Good morning. The Roper Technologies conference call will now begin. Today's call is being recorded, all participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero. I would now like to turn the call over to Zack Moxcey, Vice President, Investor Relations. Please go ahead.
Good morning, thank you all for joining us as we discuss the fourth quarter and full year financial results for Roper Technologies. Joining me in the call this morning are Neil Hunn, President and Chief Executive Officer, Jason Conley, Incoming Executive Vice President and Chief Financial Officer, Rob Crisci, Executive Vice President and Chief Financial Officer, Brandon Cross, Incoming Vice President and Principal Accounting Officer, 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 prepared slides to accompany today's call, which are available through the webcast and are also available on our website. If you'll please turn to page 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. Now please turn to page 3. Unless otherwise noted, we will discuss our results and guidance on an adjusted non-GAAP and continuing operations basis. For the fourth quarter, the difference between our GAAP results and adjusted results consists of the following items: amortization of acquisition-related intangible assets, purchase accounting adjustments to commission expense, a legal charge related to the settlement of the Berald versus Verathon patent litigation matter. The case related to the sale of certain Verathon products from 2004 through 2016. There are no future financial obligations for Verathon related to this matter.
Next, transaction-related expenses for completed acquisitions. Lastly, we have adjusted our cash flow statement to exclude the cash taxes paid related to our divestiture activity. GAAP requires these payments to be classified as operating cash flow items, even though they are related to divestitures. Reconciliations can be found in our press release and in the appendix of this presentation on our website. Now if you please turn to page 4, I'll hand the call over to Neil. After our prepared remarks, we will take questions from our telephone participants. Neil?
Thanks, Zack. Good morning, everyone. As we turn to page 4, we'll walk through our usual year-end agenda, highlights for the most recent quarter and full year, followed by color commentary for each of our segments, and then the initiation of our 2023 guidance. Let's go and get started. Next slide, please. As we turn to page 5, the main takeaways for today's call are, first, we delivered another great year of strategic, operational, and financial progress. To this end, we concluded our multi-year divestiture program, which was centered on improving the quality of remaining portfolio, namely emphasizing less cyclical, more asset-light, and higher growth businesses. In addition, we successfully deployed $4.3 billion towards market-leading and application-specific software businesses. More on this later, but we also continue to have substantial M&A firepower well north of $4 billion.
Organically, we grew just shy of 10% for the year, while simultaneously improving the underlying quality of the enterprise. During the course of the year, our businesses did a terrific job of innovating and capturing share. Which leads us to our second main takeaway for today's call, that we're well-positioned for another solid year of performance in 2023. Our higher quality, less cyclical, and more highly recurring nature of our portfolio will serve us well during 2023. Now as I hand the call over to our incoming CFO, Jason Conley, let me take a moment and thank Rob Crisci for all he's done for Roper and for me. Rob has been a significant contributor to our success and an important member of our executive team with meaningful insights and contributions across a variety of topics, including our most recent portfolio repositioning.
We're excited to welcome Jason to his new role. Many of you know Jason, but those of you who do not, Jason has been with Roper Technologies for 16 years. He started in corporate IR and FP&A, then the operating CFO at MHA, one of our businesses, and most recently serving as Roper Technologies' Chief Accounting Officer. Since his return to corporate, he has been a member of our capital allocation team and has attended every board meeting. The team and I are excited to partner with Jason for the next leg of our evolution. Looking forward to the partnership, Jason, and thank you, Rob Crisci, for all you've done to make Roper Technologies better than when you joined. Jason, let me turn the call over to you so you can walk through the fourth quarter and the full year financial summary. Jason?
Hey, thanks, Neil. I am very excited and incredibly grateful for the opportunity to work with you and the team in this new role. Of course, thanks, Rob, for your awesome partnership and mentorship over the years. It's been just a great experience working together. First I'd like to introduce Brandon Cross as our new Principal Accounting Officer. Brandon joined Roper about 5 years ago, progressing to our assistant controller, and more recently has led and transformed our audit services function. He has significant M&A and integration experience, this is a natural and well-earned promotion for him. Brandon, I look forward to working together in your new role.
Thanks, Jason.
If you'll indulge me, I'll riff on Roper for a few seconds. I've been blessed to help guide and execute our evolution from Roper Industries to Roper Technologies, which has been underpinned by our North Star belief that cash is the best measure of performance. As we enter 2023, our best years are ahead of us.
We have a family of market-leading businesses with durable growth drivers and terrific free cash flow margins. Further, the leadership teams and talent processes at our businesses are the best in the company's history. Finally, we have significant capacity to execute our proven and disciplined M&A strategy that I've been a part of for many years. I anticipate being quite active on the road this year. For those on the call, I look forward to either meeting you or reconnecting in the coming months. All right, let's get into the financials. Turning to slide 6, we'll do a quick review of our Q4 performance. We capped off a solid year of growth with revenue of over $1.4 billion, which was 14% higher over prior year.
Organic growth was 7% with strength across the portfolio, which was enhanced by 10% software recurring revenue growth. Acquisitions added 8 points of growth led by our Frontline Education business that closed in early October, and currency was a 2-point headwind. EBITDA of $592 million was up 17% over the prior year. We experienced strong operating leverage across the enterprise and improving gross margins in our tech segment to finish out the year. EPS came in at $3.92, which was 17% against prior year and $0.18 above the midpoint of our guidance range. Next, we'll look at free cash flow. Free cash flow of $457 million was down 8% over the prior year. Excluding the Section 174 impact, we were down 3%.
Factoring out a $30 million Vertafore tax benefit in 2021 that doesn't repeat, we're up about 3%-4% in the quarter. Taking a broader view, you can see we compounded cash 11% over a four-year period despite the Section 174 headwind, and we're well positioned for double-digit cash flow compounding going forward. Turning to slide seven. We'll now do a quick overview of our Q4 segment results as Neil will unpack more detail on the full year a bit later. We had a nice finish to a great year across the three segments. For application software, revenue was up 22% to $740 million, with organic growth of 7%. EBITDA margin increased to 45.6% in the quarter.
We had strong SaaS bookings growth and overall solid net retention throughout the year, which is just naturally rolling through recurring revenue in the quarter. Growth was broad-based across the segment, aside from some delayed decision-making in the large government contracting space within Deltek. On margin, we had lower incentive-based SG&A and employee medical costs, some favorability in the quarter. If you look at the full year margin of 44%, that's about where we would expect to be over a longer horizon. Our network software segment grew nicely in the quarter, with revenue up 9% to $350 million, and EBITDA also up 9% to $189 million or 54% of revenue. Growth was led by our freight matching businesses, which continued driving higher ARPU from premium offerings to offset moderating carrier activity as we expected.
Tech-enabled products revenue was $340 million and grew 5% organically in the quarter. Demand remained strong, and we had some orders that didn't get delivered toward the end of the quarter, which will benefit Q1. EBITDA grew 7% to $119 million, resulting in EBITDA margin of 34.9% or 100 basis points over prior year, with strong operating leverage as the price cost dynamic was neutralized in the quarter. Turning to the full year 2022 performance on slide 8. Revenue was 11% higher than prior year to $5.4 billion, with 9% organic growth. EBITDA was 12% better to nearly $2.2 billion, with EBITDA margin coming in at 40.4%.
Depths of $14.28 was 15% over prior year and reflected strong P&L leverage against the 11% revenue growth. Notably, compared to our 2018 pre-divestiture financial profile, our revenue is about $175 million higher, while EBITDA is nearly $365 million higher. Through a combination of organic growth and capital deployment, we've grown despite divesting about 40% of our 2018 revenue. Most importantly, the composition of our portfolio today positions us for higher and more durable growth going forward. Free cash flow came in at about $1.5 billion, so down 7% versus prior year.
It's a bit of the same situation as our fourth quarter, with both the 2022 headwinds of Section 174 of nearly $100 million and the non-repeat of the 2021 Vertafore tax benefit of $117 million. If we normalize for those items, free cash flow grew about 8%. We've had a bit of an inventory build within our tech segment as supply has become more available. This is not a new normal, and we certainly expect that to improve in 2023. If we take this up to a multi-year view, you can see we've compounded cash at 15% over a four-year period. As we look forward, the impact from Section 174 will be fairly neutral, and we expect to convert ±80% of EBITDA to free cash flow.
We're clearly well-positioned for double-digit growth. Turning to slide 9, let's take a look at our financial position. We certainly had a lot going on in Q4. On November 22nd, we completed the majority sale of our industrial businesses, which are now operating under the name Indicor, and received $2.6 billion in upfront proceeds. Also in the quarter, we paid $270 million representing all taxes due related to the majority sale. This yielded us net proceeds of over $2.3 billion. A very good outcome here indeed. Related to our stake in Indicor, this is now appearing as an equity investment on our balance sheet. We'll be updating the fair value of the equity investment each quarter going forward.
To provide a clearer picture of our continuing operations, we will provide a non-GAAP adjustment for this fair value accounting and any tax expense related to this investment. Just looking at our balance sheet, even after our $3.7 billion Frontline Education acquisition, which was completed in October, our net debt to EBITDA ratio stands at 2.7 times. Our solid leverage profile, coupled with strong free cash flow generation and an undrawn revolver of $3.5 billion, gives us $4 billion+ of M&A capacity. Clearly, we are very well positioned for disciplined capital deployment in 2023. With that, I will turn the call back over to Neil to go through our segment details. Neil?
Thanks, Jason. Well done. Let's turn to page 11 and walk through our 2022 highlights for our application software segment. Revenues here were $2.64 billion, up 7% on an organic basis, and EBITDA margins were 44.1%. Performance across this segment was just solid in 2022. Vertafore, our software business that tech enables property and casualty insurance agencies accelerating their growth, led by continued strength in their enterprise class segment. In addition, the two vertical Vertafore bolt-on acquisitions are strategically on point, integrated, and performing well. As we've been discussing, SaaS migrations have been a key theme for us over the past few years, and 2022 was no different. Both Aderant and Deltek continued their SaaS migration momentum, and both grew nicely based on solid customer adds and strong retention.
Deltek was particularly strong in their private sector end markets. As Jason mentioned, Deltek did see some slower decision-making specific to new bookings in the enterprise segment for their GovCon solutions. At our upcoming March 21st investor day, you'll get an opportunity to hear directly from the leaders at Vertafore, Deltek, and Aderant about how they're competing and consistently winning in the market. As it relates to PowerPlan, we liked what we saw last year. PowerPlan was strong, given their refocused and narrowed strategy, combined with a highly aligned team. As a result, PowerPlan crossed a meaningful milestone, launching a SaaS solution for their flagship product, Tax Fixed Assets. Congrats to the team for a great 2022 and looking forward to more great things in 2023. 2022 was a very good year for application healthcare IT businesses as well.
StrataJazz combination with EPSi has just been great. The integration is complete. The number of EPSi to StrataJazz conversions and upsell, cross-sell are both meaningfully ahead of our deal expectations. Clinisys and Data Innovations continue to win in the marketplace. The internal combination of Clinisys and Sunquest has rejuvenated and energized their high-performance culture, which is enabling the business to more effectively compete and win in the marketplace. Data Innovations continues to gain share and evolve to become the de facto standard as it relates to lab middleware. Finally, Frontline, our cornerstone 2022 acquisition, is off to a solid start. We look forward to sharing the strategic and financial success of this business in the quarters and years to come. I'd like to reiterate with what we started with. Performance here, strategically, operationally, and financially was just great in 2022.
Very proud of the team and the performance. Congrats, thanks. Looking to the outlook for 2023, we expect to see organic growth in the mid-single digits based on our market positions and growth in recurring revenue. Turning to page 12. Revenues in 2022 for our network software segment were $1.38 billion, up 13% on organic basis. EBITDA margins were strong at 53.3%. As we dig into business-specific performance, our U.S. and Canadian freight matching businesses were great in 2022. Their exceptional growth is based on many factors, certainly favorable market conditions, also continued product and network innovations, as well as terrific product and package designs that drove increased value for the network participants. iPipeline and iTradeNetwork were stellar performers throughout 2022 benefited from having strong renewal and expansion activity.
iPipeline, like that of PowerPlan, is benefiting from having a narrowed and more focused strategy, namely tech enabling the life insurance and annuity distribution network. Moving to Foundry, which had another great year as part of Roper. Foundry continues to be the market-leading software in post-production media entertainment. During 2022, Foundry's product innovations were impressive, with several new features focused on ML-based automation. Starting in 2023, Foundry's flagship product, Nuke, will begin its subscription transition, so looking forward for solid progress on that front. Growth in our businesses that focus on alternate site healthcare was led by SHP and SoftWriters, and importantly, retention rates across SHP, SoftWriters, and MHA remain extremely high. Broadly, the performance across this segment was great. Congrats to the teams for this terrific year of financial performance.
Turning to the outlook for 2023, we expect to see mid-single digit organic growth for this segment based on broad and sustained growth across the group and a normalization of market conditions for our freight and logistics applications. As we turn to page 13, revenues in 2022 for our tech-enabled product segment were $1.35 billion, up 10% on an organic basis. EBITDA margins for this segment were 35.4% for the year. As expected, EBITDA margins expanded in the second half of the year as pricing and supply chain improvements flowed through. Let's start with Neptune, our water meter and technology product business. This past year was just terrific, with very strong growth based on strong market conditions, strong share gains, and strong adoption of their static ultrasonic meter technology.
In addition Neptune launched their cellular connectivity solution and did a fantastic job migrating a large chunk of their customer base to their newest data management solution. Spectacular job, Neptune. Congrats, Don, to you and your team. Northern Digital, which is our precision measurement tech company, continued to see terrific demand for their optical and EM solutions. NDI benefits from having a strategy that is laser-focused on healthcare applications and an R&D capability that is unmatched in the industry. NDI's core tech is used in countless life-saving procedures on a daily basis across the globe. Verathon turned in another solid year of performance in 2022 as well. The growth is based on momentum across their video innovation and single-use bronchoscope product lines. As you saw in the press release, we did take the opportunity to clean up a legacy patent dispute.
Make no mistake, the innovation capability at Verathon is nothing short of exceptional, and we could not be more confident about their most recent product launches and the new concepts in their development pipeline. As it relates to the single-use bronc space, we hope to see Verathon capture the number one market position in North America in 2023. Our outlook for the year in this segment is in the high single digits area and is based on continued strength and backlog at Neptune, as well as continued growth across our medical product businesses. Specific to the first quarter, we do have easier comps versus a year ago. Please turn to page 15, and let's review our 2023 and Q1 guidance. For 2023, we're initiating our depth guidance to be in a range of $15.90 and $16.20.
Underpinning this guidance is expected organic growth of 5%-6% and a tax rate in the 21%-22% area. Specific to the 1st quarter, we're establishing our depth guidance to be in the $3.80-$3.84 range. Now please turn with us to our final page 16. As we turn to this page, we want to leave you with the same key points with which we started. First, 2022 was a year of great accomplishment for our teams and our enterprise. We grew revenue 11%, 9% on an organic basis, and we did this while continuing to increase the underlying quality of our revenue base. In fact, we delivered double-digit increases in our software organic recurring revenue during 2022. EBITDA grew 12%, and our EBITDA margins expanded 20 basis points to 40.4%.
We successfully concluded our multiyear divestiture program and deployed $4.3 billion against our long-standing capital deployment strategy, headlined by Frontline Education. The second key takeaway is that we're well positioned for double-digit cash flow compounding in 2023 based on our organic revenue growth outlook, contributions from our 2022 acquisition cohort, and having well north of $4 billion of M&A capacity. To this end, we continue to be very active in the M&A markets, but as you saw during 2022, and as always, we will remain super patient and highly disciplined to ensure optimal deployment of our available capital. Finally, and perhaps the most important, the new higher quality Roper portfolio is becoming increasingly more evident, and we've never been more excited about the future of our enterprise.
As we open up to your questions, we'd like to take this opportunity to remind everyone that we're hosting an Investor Day on Tuesday, March 21st in New York. We look forward to seeing many of you there. With that, let's open it up to your questions.
Thank you. We will now go to our question-and-answer portion of the call. We request that our callers limit their question to one main question and one follow-up. If you would like to ask a question, you may do so by pressing the star key followed by one on your touchtone telephone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. Once again, we request that all callers limit their questions to one main question and one follow-up. Today's first question comes from Deane Dray at RBC Capital Markets. Please go ahead.
Thank you. Good morning, everyone.
Morning, Dean.
Hey, just start with a best wishes to Rob. I remember when he was starting as a rookie investor relations professional and just wish him all the best. Thank you.
Thank you, Deane. Appreciate it. It's been a great decade.
It's fabulous. Jason, yeah, I think you've been on every one of our call backs for the 16 years, you're absolutely. We know exactly who you are, and your experience, congrats on the new role.
Thanks, Deane Dray. Appreciate it.
All right. For a question, maybe we can start with a bit of a macroeconomic sensitivity because, you know, typically you don't see much of this within Roper, but just since you called out the Deltek delayed decision-making, Neil, is there any change in the pace of like new customer ads or the migration, new logos? Anything that you would point to that, you know, perhaps there is some economic sensitivity reading through in the kind of the pace of business.
Yeah, I think the, if I take it at the highest level, you know, we've been 8%-10% organic the last couple of years. Obviously, we're guiding, you know, a little bit below that for 2023. I think you see it in our guidance model reading through as a general matter. If you take the software businesses, our retention rates will stay very high. We expect that to the intimacy and the criticality of our applications. Retention rates will be very high. As our customers, I mean, across all these end markets, I mean, if there's macroeconomic sort of headwinds or slowdown, then they're gonna be affected to some degree. We'd expect customer expansion activity, maybe a little bit of net new to be slowed a little bit. The softer businesses will be great.
They'll grow for sure, but a little bit slower. From an end market perspective, you know, we're in a number of end markets that are generally macro insensitive. There's a little bit, obviously, in our transportation business, DAT that we called out on the call, that'll be a little bit slower. There's some hedges inside the portfolio. ConstructConnect should be good in this lower economic environment. Also our medical product businesses, as staffing levels in hospitals gets a little bit easier, patient volume should come back, and that should help those businesses. From a product, you know, Neptune's got a gigantic amount of backlog, which will carry them through much of this year. We feel pretty well set up. It doesn't mean that we're completely insensitive to macro, but relatively insensitive.
That's real helpful. Then let's just switch over to free cash flow, maybe I'll be accused of quibbling. The 161 free cash flow conversion is still elite, but it did lag your 5-year average. I know there's some dynamics here, and you touched on them in the remarks, the Section 174, and the comparison from the tax benefit last year. Anything that on the working capital side or maybe the Frontline Education contribution, because, you know, they're on a different school year, so maybe more of a third quarter collection. Is there any change in the seasonal tilt on free cash flow conversion?
Deane, good question. I think you're spot on. We typically convert from an EBITDA free cash flow, we'll be in the 90s% typically in Section 174. If we adjust for that, we're in the 80s%. You're right. Frontline has a very seasonal sort of cash collection cadence. Their third quarter is when all the renewals and upsells happen, most of their cash comes in the third quarter. In the fourth, you won't see that, you know, converting to cash from EBITDA. That's, that's exactly what you saw. We're looking forward to next year, and especially in the third quarter, be a little bit more weighted than normal.
That's great. That's exactly what we're looking for. Thanks.
Thanks, Deane.
The next question today comes from Scott Davis at Melius Research. Please go ahead.
Hey, good morning, guys.
Morning, Scott.
Morning.
Congrats, Rob, and good luck, Jason, et cetera. Wish you guys well.
Et cetera.
Good luck. You know, Jason, you get to work a few more years with Neil. Good luck.
Thanks, I guess.
Hey, now.
I can say that, I guess. Anyways, I don't wanna climb into minutia here, but I know there's no one particular asset that moves the needle in a huge way. Can we walk back and talk a little bit about PowerPlan? I mean, you mentioned, the narrower product focus, I think I heard you say, which I didn't really understand what that meant, and the, and the cloud rollout again, like, you know, is that how relevant is that to the business? Maybe if we just go back, and you can explain to us again what kinda drives PowerPlan and I'll just leave it there and leave it open-ended.
Yeah. Appreciate the talk. Appreciate the opportunity to talk about any of our businesses. It's been a while since we've been able to do a double-click on PowerPlan. Just to remind you what they do, right? PowerPlan software and services live at the intersection of the financial system and the asset tracking system for these large utilities, investor-owned and public utilities. When PowerPlan software has a perfectly curated view of what the assets look like inside our customer base. When you have that perfectly curated view, and these assets are constantly being updated and changed, they're not static, right? That's why you have to live between these two systems.
We have this perfectly curated view of what the assets are, then you get, you get the most appropriate, you know, tax treatment you can, the most appropriate lease accounting, and a series of other financial benefits associated with that. We bought the business. The business was doing that, but then was also reaching outside its core customer base and the core products I just described, looking for growth, sort of in all the wrong places, if you will. What we did when we did our strategy work with them, going back probably one year, one and a half years ago, is the amount of opportunity inside the core of what they do was large enough to support the growth thesis for many years to come. It's just refocusing back on the core.
That's a common theme. We talked about that. You know, I think you'll see that increasingly more inside of Roper's with your strategy work, right? Not getting too far away from the core and getting distracted. That's what they've done. The first impact of that is they now have this 100% SaaS solution for their principal product Tax Fixed Assets, it just released in Q4. We're excited by that because as you lift and shift your customer base from an on-premise to a cloud solution, there's a tremendous value capture opportunity and it'll unlock some growth for the business.
Can you get pricing in the process? Or is this just more about retention?
No, that's the value unlock, right? We're doing more for our customers with the SaaS solution, right? We're not just hosting it. There's more features. You're on the latest release. We know how to operate our software, you know, ourselves better than third parties, and so it's the efficiency and the uptime is higher.
Yeah.
As a result of all that, you do get price. You know, we'll see. You know, we talked about, you know, there's roughly $900 million in legacy on-premise maintenance in our revenue base, and as that is lifting and shifting to the cloud over a long arc of time, that should lift and shift north of, you know, 2 x, right? There's $1 billion of growth that's latent inside the portfolio as we lift and shift that on-premise maintenance to the cloud.
Okay. I look forward to the Analyst Day. I'm gonna pass it on. Thanks, guys. Congrats on another good year. See you in a couple of months.
Thank you.
Our next question today comes from Julian Mitchell at Barclays. Please go ahead.
Hi. Good morning. Thank you, Rob, and I look forward to working with you, Jason. Maybe my first question, just to try and home in a little bit more on the sort of macro framework in the guide, maybe specifically, I think about 25% of your software revenue is reoccurring and non-recurring, so maybe more cyclical kind of talk. Maybe just remind us sort of, you know, what the organic growth of those two in aggregate was last year and what you're dialing in for 2023 or any flavor of that. Then within network software, specifically, you know, transport and freight, it's almost a quarter of the revenue, and you mentioned you're dialing in, I think normalization was your phrase.
Maybe just any finer point on what that means exactly of growth this year versus last?
Let me take those, Jason and I take those in sequence. I'll set up what the difference between recurring and reoccurring revenue is in our base. I'll let then Jason talk about the relative growth rate. We'll tackle the DAT freight question you're raising. Just to level set what everybody is, if we have a recurring revenue is subscription, contractual recurring revenue. Reoccurring revenue is principally located at our MHA business. You know, we take a percentage of the drug and food spend that goes to the network, and so it's not technically recurring, it's highly reoccurring. It's not. That's probably one of the most stable parts of our portfolio, long-term care, healthcare, residents in buildings consuming food and pharmaceuticals, right?
It's highly secure, for lack of a better word. It's not transactional relative to a macroeconomic sort of situation. I'll stop just in terms of framing recurring versus reoccurring and let Jason take the relative growth rate question.
Yeah, sure. Glad to. You know, MHA, as Neil mentioned, it's really about drug purchases from the pharmacies, and they have very strong retention in those businesses, you know, from a customer standpoint. We always sort of think about the business being maybe at the bottom end of the mid-single digits, maybe a little bit in the low singles. That's, you know, that's sort of what we experienced this year, and that's kinda what we're baking in for next year.
Great. Okay, now let's take to your freight and logistics around DAT specifically. To remind you, there's this tension between the a cyclical freight dynamic and a secular push or secular benefit that DAT and DAT's customers are experiencing relative to the spot market becoming a more efficient place to place freight. There's tension between those two. From a cyclical point of view, we expected and have seen the carrier side of the network reduce a little bit. And we expect it to reduce over the course, or shrink or get a little bit smaller over the course of this year. DAT grew through the 2019 freight recession. I think DAT has grown every year since 2010.
The business is talking about the rate of growth at DAT, not does it expand and contract. It tends to be much more stickier than that. As an early read, you know, January is actually a little bit better. I mean, the number of carriers in the network is sort of flattish through January and not declining. The people in the industry that sort of call, like, the freight timing and if there's going to be a freight recession, actually think there's a queuing for a large spring shipping season, mostly around that's triggered by produce. We might start be seeing a little bit of that bleed in, but we'll have to see how the next couple quarters play out.
That's very helpful. Thank you for the color. Just within TEP, understand the recurring piece is minimal there and it's 99% product-related. Any flavor you'd give us on the sort of what you're seeing in Medical versus Neptune for 2023? Any major difference in kind of visibility between the two or the growth rate expected?
We have the most visibility we've ever had at Neptune.
That's right.
You know, the order volume continues to flow, the order duration, meaning the longer date orders continues to flow. We feel quite comfortable and good how 2023 is shaping for Neptune. For Medical Products, you know, there's actually I think we've talked about a few quarters ago, the reoccurring elements of Verathon became the largest part of the revenue stream. There's a lot of consumable pull-through behind the capital equipment there. Northern Digital has a decently high amount of consumables that are pulled through that Zip. It is more procedure and patient driven. Like I said a few minutes ago, we feel that we're decently well set up there, but it's not in our base case, right?
We saw 6%-8% declines in patient volumes in the areas in which we service in 2022, all tied to hospital staffing levels. We're cautiously optimistic that as the labor markets loosen, hospitals will staff and be able to see patient volumes pick back up to prior levels.
Great. Thank you.
Thank you.
Our next question today comes from Steve Tusa at JPMorgan. Please go ahead.
Hey, guys. Good morning.
Hey, Steve.
Good morning.
Congrats to all.
Thanks.
Rob and Jason, looking forward to working with you. Just on the free cash, you mentioned plus or minus 80% conversion to EBITDA. Obviously, the last couple of years have been a bit volatile around all these tax items. In 2021, I think you had a decent number in of, you know, deferred revenue benefit on the cash flow statement. Maybe just give us a little bit of color looking into next year with concerns around the macro, that can be a pretty big variable. I mean, are you going to be around that 80% in 2023, or will you be kind of more in between what you did in 2021 and 2022, I think adjusted around 70%?
Maybe just a bit of color on the free cash, and then I have a follow-up on Frontline.
Yeah, happy to. No, I think we're feeling very good about the 80%. You know, our deferred revenue, our renewals were really strong this quarter. You know, we felt good how it moved up sequentially, how it was up year-over-year. Just what we're hearing from our businesses, we feel good about the renewals. You know, we're gonna have, we expect, I think I said on the call, that we'll get some improvement on our inventory ratios next year. We had a little bit of build at the end of this year. You know, Frontline will certainly help with our negative working capital profile. They're at negative 40%. Like I said, most of that will hit in the third quarter when all the renewals take place.
You know, of course, if Section 174 gets repealed, this will be a home run year, but we're not banking on that for now.
like something in the $1.8 billion range for free cash for next year?
I'll let you come to your, you know, come to your math on that.
Okay, we will. Just Frontline revenues roughly $95 million this quarter. Is that about right?
No, they were somewhere in the 1980s. We had a few days knocked off at the beginning of the quarter 'cause we closed on the fourth.
Okay. Hey, by the way, really appreciate all the discussion on the businesses and looking forward to the Investor Day, learning more on this portfolio. Very helpful detail on the moving parts of all the different businesses. Thanks.
Appreciate it.
Thanks.
Look forward to seeing you.
Our next question today comes from Allison Poliniak with Wells Fargo. Please go ahead.
Hey, good morning. Just wanna circle back on DAT. You know, I know you talked about it growing historically through cycles, but it's certainly been an unusual one. A lot of new entrants here. Is there any risk to the retention rate should that, you know, spot rate not hold in terms of stabilization if some of those new entrants, you know, I guess, can't survive? I guess along with that premium offering, in this type of uncertainty, does that drive maybe more increase or interest in that premium offering versus just to gain some visibility here in an uncertain market? Just any thoughts there?
Yeah. In terms of the number of. When you say new entrants, I assume you're referring to the number of new carriers that are in the network as opposed to a competitive entrant or the sort, 'cause there really are no new competitive entrants. Relative to the, to the carriers, yeah, I mean, it's been a tremendous last couple of years, driven by the things we've talked about for a couple of years, which is...
Yeah
Th e fluidity and the liquidity in the spot market, which is a secular tailwind and then obviously, a huge boom on the cyclical piece. Historically, when you go look at, like, peak carriers to trough carriers through cycle, the number of carriers declines by ± 10%. We've assumed that it'll decline by more than that in our guidance model because the buildup was unprecedented. So that's sort of We think we have this conservatively planned in our outlook, but it's unprecedented ramp up leading up to this. We do take some early confidence in the carrier count in the first couple weeks of January, right?
The fact that we're flattish versus continuing to see some declines is certainly encouraging, but it's only a handful of data points we wanna see take together. In terms of the premium offering, I mean, DAT has just done a tremendous job creating product and package designs that have more value for all the network participants. It's helped drive some ARPU increases because there's more value that the participants are getting.
Different packages, different features and functionality that they've upsold.
That's right.
Great. No, that's helpful. Just in terms of the M&A pipeline, you know, are you still, you know, under the new portfolio, you know, PE primarily your source of opportunities here? Have you expanded it? I guess if you have, you know, are you looking at, I know CRI is your metric that is your foundation, but are you providing any other controls with maybe some new opportunities out there? Just any thoughts there?
Yeah, we've You're right. We've obviously historically sourced all but, in my time here, I think one meaningful deal from private equity. One was from a small founder or founder. That has been sort of the, the pod in which we fish. That's not exclusively where we have business development activities going on. We've always looked in public markets. We just haven't found anything that's been compelling from a value point of view yet. We'll continue to look there. You could see us get a little bit earlier in the cycle and try to compete a little bit more with private equity, sort of a half a click earlier in the company's life cycle.
When we did the Vertafore transaction and the Frontline transaction, many of our investors said, you know, "Why didn't you buy it when the person you bought it from or the private equity firm you bought it from bought it?" That's something that you could see us explore in the right situations. Still, all that being said, the predominance of what we're gonna do is what we've done for the last 20 years, which is, you know, sort of lower risk, highly recurring software, application software businesses from private equity.
Great. Thank you.
Yeah.
Our next question today comes from Brad Hewitt with Wolfe Research. Please go ahead.
Hi. Thank you and good morning.
Good morning.
Good morning.
You noted that your Adjusted EPS calculation will include the fair value accounting and tax impact of Indicor, why would you not include the minority interest contribution as well? Just wondering what is the logical downside to not including that? Shouldn't it be a positive and growing contribution?
Well, it's a calculation that's gonna be based on many variables, right? It's mainly an accounting exercise. We don't think that. We'd rather see the outcome when we do the exit. We think that's the better reflection of what the economics are gonna be. We feel really good about what that's gonna look like. You know, we've worked with CD&R on a strategy there. They typically look at, you know, several multiples of return on investment, and that's what we're planning for upon exit.
Okay, great. That's helpful. Then in terms of price contribution in Q4, what did that look like? Then also, how much pricing is embedded in your 2023 guidance?
Price for us, I mean, it's a, it's an important lever to our growth algorithm, not just for 2022 and 2023, but all prior years and all forward years. Teasing out specifically how much is price is a very, very difficult thing across our 27 companies and rolling it up to a number that is meaningful. We're not gonna share a specific number in that regard. I'll tell you, the pricing, the value capture that we have, given what we do, the criticality of what we do, we've always had pricing power and pricing value capture, and there's nothing different with that. You wanna add anything to that, Jason? Okay. Perhaps we can go to the next question.
Absolutely. Our next question today comes from Brendan Luecke with AllianceBernstein. Please go ahead.
Good morning.
Good morning.
Morning.
Morning.
Just wanted to take a quick look at macro. One other question here. Is there anything you can offer any color on your exposure to construction end markets and how that's playing into your growth expectations for FY 2023? And I guess specifically, I'd be curious about Deltek, ConstructConnect, and Neptune as well.
Yeah. Appreciate the opportunity there. Let's just take it by those 3. ConstructConnect, to remind you what it is, right? We have a near perfect database of all the construction, commercial construction projects that are in the planning phase across North America. As a result, when it's has a bit of counter-cyclical demand attached to it. When there is a tremendous amount of new projects and you're a subcontractor, general contractor, and building product manufacturer, and business is flowing from everywhere, then you don't have to look too hard for what you're gonna do next. When there's fewer projects, then you subscribe to the subscription service of ConstructConnect, so you can identify what projects are coming down the pipe that you want to, you wanna try to bid for and win.
The ConstructConnect has been a modestly good performer for us over the years. We expect it to actually have a good run here in 2023 as a result. Deltek does have, it's been a strategic focus of Deltek. Deltek is 60% government contracting, 40% private sector. In private sector, the smallest sliver is construction, and we sell software to large contractors, right? That's what we do. That business, in our prepared comments, we talked about how the private sector was very strong in Q4 for Deltek. We would expect and do anticipate some softening on the construction side for Deltek in 2023, and we think we have that fully covered in our guidance. Neptune, we believe strongly that Neptune is not a cyclical business.
As you sell water meters and water meter technology to these, to the municipalities, they tend to have a budget for meters. When there's a large new residential new construction, then a higher percentage of the budget goes to install new meters. When there's fewer new starts, the budget stays the same, but they take the meters, and they do the retrofits and trade outs of the aging fleet and infrastructure. That is a general across cycle sort of view of Neptune. Our confidence is further buoyed by the fact we have this just unprecedented amount of backlog at Neptune for 2023. We think that Neptune will perform well for us this year.
Very useful. Thank you.
Yep.
Our next question today comes from Rob Mason at Baird. Please go ahead.
Yes, good morning, and congrats as well to Jason and Rob. Maybe just stick on the technology-enabled product area. I think the there was a mention of some products didn't ship in the quarter, maybe got pushed. Just to step back, maybe update us where you think you are around supply chain, just on the product side in your businesses. I'm curious what kind of impact that, you know, those deferral shipments might have had in the fourth quarter.
Let me just set it up, and I'll hand it over to Jason. In TEP, you know, we talk obviously about Neptune, we talk about medical products. There's also a small cohort of RF product businesses, Inovonics and rf IDEAS. The fourth quarter was particularly brutal, supply chain-wise on those RF product businesses. With that, I'll give it to Jason to sort of talk through anything you'd like to.
It wasn't significant. It was probably in the $5 million-$10 million range, and it was across a number of businesses. I think we expect, you know, the first quarter for TEP to be up a little bit more than the rest of the year because of that and because of some of the easier comps, maybe low double digits in the first quarter, but that's sort of the range. A lot of this is in the rearview. Of course, things do pop up here and there, but we're not hearing as much, you know, sort of meaningful impact, you know, in the quarters.
Sure. Sure.
As a general matter, we're not the only ones that the supply chain is generally, as Jason has said, improving. There's essentially, you know, the chip shortage and chip issues. There's more of a glut globally. It's just... You're not just hearing that from us. We do think this all, the supply chain issues abate over 2023.
Sure. Sure. Neil, you've made several references to Neptune through the call and, you know, in share gains and the strength in your backlog. That tends to be a business where share doesn't move around that dramatically. I'm just, you know, could you expound a little bit just on how, you know, what's going on there, what you've done, whether it relates to, ultrasonic adoption or the introduction of cellular, or it's a broader effort at Neptune that's driving that?
Yeah. Neptune has been a just a steady and consistent share gainer made the whole time I've been here, right? I mean, for a decade. The reasons for that are manyfold, but they have a product orientation that starts with, they never wanna strand their existing customers with technology. For instance, this goes back to the prior iteration of communication software, but the proprietary protocols between mobile and fixed point.
You know, Neptune has a solution where if you're a rural municipality and you can have one fixed point, roaming points, and still have some manual reads, and the master data management software package in Neptune can ingest all that data, and you don't strand a customer having to pick one piece of technology for the totality of what they have to do. It comes from a product orientation that starts with flexibility. The second thing is the products are just particularly well thought out for the long arc of what the customer wants to do. For instance, on the large commercial meters for ultrasonic, you know, you have to be able to read high flow and low flow equally accurate. Our products do that.
Think about a big hotel application, you know, a trickle that happens at 3 in the morning versus the high flow when everybody takes their showers in the morning. Our ultrasonic meter will perfectly read the low flow and the high flow, and the competitive products have to tend to be focused on 1 or the other for the precision. More so for that application, when the ultrasonic, the battery that drives the ultrasonic technology needs to be replaced. In our case, it's essentially a drop-in battery. The competitors, you have to cut the meter out and replace the meter. It's small thing... It's seemingly small things like that that help drive market share gains over a long arc of time.
Final thing I would say, in 2022, it was particularly beneficial for us because we had product availability throughout the totality of the year. Some of our competitors were quoting year plus lead times. I think our lead times went from, like, 8-12 weeks. Just some accounts that we typically have not had any presence in, they need meters, we can deliver meters. All of a sudden you have presence and the opportunity to compete in that account. That's helped gain some market share in the relative short term.
Great. That's very helpful. Thank you.
Yeah. Our pleasure. Yep.
Our next question today comes from Alex Blanton at ClearHarbor Asset Management. Please go ahead.
Hi. Thank you. Good morning.
Good morning.
Good morning.
first I just wanna say that I think your format for the slide presentation, this time is probably the best ever, and, I think you should stick with it. It's really a great presentation.
Noted.
Most of my question have been answered, but something came up from one of the other participants regarding the business that accumulates commercial construction plans.
Yes.
Barry Sternlicht, who's the CEO of Starwood, was on CBS, CNBC yesterday.
He was
S aying that in his business and across the board, really in commercial construction, as interest rates have gone up, people will complete the projects they have but hold off on starting new ones. That's why he's looking for a big drop in commercial construction in the second half of this year because new projects are sliding. Do you see that in your statistics?
That's interesting. I can have Zach. ConstructConnect publishes, I'm looking at Zach, quarterly?
Mm-hmm.
Quarterly, the macro of what they're seeing from a construction planning point of view, and I can have Zack forward that to you. Personally, I've not read the most recent report yet, so I don't wanna comment on its contents. We can send that to you.
Okay. Thank you. It would seem that if new construction projects are not, are not being put into implementation, it would show up in those numbers, wouldn't it?
Here's the countercyclical nature of that. If you have several hundred thousand construction workers, construction small subcontracting firms in a, you know, ConstructConnect has tens of thousands of customers. As those hundreds of thousands are looking for work, it only takes a small percentage of that cohort to become a customer of ours to exhibit countercyclical growth behavior, which is what's happened in every prior slowdown in the history that we've been able to observe with ConstructConnect.
Okay. You're really talking about your business and market share-
Correct
R ather than the overall trend of that market.
Correct.
Yeah. Okay. Thank you.
Yeah, thank you.
Ladies and gentlemen, this concludes our question and answer session. We will now return back to Zack Moxcey for any closing remarks.
Thank you everyone for joining us today, and we hope to see you all at our Investor Day on March 21st in New York.
Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines and have a wonderful day.