Great. well, next up, it's my pleasure to have Roper here. I think all of you know Neil and Jason, CEO and CFO. I think we'll have a couple of introductory comments from Neil, and then go into questions thereafter.
Great.
Thanks for coming.
It's our pleasure. Thanks for having us. Long commute from Sarasota to Miami, appreciate the proximity. Delighted to be here. Just a couple pages, just a couple minutes. If you're new to our story or you're just being reminded about what Roper Technologies is all about, in a sentence, our ethos is we focus on compounding cash flow by acquiring and growing niche leading technology businesses. Each one of those words are specifically chosen with emphasis on compounding these and growing these leading businesses that are in small markets. If you look at the composition of our revenue, it's really evolved.
You know, in 20 over the course of the last three or four years, we've divested about 40% of our 2018 revenues to have a portfolio that looks like this, one that is meaningfully less cyclical, one that's more recurring in nature here. You can see that $2.9 billion of revenue is recurring in nature. It is a bit more growthy. Five years ago, 3.5%-4% organic growth. Last couple of years in the 8%-9% range and guided to be 5%-6%. Our core ethos has always been about asset intensity or the lack thereof. It's also meaningfully a meaningfully less asset-intensive portfolio of companies. You can see here the growth rate over time and the margin structure.
We're blessed to have a business that's plus or minus $6 billion of revenue and 40% EBITDA margins. A very large percentage of that converts to free cash flow. The portfolio is comprised of 75% of vertical software, application-specific vertical software businesses across a variety of end markets: legal, education, healthcare, construction, transportation, media entertainment, education, a lot of insurance in there. 25% technology-enabled or medical and water products. The largest water meter business and a handful of medical product businesses. The way that we think about creating value is we have these businesses that are the market leading. They're in these small, highly protected end market. The end markets are growing, every one of our 27 businesses are either number one or number two in their markets, so quite defensible.
We compete on this notion of customer intimacy. As a result, we have an organizational structure that is super autonomous. We have a very small center, about 16,000 people in the company, only 75 at the center. We have 27 everything. We have 27 presidents, CFOs, ERP systems, strategies, operating frameworks. We focus at the center on helping our businesses get better over a long arc of time, as I mentioned at the onset. We do this by helping them think about their strategy. We help them think about how to execute strategy. We help them think about how to get high performance out of their teams and really just focus on continuous business building and improvement. When we have these businesses that are in good markets, they get better over time. The organic growth rate improves.
We take all that cash flow, we have this very structured, systematic, center-led capital deployment approach to acquire the next great business, and the loop continues. That's us in 3.5 minutes, and perhaps we can get to, get to your questions.
Thank you, Neil, for that. That, you know, that little deck speaks to a lot of the general strengths and appeal, I think of the company to shareholders. Here it's mostly a sort of industrial and generalist audience by nature, but clearly there's more and more tech investors looking at the company as the portfolio has and continues to change. I don't know if there's any flavor or elements you'd highlight for tech investors in particular as to why, you know, this is a vehicle that they should focus on.
Sure. Well, I'll say that the concept or the notion of, vertical software is not a new thing for the tech investor, right? As a general matter, there's horizontal software and vertical. We're a portfolio of deeply verticalized software, and there's, a whole cohort of that.
Mm-hmm.
Investors like both, but the reasons they tend to like vertical software are the things that we just talked about. It's application specific. We don't do ERP broadly for professional services. We do ERP for law firms. We do ERP for architects. It comes out of the box ready to go with very little, if any, customization or configuration that's required. When you have that, and you're competing on intimacy, vertical software companies generally do have very high gross retention, like very high, mid-to-high 90s gross retention. The book of business is very predictable.
Mm-hmm.
It's again, it's just competing on that customer intimacy. You trade away a little bit of the hypergrowth for that stability, right?
Yeah.
Vertical software businesses, as a general matter, are gonna be more moderate growers.
Yep.
Which we would sort of view ourselves as that, improving in our case, really when we'll talk. You have some questions on how we've worked to improve the organic growth outlook.
Mm-hmm.
Also, the tech investors like to look at this notion of the Rule of blank, right? We're a Rule of 45, maybe at some point a Rule of 50 company to add to your margins and your growth rate.
Yeah.
And so-
That's just organically.
That's organic.
Mm-hmm.
We're very much a rule of 45 business. I think the thing that we're most excited to tell about to the tech investor is most tech capital deployment, not all, but most is bespoke. There's not a software compounder. Like in the industrial setting, you have the whole lineage of old school GE, Danaher, Fortive, IDEX, AMETEK.
Yeah
... Roper about compounding models.
Mm-hmm.
That doesn't really exist in any meaningful way in the software landscape. Software business models are mostly blessed with the ability to generate a ton of cash flow, but then they don't have a great use for it.
Yeah.
We have this go-to-market motion around capital deployment that is an enhancer to the TSR algorithm.
That's very helpful. Just as a quick aside, I guess this version didn't reflect it, but Jason had a recent promotion, so congratulations on that Chief Financial Officer. It was changed in another version, but there we are.
Thank you for that, by the way.
Getting back to the here and now. You know, there is that IT and software focus at the company now, more than ever before.
There are a lot of questions in general for a year now about the IT spending environment, you know, very well-publicized headcount reductions at some large IT companies in software and hardware. How would you characterize that IT spending environment and fully understand that you're sort of niche-focused rather than sort of, you know, generic system?
I'll explain it relative to Roper and our collection of businesses, which is bespoke to us, right? First, the whole point of our portfolio strategy is to work the cyclicality out of the portfolio.
Yep.
We're in these end markets I alluded to at the beginning: healthcare, legal, insurance, both property and casualty and life, government contracting, to name a few.
You get the sense they're pretty stable through cycle end markets, the customers are quite resilient.
Yeah .
What we do for them is required. Our software is required to run their business. We're not a discretionary spend on the edge, if you will, of their IT ecosystem. We're the center of it. As a result, our retention rates, we expect to stay very high.
Mm-hmm.
Also, we tend to price based on a fixed subscription, not a transaction or volume-based model. There's a very small amount of that are in our you saw in the revenue buildup slide. Even to the extent that our customers felt a little bit of cyclicality in their end markets, then our pricing model buffers that as a general matter.
I just want to give you the characteristics of what we do and how we charge what we do. The last couple of years, we grew sort of in the 8%-9% range. Obviously, we've guided a little bit below that. We do expect there to be a little bit of spending headwind.
Yeah.
Again, we don't expect it in any meaningful way to show up in retention. We expect it to show up a little bit in net new. Just a little bit more cautious IT spending. If you're unsure, customers are unsure what the next 12 months look like, it's generally not when you're gonna lay a lot of investment down.
Yeah.
A little bit of slowness there.
Also, if the customers aren't expanding or growing themselves, then we won't have the expansions or the cross-sell that happens as a result of that. That would be the general reconciliation, if you will, between 8% or 9% growth and 5%-6%.
Anything you want to add to that?
Just DAT, right? We had a run up in the freight match business for the last 3 or 4 years, just with the adoption and some of the pricing and packaging we've done. I think that a lot of the pricing and packaging will hold up, but the carriers have come out of the market a bit. We saw a little bit of contraction in the fourth quarter.
Yeah.
We're not expecting dramatic improvement in 2023. That's the other piece.
Perfect. Neil, you'd mentioned, you know, the sort of the broader effort since you became CEO to drive up organic growth and make that more of a focus through the company. You know, maybe help us understand, you know, the progress on that front. You know, how has your own way of trying to drive up organic growth, how has that changed as well, if at all, since you became CEO?
Sure. I've been CEO, 4.5 years or so, we first talk, it's like, "What are you gonna do different than your predecessor?"
Yeah.
It was really this notion of having been an operating person in the company for many years before, just seeing an all-you-can-eat buffet of opportunity relevant to growth, right? Just not sort of trying to go grab it.
It was this latent sort of value driver. We spent a lot of time organizing about how do we do it. We wanted to honor the autonomous structure, have support from the center to be able to help our companies think about growth. We're also cautious about, hey, we're talking about it, we obviously have not some time to see if it proves out. Unfortunately, COVID got in the way of that, we don't have perfectly clean visibility.
Yeah.
We feel very, very good about where we are, right? Five years ago, it was a 3.5%-4% organic growth portfolio. We said a couple of times, 8%-9% the last couple of years.
In a down market, it's, and we anticipate this year, 5% or 6%. We believe we have structurally improved the organic growth rate of the business by a little bit. And we're still chipping away at it.
Yeah.
We still think there's very much opportunity to continue to improve that. This portfolio, again, the markets and the protective nature of markets of what we do is not gonna be a 15% organic growth portfolio. It very much can be a high single digits organic growth portfolio. We're not there yet, but we're working at it and then see a pathway to get there. The way we do it is we're not this is not growth at all cost.
Mm-hmm.
Our margins have, for the most part, been flattish as we've improved the growth rate.
We've done it and translated the growth to margin to cash flow. That's super important. We're not trying to create, you know, a revenue growth algorithm that doesn't translate to cash flow. I mean, it is all about how do we increase the TSR compounding for our shareholders.
Yeah,
translating and finding good growth in the right areas and adding to the TSR compounding.
Understood. I think you mentioned the sort of, you know, 27 or so business units. When you look across all of that range, you know, which are the ones that you might say Roper has enhanced, you know, the most in recent years in terms of organic growth or-
EBITDA margin profile.
Yeah, we could, I could almost ask you to pick a name out of a hat, so you don't think I'm cherry-picking, but I'll name a few. First of all, when we sat in the room 5 years ago and said, we're thinking about we want to try to drive organic growth, how are we gonna do it? We sort of looked at 2 distinctly different ways. Are we gonna look at the portfolio and say there's 5 companies that possess the most potential and focus all the resources there, or are we gonna do a all tides lift all boats and sort of work on structural, systematic, governance-related things? We very much chose the latter, the second.
what I'm about to describe, a couple incidents, a couple examples, is very much the case across 27 of our companies.
Okay.
I'll highlight a couple. The first, and perhaps best is a medical product business that we have called Verathon Medical.
Yeah.
They make ultrasound for bladder volume measurement, but then also intubation devices. Small cameras on the end of a device to help anesthesiologists intubate. We bought this business in the 2000-
Nine.
9 timeframe. founder transitioned for a few years. It was very much a low single-digit organic growth business that was launching a product every 2 or 3 years. Today, that business is a low double-digit organic growth business. It's launching 3-plus new products a year.
Mm.
It's not just product extensions across those two franchises, but is a third franchise around single-use bronchoscope, where it'd gone from 0 market share five years ago to number two in the U.S. We anticipate should be number one in the U.S. this year in market share. It's about this product engine that is now super capable of creating and inventing and launching new products. There's more obviously that are coming behind that we're excited about. So that's an example. Neptune, the conference here, I mean, it's our water meter business.
Yeah.
It's been remarkable where every year we chip away and gain a bit of market share. The evolution of that's been a little bit different. The current evolution is, we've just been terrific on the product and the metering technology itself going from mechanical to ultrasonic, and the team having the processes in place to invent an ultrasonic measuring technology that is precise at high and low flow rates, which is very, very hard to do. For the most part, the competition has to calibrate to one end of the spectrum, and we're calibrated across the entire spectrum. How do you get the meter, the data off the meter?
We've evolved from our proprietary protocols to cellular, then when you have all this data that's now flowing off the meter, what do you do with it? We have the software capability built in residence inside of Neptune to capture and manage that data so you can turn it into cash flow at the utility. As a result, that business was low single-digit growth, and now it's every bit of mid, maybe higher, right? It's just the result of that is they do well with the market growth, but they're every year for a decade, they've chipped away market share and gained it. We could go on and on, but I'll stop with those two. I could give you some software examples if you want to go to that.
It's about the ability for us to build the businesses and build repeatable capabilities that then pay the dividend over a long arc of time. It's not, can we launch a product and spike up growth for a couple of years and be like, "Oh, what?" It's about systematic capability building.
That's helpful. you know, or sticking with that point on organic growth and I guess looking at it differently in terms of how, you know, the costs of driving for that on something like R&D spend, as an example. you know, I know when there is, say, spin-outs or transformations of industrial companies into a different field, software or healthcare or tech, the sort of incumbent investors in that other market tend to be very skeptical. They always think of these assets from an industrial background, they undergrow, there's been no investment. They're gonna struggle to succeed. Needless to say, that view is wrong most of the time. In Roper's case, you know, how do you deal with that question mark around, do they invest enough organically in R&D?
You know, how do they ensure that they're getting a good return on the R&D dollars that they're spending?
Sure.
Um-
I try to start with a foundational element to our culture and our enterprise, which is we pay all of our operators to grow organically. I can't overemphasize the importance of that notion. We don't pay people to achieve a budget. We pay people to grow. As they increase their growth rate, we do not move the goalpost on the growth. If a company is starts earning at 5% growth and has maximum sort of full potential earnings at 10%, and they inflect their growth rate and they're growing 12%, then they're in overdrive into perpetuity, right?
Mm-hmm.
There's no caps on the cash compensation inside of our enterprise. As an operator in our business, your incentive is to figure out how to drive EBITDA and cash flow growth in the business over a long arc of time and sustain it. If you're Amy or Earl or any of our operators running our businesses, you're like, "How do I do that?" As a general matter, it's a go-to-market motion or product motion. If we're going through our strategy work or annual operating work and we need to invest more in R&D and it's gonna pay off in the future, we're gonna certainly underwrite that. For the most part, that's not what has to happen. Structurally, our application software businesses are in the mid-teens. R&D is % of revenue.
Yeah.
Our network businesses are sort of in the 10-ish% range. That reflects the intensity of the code base. When you're building software that enterprises run on, ERP software, it's just more intensive code. When you're building software to organize a network like DAT or a data informatics business like ConstructConnect, just the intensity of the code base is lower, so the investment required is less. In some instances, like DAT, we see an opportunity to really unlock a ton of growth. We increased the R&D as a % of that company from high single digits to low teens over the last 2 or 3 years because there's an opportunity. For the most part, structurally, we feel that we're investing in the right level.
The final thing I'd say is the first look, when we do think we need to do something better is around choice. It's not about layering on the next new thing, it's like, can we make a choice to stop doing something to then start doing something, right? We really lay in the notion of strategic choice, very rarely can you stop doing something to then fund something that's more important. Obviously a productivity lock. I mean, we are far from optimal in terms of how productive our R&D capability is. Just like lean manufacturing, there's lean principles that are applied to get more lines of code developed, and that's certainly pervasive through our culture.
If you wanna add to that would be incredible.
The only thing I'd add is that, you know, our presidents are primarily builders. They're not PE transactors. You know, our selection process sort of offsets any risk that they're gonna, you know, under-invest in the business. They're there for the long arc, so they're gonna make those trade-offs and make the investments that are needed to sustain long-term growth.
Perfect. Just on the near term, the sort of, you know, the organic growth outlook, I think the sort of non-recurring software is just over 10% of the business, grew mid-single digits last year. What are you sort of dialing in for this year? Again, you're very cognizant that maybe some caution might be warranted for the macro. Maybe just hone in on that non-recurring piece. Also, Jason, you mentioned, you know, the carrier and freight matching elements-
Yep.
in network. you know, how is that playing out? What's expected for 2023 there specifically?
Sure. I'll start with non-recurring.
Yeah.
Two-thirds of the revenue is service-related, a lot of that is, you know, either in backlog or, you know, we have commitments for the customer to execute on that.
Yep.
That should grow in sort of the mid-singles, for this year, which is consistent with history.
Mm-hmm.
When you get to the perpetual revenue, which is about 1/3, that, you know, what we're seeing, that's what we talked about earlier, just a little bit of slowing in the macro. That's one part of it. We talked about Deltek and GovCon, we expect some recovery, but not a ton this year. Then, just broadly, you know, we have companies going, or customers going to the cloud, so you're getting more uplift in SaaS and subscription than you would in perpetual license. That's probably gonna be down a little bit. Net-net, I'd say sort of low singles to flat for the non-recurring business.
On DAT, I think we talked about, you know, I alluded to sort of what the prevailing market says, which is gonna be a recovery in the freight market in the springtime.
Yeah.
That's certainly what DAT thinks. You know, January looked a little bit better than that, so we're encouraged by that, but it's still early days, so we'll see how things play out.
We're definitely taking a more cautious view.
Yeah.
-on DAT until we see it play out.
Okay.
I just wanted to emphasize 1 point. You know, we have, as we showed on that revenue build-up, about $900 million of on-premise maintenance.
Yeah.
As that's shifting to the cloud, that's gonna lift and shift at 2-2.5 times that base. There's a $1 billion-plus revenue, latent revenue driver inside the organization that'll manifest over a decade. We're going at our customers' pacing, as we've talked about, versus forcing it.
Yeah.
That's the good news, as Jason alluded to, as that migrates, then the perpetual will essentially go to zero, right? The $200 million of perpetual go to zero. On balance, as that happens, it's a meaningful net growth driver for the organization, both on revenue and cash flow.
Got it. You know, you mentioned, Neil, a sort of, you know, focus on growth that's profitable, so margins are stable. Should we think about that growth algorithm as being, you know, mid-single digit to high single organic, the few points of acquired revenue growth on top and then sort of flattish margin within that, just as you bring new businesses in and keep reinvesting? Is that.
I would characterize it slightly different. We feel from the organic piece, we feel the organic sort of cash flow. There's gonna be a little bit of margin expansion over time, maybe incrementals in the 45% range over time.
Yeah.
-versus, you know, fleet of 40, the margin of 40-
Mm-hmm.
on EBITDA. So that's gonna sort of be very solidly high single digit organic cash flow. Then when you look at the amount of capital we have to deploy and the way we do it, the type of assets, the improvement we've had with the businesses.
Yeah.
We're very, very comfortable and confident in the mid-teens cash flow compounding, is how we would sort of orient to that question.
Cool. On the sort of the acquisition front, you know, last year was an extremely challenging year for sort of global M&A in general and overall activity. What are you seeing this year to date? Again, it's seven weeks in, so probably not a huge change, but, you know, are you seeing more things bubbling up or no, it feels tough and so getting deals of size done-
Yeah.
is not gonna be easy.
If I may, just on 2022-
Please.
We feel terrific about 2022. It was a hard environment.
Yeah.
We got $4 billion deployed.
Yeah.
With Frontline plus 5 bolt-ons and we feel fantastic about that cohort.
Mm-hmm.
Both the quality of the cohort, the value of the cohort, the growth potential, it's Roper-esque in every sense.
Yeah.
We feel great in a very difficult environment, being able to get the $4 billion deployed on the back of all of the portfolio restructuring work that we did. The good news is that, we. I mean, we're still relatively small amount of capital we have to deploy, you know, $3 billion or $4 billion a year. It's not tens of billions a year.
Yeah.
Against a backdrop of hundreds of billions of tech deals that happen every year, right? We're still, you know.
Yeah
...have a very large pool to fish in, which allows us to be patient and opportunistic. To your point about how this year is, it is early.
Yeah.
I think we were talking about it yesterday and on Monday, I would say in our Monday meetings about capital deployment. Feels like there might be, like, ever so slightly a little bit of thawing.
Mm-hmm.
A little bit of realization around where asset prices really are. Our belief for this year is it's gonna continue to be difficult because of the dislocation.
Yeah
between cost of capital and asset prices, especially in the private markets.
Okay.
those will come in line at some point.
Yeah.
Either capital, asset prices will come down or cost of capital will go down based on what the Fed's doing. We will continue to be super patient, but super opportunistic.
Mm-hmm.
I mean, the reason we're able to do Frontline, there are very bespoke reasons for the seller at that moment, and we could strike a deal that made sense from a value point of view. We're super active. There's lots of activity in the market. The question is, will be deals that get made, and that's where I think there'll be fewer handshakes. You know, Five three years ago, every deal on the market got done. Now every deal on the market's not gonna get done. It's gonna be a much smaller percentage because of the bid-ask spread.
Yep. When we think about sort of overall, you know, financial returns from future M&A at the company, and maybe talk a little bit about the expected returns on the deals you enacted last year. Kind of what should investors expect?
Julian, as you know, and our investors certainly appreciate, our central guiding North Star of value creation is notion on Cash Return on Investment.
Yeah.
Right? This notion of asset intensity goes down and you don't have all the calls on capital, and therefore there's more capital and cash flow available to the shareholders, and that ascribes to a higher value. We're gonna show a page in our investor day in a month or so that shows that correlation.
Mm.
That continues to be our North Star. As we have built the capability over the last 5 years to improve the organic growth rate, improve the operational capabilities of our existing portfolio, that certainly translates to the way we think about getting even better returns from our capital deployment. We're excited about we've got a great track record of doing it and then now an option to have better returns going forward.
Perfect. Then, you know, lastly on the questions before the audience response survey, you know, the recurring revenue piece is obviously the bulk of the company's cash flow and revenue now. What are you driving for on long-term growth for recurring revenue? What are we thinking about that for this year?
Do you wanna take a crack at that one?
Yeah. I mean, I think it's pretty consistent with our overall enterprise organic growth as we become more recurring. you know, even in our Tech, segment-
Yeah
...we've got a lot of recurring business through Verathon, and you can argue a big piece of Neptune is recurring just because of the replacement cycle. I'd say it's in line, especially as we go more to the cloud. There'll be less perpetual, less non-recurring that kind of comes in and out.
Perfect. Lastly, industrial. You know, realize you don't have much of it, and we don't sort of see it really anymore in the financials. What's the sort of path or timing on monetization of the stake you retained?
Yeah. It's for those we package up 16 of our industrial businesses and sold 51% to CD&R. The company's been named Indicor.
Yeah.
Our partner, CD&R, they make money for their limiteds by growing businesses and then getting liquidity in a 3 to 5-year period.
Yeah.
We obviously have the work through a cycle. It's probably a public offering for the business.
Mm-hmm.
We've got a lot of stuff we have to do at the company level and the board to sort of create a company that has the basis for being the next great industrial compounder.
Mm-hmm.
Think of it as a, you know, they underwrite the 3 times plus money on money return.
Yeah.
That's sort of where we're heads at. Three to five years, maybe there's $2 billion or $3 billion ± that will fall in our laps. We'll deploy that to buy the next great Roper company.
Perfect. Yes, let's switch please to the audience response survey. The first question with the gray boxes, do you currently own the stock? For context, we normally get about 60, 70, 60% no as the typical response. Okay. There's more true believers in this audience than others. Secondly, general bias towards the stock, you know, right now-
You wanna predict that one too?
Should be positive based off the first one.
Can we vote?
Sure.
Yeah. 60% positive. Thirdly, you know, this one is around through cycle earnings growth. The peer set is obviously in flux to a degree, but this conference is, you know, U.S. industrials, if you like, would be the peer set, rightly or wrongly, to think about. It should be above-
Yeah
...you know, consistent with history and the future. The next question, this one for Roper may be less. Yeah, it should be between one and two, more clearly.
I guess there's a fine line between predicting and biasing, right?
I'll be quiet.
Okay. Interesting.
Next question. I'll be quiet. It's the question on what PE should Roper trade at. Yeah, 20 times plus. The penultimate question next is around sort of, you know, what are the main reasons why more people don't own the stock or, I think it should be 20 times, not 30. This kind of thing.
Uh-oh, the countdown stopped. Okay, there we go.
Organic growth, the biggest question. Lastly, I think is a question around ESG. It's a new question this year. We'll see how the results look with the rest.
We appreciate the last question because we're allocating about two-thirds of our investor day to the organic growth. That's helpful.
There you go.
Okay.
We're consistent with the other companies here.
Okay.
Neil and Jason.
Julian.
Thank you so much for being here.
Thank you. Greatly appreciate it.
Thank you, Julian.
Thank you, Jason.
See you.
Yeah.