Aderant was one of the first to come out and we've got ConstructConnect that's making a ton of progress on a real TAM expansion for them around, I can give you a specific, but we can keep going to Frontline has an AI-first strategy. It is sort of all happening real time here and we're super encouraged by what can happen. I'll give you the one, for instance, on the TAM expansion. ConstructConnect is a business that does pre-construction, they basically provide pre-construction data. That is their primary business. They get data for both public, which is publicly available projects, but also private is sort of the secret sauce. They have all of this data that they can use to then inform another product they have, which is an estimating tool essentially.
It can take a blueprint and do the lift-off to estimate what that project's going to cost. We've been able to use this tons of rich data that we have to feed LLMs to then inform this product called Boost, so takeoff Boost product. What that's going to enable them to do is essentially you've got a $10 billion or more market of estimators out there that'll now have the ability to be more efficient or have it built even more importantly, take some cost out of that.
That was a service that was not available as part of the core product?
It was a service, but it was still very manual. It was basically a software tool, not an actual AI takeoff solution.
Interesting.
Yeah. I just add real quickly, I mean, you've covered us for a while. Our model is very much a decentralized operating structure. This is an instance where there's much more push from the center than really anything that we've had. I think that reflects the magnitude of the opportunity that we see and also the importance of acting urgently for our businesses. We're not being overly prescriptive. There's not like a playbook that all 29 are going to follow, but they're all going to craft that based on their deep knowledge of their individual markets and all that. We're definitely, as Jason said, trying to educate, arm, make sure everybody's ready to act quickly on this.
How much can you do centrally for that? Are there different models for different businesses? Is the push just a mandate to figure out a way to harness this and kind of go out and do it? Is there centralized resources and things like that?
Yeah, I mean, I'll give you the other thing we're doing is we're doing a value chain analysis for our top six businesses where we're going through clinically what is this going to mean for their customers? And then how is that going to inform product strategy? And then how is that going to evolve our product roadmaps for those businesses? We're not prescribing it, but we're sitting partnering with them to go through that analysis to make sure that we do it. I think what we're also seeing just on the internal efficiencies is Cloud, as an example, Cloud Code is now being adopted across a number of our businesses because Deltek did a webinar two months ago on specific use cases of why this is working, not just from the leader, but from several of the developers.
Just that power of being in a portfolio of companies where they can learn and kind of have the free-flowing information has been super helpful as well.
When you're evaluating targets now, I assume this has to be a critical piece as to ensuring that this can't be disintermediated for whatever reason by something like that. How does the evaluation process change?
Yeah, I think that's 100% right. I mean, even if it's seed-based, we have to kind of look, okay, well, it's seed-based, but is there an opportunity, again, what's going to happen with our customers? What's that workflow going to look like? And how are agents potentially going to play a part in that? And then how elastic will that be in terms of being able to charge for that? I think that's one aspect. The other is what's the mindset of the company around AI, right? I mean, you have to get, there's some lead time around that to get leaders bought in and the company bought in. Are they an AI-first? Are they taking an AI-first approach to running their business? You got to look past sort of the investment banker sale on that.
Is it truly something that's going to be something that we can gravitate towards? CentralReach is a great example of that where not only are they, their business model is serving therapists that have to tactile, sit with their patients. That's not going to be disrupted, right? They have this AI-first mindset where they had an AI leader that was separate from their development leaders. They had this very interesting way of developing products. There's conflict, good healthy conflict between software development and AI. We've actually thought that was a great model to sort of emulate. We've shared that around the portfolio.
For what it's worth, and I can say this as an industrial guy, all the pushback we get currently on AI as a threat comes from industrial analysts and the software analysts who definitely know more software than I do. I think that there's no risk of that. That's an interesting dynamic there. We have only a few seconds left here. I'll turn it over to any last minute questions from the audience. I think otherwise that's a good place to leave it. All right. Thank you guys for joining us. Thank you, Michael, for standing in.
Yeah.
We'll see you guys through the rest of the conference. Thanks.