Roper Technologies, Inc.

Good morning. The Roper Technologies Conference call will now begin. Today's call is being recorded. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star, then zero. I would like to turn the call over to Zach Moxie, Vice President, Investment Relations. Please go ahead.

Good morning, and thank you all for joining us as we discuss the first quarter financial results for Roper Technologies. Joining me on the call this morning are Neil Hunn, President and Chief Executive Officer, Jason Conley, Executive Vice President and Chief Financial Officer, Brandon Cross, 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 have prepared slides to accompany today's call, which are available through the webcast and are also available on our website. Now, if you'll please turn to page two. We begin with our safe harbor statement. During the course of today's call, we will make forward-looking statements which are subject to risks and uncertainties as described on this page, in our press release, and in our SEC filings. You should listen to today's call in the context of that information. And now please turn to page three. Today, we will discuss our results primarily on an adjusted, non-GAAP, and continuing operations basis. For the first quarter, the difference between our GAAP results and adjusted results consists of the following items, amortization of acquisition-related intangible assets, and the financial impacts associated with our minority investment in Indicor. Reconciliations can be found in our press release and in the appendix of this presentation on our website. And now, if you'll please turn to page four, I'll hand the call over to Neil. After our prepared remarks, we will take questions from our telephone participants. Neil?

Thanks, Zach, and we hope everyone's doing well this morning. We're looking forward to sharing our Q1 results with you, which were quite good. As we turn to page four, let's look at today's agenda. We'll start with our enterprise highlights and financial results, then turn to our segment-specific discussion and wrap up discussing our raised 2023 enterprise guidance. So with that, let's go ahead and get started. Next slide, please. As we turn to page five, the three main takeaways for today's call are, first, the year is off to a strong operational and financial start as our higher quality enhanced portfolio is obviously performing really well. Second, we're increasing our full-year guidance, both in terms of organic revenue growth and adjusted debts. And third, we continue to be very well positioned for discipline capital deployment. As relates to our first takeaway, a strong start to the year, we saw total revenue grow 15% and organic revenue grow 8%. Consistent with our long-standing strategy, we continue to not only scale our enterprise, but also simultaneously improve its underlying quality and recurring revenue base. Importantly, we had very strong cash flow performance with free cash flow margins in excess of 30%. Our results this quarter are another proof point that our higher quality, less cyclical portfolio was purpose-built to consistently perform at a very high level. Finally, and also during the quarter, We held our first ever Roper Leadership Summit, where we had our 27 business unit presidents together and shared best practices and learnings across a variety of topics, including strategy development, strategy enablement, and team and talent. While honoring our high-trust autonomous model, the operating and corporate teams left feeling a true sense of community. It was a terrific week. Given the strong start to the year, we're increasing our full-year organic growth outlook 100 basis points from 5% to 6% to 6% to 7%, and increasing our full-year depth guidance to be $0.1610 to $0.1630, or $0.15 at the midpoint. Our previous depth guide was $0.1590 to $0.1620. And finally, we continue to be well-positioned relative to capital deployments. We remain quite active in the market as we evaluate and actively diligence many high-quality opportunities. Jason, I'll turn the call over to you so you can walk through our first quarter results and our strong financial position. Jason.

Thanks, Neil, and thanks, everyone, for joining us this morning. Turning to slide six, we're very pleased with how Q1 shaped up. Revenue came in at $1.47 billion, or 15% over prior year. This was through a combination of strong organic growth of 8% and an 8% contribution from acquisitions led by Frontline, and this was slightly offset by a 1% FX headwind. Growth was broad-based across the segments and a little better than expected. Broadly speaking, customer demand was favorable in the quarter and order pipelines remained strong. EBITDA was $582 million, or 15% above prior year, with margins roughly flat and in line with expectations. Debts of $3.90 was up 19% over prior year and 6 cents above the high end of our guidance range of 380 to 384. Free cash flow of $445 million was 4% higher than prior year. In our Q4 earnings call, we highlighted a $45 million settlement of a patent dispute for certain Verathon sales dating back to 2004. We paid that this quarter, so adjusted for this settlement, free cash would be 33% of revenue and up 14% over prior year. We saw very good cash performance, especially at our software businesses, where Q1 renewals and related collections came in strong as expected. As I mentioned last quarter, Frontline will collect most of their renewals in the third quarter, so it's a bit of a drag on conversion in the first half. So overall, just a really great start to 2023. Now turning to slide seven, we'll spin through our balance sheet. Coming off solid Q1 cash flow performance, our balance sheet continues to strengthen. Gross debt was around $6.7 billion, and our cash balance has grown to just under $1.2 billion, which yields net debt just shy of $5.5 billion. This puts our net debt to EBITDA ratio at 2.4, which was down from 2.7 at year end. This, coupled with our undrawn revolver of $3.5 billion, gives us capacity to deploy $4 billion or more in the near term. To that end, we've been quite active in 2023, evaluating a number of platform and bolt-on opportunities. As always, we will remain disciplined and patient in our capital deployment process. With that, I'll turn it back over to Neil to talk about our segment performance and outlook.

Neil? Thanks, Jason. Let's turn to page 9 and walk through our Q1 highlight for application software segments. Revenues here were $761 million, up 6% on organic basis, and EBITDA margins were 43.2%. Performance in this segment was strong across the board. To highlight a few of our businesses' performance, we'll start with Dell Tech. Dell Tech was solid. As we mentioned last quarter, Dell Tech did see some slower customer decision-making, but that was largely rectified this quarter. Dell Tech had double-digit bookings in a quarter with strength across both enterprise-class and SMB-sized customers, as well as government contracting and private sector solutions. As usual, both gross and net retention at Dell Tech remain strong and consistent with recent history. Adderitt, our software business focused on the needs of law firms, continues to compete and win and take share from our competitors. In the quarter, Adderitt experienced record bookings and continued success in the adoption of their SaaS solutions. Great job by Chris, Rafi, and the entire Adderitt team. VertiFOR, our software business that tech-enables property and casualty insurance agencies, posted another solid quarter and continues to perform quite well for us. A particular note, VertiFOR's recent acquisition of MGA Systems, a software solution targeted to managed general agents, or MGAs, is proving to be highly strategic, and Booking's activity is tracking ahead of plan. Frontline continues to perform quite well for us in the first couple quarters of ownership. Frontline's mission is to empower the front line of education. As many of you know, hiring of teachers and administrative staff is particularly challenging, and Frontline software solutions better equip K-12 school districts to navigate these challenges. Because of this, Frontline solutions are mission critical and of high importance to their school district customers. For this segment, EBITDA margins were down 90 basis points year-over-year, in line with our expectations. Our acute care software businesses, especially Clinisys, Data Innovations, and Strata, are ramping up their implementation capacity based on recent bookings momentum. We expect to see similar margins in Q2. Looking to the balance of the year, we expect to see organic growth in the mid single-digit area for the segment based on our leading market positions and growth in recurring revenue. Turning to page 10. Readers in the quarter for a network software segment were $355 million, up 6% on organic basis, and EBITDA margins were strong at 53.1%. As with our application software segment, growth and performance was broad-based across the segment. Relative to business-specific comments, we'll start with our U.S. and Canadian freight matching businesses, DAT and LoadLink, which both grew nicely in the quarter. While freight marketing conditions are softer than this time last year, Our businesses in this space are critical to the operation and execution of the spot freight market. In addition, and importantly, the spot market is a long-term secular beneficiary in terms of the volume of future freight shipments. Throughout and across the freight and economic cycle, DAT and Lotely continue to innovate and launch new products and offerings to help drive enhanced customer value and share of wallet. With the current product strategy focused on tech enabling the connectivity between brokers and carriers. iPipeline, our network software business that tech-enables the distribution channel for life insurance and annuities, is coming off a terrific 2022 and continued its high level of execution this quarter with very strong bookings, retention, and customer expansions. Foundry continued its string of strong performance in the quarter and had terrific seat growth for their flagship product, Nuke, which enabled continued double-digit recurring revenue growth. As we mentioned last quarter, Foundry commenced their subscription pricing transition for NUC and a Q1 had north of 50% of their NUC seats sold under their new model ahead of their plan. Finally, our alternate site healthcare businesses, MHA, SoftRiders and SHP were strong in the quarter. Execution was solid and the businesses benefited by an improving census and skilled nursing, assisted living facilities and home health, reaching the highest occupancy levels and patient volumes since the onset of the pandemic. Turning to the balance of the year, we expect to see mid single-digit organic growth for this segment based on broad and sustained growth across this group. As we turn to page 11, revenues in the quarter for a tech-enabled product segment were 354 million, up 14% on an organic basis. EBITDA margins for this segment were 34.7% in the quarter. Across the segment, business performance and execution was solid, Importantly, the broad-based supply chain issues continue to wane. Though we're not entirely out of the woods, we can now see a path to a more normalized supply chain environment. Neptune, our water meter and technology product business, continues to be just great. In the quarter, they had record revenue performance and set records for backlog levels. Importantly, Neptune continues to see increasing demand and momentum for their residential and commercial ultrasonic or static meters. We remain bullish on Neptune and the market in which they compete, as this market tends to be quite steady as Neptune's customers' budgets are typically fixed year to year and not tied to broader macroeconomic trends or cycles. Great job at Neptune, and congrats. Verathon was strong in the quarter as well, with double-digit order growth. Specifically, Verathon saw strength across their reoccurring single-use products, both RoncaScope or B-Flex, and Video Innovation or GlideScope, as well as bladder scan capital purchases. Importantly, Verathon has four product launches scheduled for the next few months, which will help continue their market share gains and momentum. Northern Digital, or NDI, was also strong in the quarter and continued to see terrific demand for their optical and EM solutions. NDI's enabling measurement technology is used by scores of medical product OEMs and solutions such as robotic-assisted surgery and across multiple cardiac-specific modalities. NDI's high level of market focus and operational discipline will enable them to continue to be the market share leader for these measurement technologies long into the future. Our outlook for the balance of the year for this segment has improved to be in the low double-digit area, and it's based on continued strong orders and improving manufacturing productivity at Neptune, as well as an improved growth outlook across our medical product businesses. Now, please turn to page 13 and let's review our increased 2023 guidance. For 2023, we expect total revenue growth to be north of 12%. In addition, we're updating our organic revenue growth outlook to be in the 6% to 7% range, an increase from our original guidance of 5% to 6%. As a result, we're increasing our depth guidance to be in the range of $1,610 and $1,630, up from our prior guidance of $1,590 to $1,620. Assume that this guidance is a tax rate in the 21% to 22% area. Specific to the second quarter, we're establishing our depth guidance to be in the $396 to $4 range. Now, please turn with us to page 14, and then Jason and I will look forward to answering your questions. As we turn to page 14, we want to leave you with the same three points with which we started. First, 2023 is off to a great start. We saw revenues increase 15% to $1.47 billion in the quarter. This growth was underpinned with 8% organic revenue growth and 8% recurring revenue growth. In addition, margins were quite strong. This quarter's financial and operational performance is yet another proof point of our capabilities and, frankly, the expectations of our improved higher-quality portfolio businesses. Most importantly, our revenue growth translated to impressive cash flow growth with our underlying free cash flow growing 14%. As you know, we view cash flow growth as the best measure of performance. Second, based on the strong start to the year, the highly recurring nature of our revenue stream, and the importance of our solutions to our customers, we're increasing our full-year organic revenue growth outlook to be between 6% and 7%, and increasing our full-year debts to be between 1610 and 1630. Finally, we continue to be active with our capital deployment activities as we have north of $4 billion of available M&A firepower. As we discussed during our investor day last month, we have a very large universe and pipeline of opportunities, though, as always, we will remain super patient and highly disciplined to ensure optimal deployment of our available capitals. Now, as we turn to your questions, and if you could flip to the final slide, our strategic flywheel, we want to thank those of you who joined us in New York or online last month for our first ever Investor Day. During that long-form overview of Roper, we're excited to share with you our long-term strategy, the high-quality nature of our portfolio businesses, our operating ability to improve our businesses, our process-driven capital deployment approach, and our compelling long-term business model that compounds cash flow in the mid-teens area. So thank you for your continued interest in ROPR, and with that, let's open it up to your questions.

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 the digit 1 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 the digit 2. Again, we request that callers limit their questions to one main question and one follow-up. The first question comes from the line of Dean Dre with RBC Capital Markets. Please go ahead.

Hey, good morning, everyone.

Hey, Dean, good morning.

Hey, it's great to see everyone in New York last month. Hey, just maybe we can start off and it's a bit of a follow up from last quarter, you know, with Dell tech on some of the slowing and decision making. This is kind of what everyone's watching, you know, might there be any kind of fallout from bank turmoil or, you know, read through into construction markets and so forth. But the idea of slower customer decision-making, maybe just give us an update on how that played out, you know, time to sign contracts, any new logos, just any call today would be helpful. Thanks.

Yeah, sure. Sure. Dean had to lie to talk about it. It's a, something that we spent a tremendous amount of time talking to our, our leadership teams, our group executives about trying to understand the signal, you know, to set the obvious context we spent the last several years trying to really work out the cyclicality of the portfolio. And we're also in these very small niche markets where the customers tend to be not that cyclical. So the signal for us is faint. It's not non-existent, but it's faint. Last quarter, we certainly talked about Dell Tech and them having some slower customer demand, as we said in the prepared comments, that largely has not fully rectified itself this most recent quarter. Two or three quarters ago, we talked about the same thing going on a power plan. That rectified itself the subsequent quarter as well. Some of the other macro things that we listened to, the amount of property casualty insurance written as a sign of business formation or business growth continued to grow. Life insurance applications got steady. The number of carriers we expected and certainly have seen for a couple quarters carrier declines at touch, but that meaningfully moderated in Q1. So we continue to listen for it, and we certainly have planned for the second half of the year. I'm a concern about look relative to a slowdown, but the signals faint at the moment. Jason, anything you want to add to that?

Yeah, I would just say our software bookings were up high standard digits year over year in the quarter, so that just puts some math behind what Neil was saying.

Great. That's real helpful and appreciate kind of that walk through the portfolio there on sensitivity. And then just second question, it was nice to see the boost in organic revenue guides for the back of the year in tech-enabled products up low double digits. And just with the expectation, look, Neptune continues to do really well, and we see that in the industry. that tends to be a bit steady. So how is it that you're seeing this acceleration and must be also on the medical side too? But thanks.

Yeah, there's three parts to this, macro parts of this segment. There's Neptune Medical Products and then a couple of small RF product businesses. All three, they have and we at the corporate have sort of increased the outlook for the balance of the year. Neptune, it's just continued incredible order growth. And then terrific performance out of the factory at Neptune, which gives us confidence that they can chew into a little bit more of the backlog than we maybe originally thought coming into the year. At the medical product businesses, as we all know, last year medical procedure volumes were down in the 7-8% range. We plan for that to continue this year. It's actually been a little bit better than that, and that flowed through at Verathon, Civco directly, and less directly through NDI. And then the innovonics and RF ideas, the RF product businesses have been riddled with supply chain challenges, and coming into the year, we assumed those would continue, and they meaningfully improved in Q1. So it was a little bit uplift across the board that gives us the confidence to take the guide up in that segment.

It's all really helpful. Thank you.

Yep, you're welcome.

The next question is from the line of Scott Davis with Mellius Research. Please go ahead.

Hey, good morning, guys. Hey, Scott. Good morning, Scott. I know it's not, there isn't any particular business that's game-changing for you in any particular quarter, but when you think about freight matching, and I know the truckers have had a tough time this quarter, some of their guidance has been a little cautious lately. tough comps, et cetera. How linked is your freight matching business to kind of the miles driven and the B2C kind of truck market? Is there a direct link there? I would assume there is, but it doesn't seem like you had really any major problems in DAT this quarter.

Yeah, DAT grew in the quarter year over year. It grew sequentially. But there is a link. It's an indirect link. We're not paid Per mile driven, we're not paid on any utilization metric. It's a fixed subscription on both the broker side and the carrier side. The reason DAT historically tends to be less cyclical than the market in which it operates is a couple things. One is you have this tension between the cyclical nature and the secular growth driver. where the spot market is just winning more market share of the total freight volumes. So you have more volume generally coming into the spot market over the long arc of time. And the simple version for why that is is because the spot market's becoming more liquid or easier to transact in as it tech enables itself, of which DAT is a participant enabler of that. The second thing is understanding the dynamic between what the role the spot market plays in a booming versus a waning market. And it's about the pricing dynamic between contract pricing and spot pricing. Spot pricing changes daily. Contract pricing changes on a rolling year basis. And so when the market is very hot, you obviously have more demand for carriers in the supply. Rates go up in the spot market. It invites capacity addition. And that's what's driven DAT's growth for the last couple, three years, is you have more carriers coming into the market. When the freight market slows, you actually have spot pricing below that of contract. And you actually, at that moment, start seeing some of the contract freight come into the spot market so the shippers can save money. So it provides, if you will, a floor for the demand of carriers. And so historically, DAT grows very nicely in up markets and grows slower in the down market for those couple reasons.

That's interesting. I hate to climb it in minutiae here, but I'm just going to do it anyways. How does this business change over time? Does AI become a big enabler and a predictor and help drive that liquidity that you talked about, Neil? How does technology, I guess... change the game and help you guys gain share over time, I guess is a better question.

Yeah, I mean, there's a lot of tech currents and cross currents in this space. You know, at the core of it today, I still think on average, there's between eight and 10 phone calls that go between a broker and a carrier to actually broker a load. Obviously, what we're all trying to do is take that to zero. DAT is a big part of their product roadmap is to tech enable that. So there's AI in the mats, there's AI in the routing, there's AI in future trucks going from Cincinnati to Chicago. It's going to be there on Tuesday at 3. How does it have a pickup in Chicago back to where it wants to go four hours later or whatever the time frame is. There's a lot of AI that can go into that. But the principle, the true unlock for the industry is to make the match more efficient. And that's where most of the technology investment is going today. Okay. That's helpful.

Thank you, guys. Best of luck. Appreciate it. Yep. Thanks. Thanks.

The next question comes from the line of Terry Tillman with Truist. Please go ahead.

Yeah. Good morning. Thanks for taking my questions, and congrats on the quarter. I guess, and hi, Neil, Jason, and Zach. Have to make sure I get that in, too. Yeah. Good morning. Yep. Good morning. So the first question, I guess, is on Frontline, because that was the last major platform acquisition. I think you all talked about $370 million of revenue, expected contribution, and $170 million EBITDA. And I think also you said it was a stub period. It was in the 80s and 4Q. What I'm curious about is how is it tracking to those targets? And I did notice they just announced the new HCM suite. There's a new CRO there. So it seems like there's some dynamic things going on, just maybe double-clicking on Frontline and then at a follow-up for Jason. Yeah.

You take the first one, yeah. Yeah, so they're tracking on their forecast. As you know, they're a business that has large renewals in the third and fourth quarter, and so we'll expect the business to take up sequentially in the second half, but they're definitely on track for their revenue and EBITDA numbers of $371.75.

Yeah, and as it relates to the new products and a couple new leaders, we're certainly excited to have Bill – A new CFO, Scott, a new CRO, and Curtis, the new Chief Client Operations Officer, joined. It's often times the case there's a few leadership changes that happen in the first year or so of ownership. And so that was expected. We're excited to have this team. It's an incredible group that's joined us. The thing that I'm particularly excited about and proud of in the first couple quarters of ownership of Frontline is the strategic choice they've made. As a pattern we see from a lot of companies that come out of private equity, there's very limited choice that's made. So they try to do too many things and not do them well. And so very quickly, Frontline doubled down on client experience and R&D productivity. and actually made a choice to take a little bit of resource out of go-to-market, which makes complete sense when you have 85% or 90% coverage of the customers and the entire strategy or the principal strategy is to focus on cross-selling and up-selling. You need to deliver a tremendous experience, hence the focus on client experience, and need to be able to innovate and sell them more product, hence the deployment to R&D. So we love the choice that's been made there and excited for what that yields in the future.

That's great, Collin. Thanks, Neil. And I guess just to follow up for Jason is, you know, you were able to call out the adjustment from the settlement, so it was up 14% in terms of the free cash flow, low 30s on a free cash flow margin. Should we think about that for the remainder of the year in terms of kind of that mid-teens growth and maintaining a low 30s free cash flow margin? Thank you.

Yeah, that's right. We're on track to deliver north of 30% free cash flow. You know, as I mentioned, the second half is going to be better than the first half with the renewals at Frontline. But yeah, we're still on track there.

Great. Good luck. Thank you. Thanks.

The next question comes from the line of Steve Tosa with JB Morgan. Please go ahead.

Hey, guys. Good morning. Good morning. Hey, good morning. A couple of the businesses that you guys didn't mention, but I think the Dean's question around what's going on out there, Construct Connect, what do you see in there? perhaps Quintessence, another one of your kind of big ones.

Sure. So ConstructConnect, as we talked about in the past, tends to be a counter-cyclical business. For those that are less familiar, ConstructConnect, for simplicity, has a near-perfect database of every commercial construction project that's in the planning phase. And so if you're a general contractor, a trade contractor, a building product manufacturer, you're generally quite interested in understanding for planning purposes, for bidding a project purposes, what's in the stage of development planning. When the construction market is white hot, general contractors and subs have more work that they can do. There's less utility and value in paying a subscription fee for future projects that are in the queue. When the amount of work starts to slow down, there is increased utility in that. So when we look back and back test ConstructConnect over a couple cycles, it has a clear counter-cyclical demand behavior attached to it. So the market we think would be coming to it. As a general matter, ConstructConnect is maybe modestly underperformed, our hopes. It's been more of a low single-digit growth business. Our expectations is it should be mid. And we're quite confident with the current strategy that it'll climb to there and get to there. We have a great leader that came up from Dell Tech a couple years ago, Matt Straza. the operational discipline, the strategy, the go-to-market sort of prowess is just at a next level. And so we're quite confident that we're going to be able to reach our expectations amid there. Clinassys has been nothing short of great. You know, Simpson, who has integrated the U.S. Sunquest business with the European business, has just done that almost without error. It's been terrific. The business grew. The combined business grew in the quarter. We haven't been able to say that for quite some time, given the drag of the U.S. business. We continue to be just tremendously strong in the U.K. As you know, we're one of three or four strategic IT vendors to the NHS as we run something like 80 or 85 percent of the laboratory network in the U.K. The pan-European strength continues. For instance, we run the largest health system in France in APHP, the Paris system. And in the U.S., some of the strength comes from the fact that we now have a product offering that is for laboratories outside of that of healthcare. So think environmental toxicology, you know, water, et cetera, which is showing some early signs of promise. And so a lot of congratulations to Simpson and Andy, the CFO, and we're excited to see what happens at Clinicist.

great and then just one last one on on a free cash flow um it's very pretty strong quarter um upside surprise at least versus what we were expecting um a little bit uh bigger of a drag from deferred but maybe a bit lower cash taxes or something you know just talk about the moving parts there and how you expect that to trend sequentially over the next couple quarters on free cash sure yeah i can take that uh steve so

Yeah, the deferred revenue is down or I guess a consumption of cash in the first quarter because of frontline, right? So you'll see that spike back up in the third quarter with those renewals. It was overall deferred revenue outside of that was, you know, in line with expectations. It was fairly flat to the fourth quarter. And then on taxes, you know, we typically make two tax payments, federal tax payments in the second quarter. and then one in the third and one in the fourth. So we will expect Q2 to be down sequentially, but up year over year. And then just overall for the full year, as I mentioned earlier, just north of 30% pre-cash flow margins. So on track there.

Yeah, great. And then, sorry, just one last quick one. The high single-digit bookings number, was that an organic number for software?

Yes.

Okay, great. Thanks for the details. Yep.

The next question comes from the line of Julian Mitchell with Barclays. Please go ahead.

Hi, good morning. Just a question on tech-enabled products first. So you're seeing a lot of sort of hardware manufacturers in our group, you know, with a big kind of flush of revenue right now as component shortages ease, and then there's obviously a lot less visibility on the forward look once that flows through. So I just wondered for TEPP, You know, very strong revenue performance in Q1. You're very confident in the sort of the next three quarters outlook. Maybe just drill down a little bit more into sort of orders and backlog trends there. Just kind of the confidence that the strength right now is sustainable through year end and not just a kind of a flush as the supply chain eases.

Yeah, so it's something that we, a couple things we've been really quizzing with our companies is two things. This very thing and then also the stability of the backlog. Has there been any order fallout of the backlog, right? So there's been none, by the way, virtually none on backlog order fallout. The orders are quite strong. You know, book to bill was greater than one, you know, in the quarter. So it gives us, I think, good indication that it's not just a flush of backlog order. In terms of the balance of the year, though, I mean, we're waiting for the time when a lot of what's happened across the whole complex, not just us, is order durations extended, right, as customers have wanted to be in the queue to make sure they have supply. At some point, and at that point, I don't know, I don't think any of us know what's going to happen, we're going to get back into a more normal order sort of duration timing. So there'll be a period of time when orders, because of timing, compress. We don't know when that's going to happen, but we're fully expecting it and candidly aren't going to be that worried about it because it's sort of a natural reaction to where we are. So that's commentary for Neptune and the whole segment. For medical products, quite the opposite. We don't work out of a huge backlog out of those businesses. And so that dynamic you're addressing or questioning doesn't exist. And then we really solved the supply chain challenges with our product businesses. They were bespoke and unique to the two businesses there. And so now we will be able to start clearing some backlog, but that's more of a second half thing than what it was in the quarter.

That's very helpful. Thank you. And then just circling back on one of the more – cyclical pieces within software, and it's already been touched on once or twice, but to try and put a finer point on the sort of DAT and load link businesses at network software, you know, within that sort of mid-single digit growth outlook for the segment for the balance of the year. What are you dialing in for sort of DAT or load link? You don't have to give me the percentage number, just curious sort of versus the segment growth of mid-single digit, for example.

Yeah, so it's the same. I'll give you a color to it. I think we'll stop sort of giving you like specifics at a company level. But as we mentioned last quarter, there is a difference of opinion between the DAT leadership and Sarasota about what the outlook of this business is for the year. DAT is much more bullish on what the balance of the year is going to look like than what we are here in Sarasota. We continue to have a very conservative posture relative to what DAT looks like, especially uniquely on the carrier count for the balance of the year. We want to see, while we had a nice proof point in Q1 that the carrier decline started to basically flatten We have not assumed they continue from that level and improve. We assume they actually get a little bit worse.

That's helpful. Thank you. You're welcome.

The next question comes from the line of Joe Giordano with Cowan. Please go ahead.

Hey, good morning.

Hey, Joe. Hey. So you kind of talked about this on the medical product side, but we had another company talking about, like, big inventory levels of component parts in medical, like, kind of, like, unexpectedly so. So where, like, their customers just have some of their – more of their products than anticipated. I'm guessing that's not really relevant to you guys, but just wanted to ask the question.

It's not particularly relevant. There's one business, Northern Digital – Correct me on this. I think it's just principally one that sells through, as I mentioned in the prepared remarks, the medical product OEMs. We're a critical component, a necessary component to scores of these medical product OEMs. They cannot ship their product without our product, obviously, so we're worried there might have been a fair amount of inventory in the channel as buffer. the commentary from the Norton digital team this quarter is they feel most, if not all of that is through the system. It's hard to know exactly for sure, but that's, that's where, that's really the only place where it happens. Otherwise it's us directly to a customer and in consumer customer. Yep. That's what I figured. Okay.

And then just question on like the, the landscape for M and a, like, I'm just curious from, from, for your competitors on the PE side who are looking at stuff, I know rates are kind of all over. Is the volatility of rates and the uncertainty around rates directionally a problem for them? And the ability to lock in debt or the desire to lock in rates, is that having an impact on the market at all?

Yeah. I mean, it's been slow. The number of deals printed in the last couple of quarters has been very low for this reason that you mentioned, for the reason that there's just a bid-ask spread between buyers and sellers. that continues to exist. And then also just uncertainty on what the exit values are going to be. If you're doing the IR analysis, the most sensitive variable in the whole thing is your exit value, your exit multiple. And so with all that uncertainty, there just hasn't been a lot of deals or recaps, private equity to private equity. There's been a handful of strategic deals that have happened. I'll tell you though, in this, our pattern recognition history would say in times of volatility, it creates opportunity. We saw that coming out of COVID. And very quickly, I mean, it was, what, August-ish in 2020 when we did VertiFOR. It was an opportunity for us. And so it's our commitment to investment-grade debt, our leverage levels, that we can be nimble and flexible and quite opportunistic because moments like this is where opportunities exist for a variety of reasons. So we're cautiously optimistic over the course of this year that those will present themselves. Cool. Thanks, guys. Yep. Thanks.

The next question comes from the line of Allison Poliniak with Wells Fargo. Please go ahead.

Hi. Good morning. Good morning. Just along the lines of that M&A, I know you mentioned you certainly have a pipeline full of platform versus bolt-ons. I guess just even what you're seeing today and sort of the comments that you just made, is there any confidence sort of you'd probably lean towards more bolt-ons in the next few months, or are there some opportunities that you're seeing on the platform side that could execute?

Yeah, I think we characterize the current near-term level of activity in the M&A pipeline as having a bit more on the add-on or bolt-on side than what we might have seen historically. I wouldn't read too much into that. It's just the way it falls sometimes. There's certainly a handful of platforms that we are currently evaluating. There always is a handful that we're in pretty late stages or detailed work evaluating, but On balance, there's a bit more on the Bolton side. Those tend to be our very best deals because they are additive to strategically to one of our existing companies. There's normally some synergies that come with those. And as we talked about in the investor day, strategically, we'd like to see more of our capital deployed against the Bolton strategy, but we're not going to force it, but it'd be nice to be able to see it.

Got it. That's helpful. And then application software, the capacity ramp and acute care. I know you mentioned, obviously, it's impacting Q2. How should we think about that to balance the year? When does that fully get running, that ramp?

Yeah, that's right. I mean, we thought EBITDA margins were in line with expectations in the first quarter, and we did have those implementations. Also, CBORD had some large integrated security pull-ins. They finally got some parts for some of those projects. But for the second quarter, we're expecting it to be about the same, and then it'll pick back up in the second half. So you can expect EBITDA margins to be about flat year over year.

Perfect. Thank you. Thank you.

The next question comes from the line of Joe Rueng with Baird. Please go ahead.

Great. Hi, everyone. Hey, good morning, Joe. Hey, hope you're well. One observation on just kind of what we're hearing in the broader environment, it does seem like the system of record companies for the industries you serve, they're holding up pretty well. And then I think there's some particular industry examples like K-12 education would be one where the spend is actually consolidating a bit around these companies. So share of wallet is going up right now. Do you think you're generally seeing this so far in any examples that come to mind where you kind of look at your growth relative to underlying IT spend and this wallet share dynamic is maybe playing out?

Yeah, I mean, I would say, I mean, we can take this offline and sort of go company by company in some level of detail to the extent of the interesting, but at the highest level, we would say yes, right? So we're, we say in the investor day, we say in all of our communication that we're mission critical software, system of record sort of software. On the application side, you know, if you think about like Dell Tech or Vertifor, I mean, Frontline's probably, Adderant's a great example where we've gone from number two to number one. We've doubled the size of the company over ownership period. The net retention has gone from like low 1.0, whatever, 1.02, 1.03 to low 1.10s, 1.10, 1.12, I think, which just gives you a sense that all these software companies work for a long time to create a customer base that then they can spend the rest of their life cross-selling into. And so most of our, all of our companies, you know, 50 to 75% or more of their new bookings come from cross-selling, up-selling companies. And the best example of that is the one you call out, which is Frontline, which I think it's like 80% plus, where they've done all the work over their history of basically capturing the customers. And now it's about how do you get more share of wallet. And in Frontline's case in particular, it's a more fragmented state by state based on the regulatory environment, competitive environment. And you're right. You know, today, 50%. of K through 12 health systems, or excuse me, education systems, want to buy from a consolidated vendor, where five years ago that number was 25 or 30 percent. So, the market is coming towards and the education space towards companies like Frontline.

Okay, that's great. And then I guess a quick one on Frontline. In terms of the sequencing of free cash flows, so 50% cash flow margin business, do they typically kind of burn cash? 1Q, 2Q, 4Q, and so 3Q, we can think of, you know, more than 50% of that business's full year generation is probably hitting in that timeframe.

Yeah, I think that's the right way to think about it, Joe. A little bit more of a burn in Q1. a little less in Q2, and then big cash inflow in Q3 and a little bit of cash in Q4. Okay.

Great. Thank you very much. Thanks.

The next question comes from the line of Alex Blanton with Clear Harbor Asset Management. Please go ahead.

Good morning. Good morning. Yeah. Most of my questions on your operations have been answered, but I wanted to ask about how the – how you benefit from the sale of compressor controls by Clayton Dubois and Rice. They sold it to Honeywell, just announced this week, for $670 million. Are they selling your piece, and do you get any cash from that?

Alex, appreciate the opportunity to talk about this. So we are certainly involved with it. You know, we're 49% owners of Indicor. We have quarterly board meetings. From the very first conversation we had with Clayton DeRoy and Rice about what the value creation plan is for Indicor, part of it was to do some portfolio work with this being the principal piece to make Indicor less oily and more industrial. And so this was a strategic, this was an asset that was highly strategic to a number of folks in the industry. It was a very competitive process. And we're delighted to be able to sell the business for 19 times this year's EBITDA. I think Honeywell is a great home for this business. That mattered a lot to us. The benefit, of course, we now get to take this capital as a company and a 49% owner of the company and then redeploy it to industrial and industrial tech type businesses, build the M&A flywheel and help hopefully create the next great industrial compounder that will become a public company in three to five years. And that's what we'll monetize through the whole value creation plan.

Okay. Do you get any cash from this deal?

The only cash we get, Alex, is we'll have a distribution to us for the tax liability of the sale, but most of the cash is going to stay in the business. So we'll get that cash whenever it closes sometime in the second half. Okay.

Thank you. Thank you. Thank you.

This concludes our question and answer session. We will now return back to Shaq Moxie for any closing remarks.

Thank you everyone for joining us today. We look forward to speaking with you during our next earnings call.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.