Roper Technologies, Inc.

Q2 2024 Earnings Conference Call

7/24/2024

spk00: Good morning. The Rupert Technologies conference call will now begin. Today's call is being recorded. All participants will be in listen-only mode. Should you need operator assistance, please signal the operator specialist by pressing star zero. I would now like to turn the call over to Zach Mosey, Vice President of Investor Relations. Please go ahead.
spk11: Good morning, and thank you all for joining us.
spk12: We discussed the second quarter 2024 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 second quarter, the difference between our GAAP results and adjusted results consists of the following items. Amortization of acquisition-related intangible assets and financial impacts associated with minority investments. 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.
spk09: Neil? Thank you, Zach, and thanks to everyone for joining our call. We're looking forward to sharing our second quarter results with you this morning. As we turn to page four, you can see the topics we'll cover today. I'll start by highlighting our second quarter performance. Jason will then go through our financial results in greater detail, review our balance sheet, including our M&A capacity, and discuss our strong cash flow performance. Then I'll walk through our segment highlights and discuss our guidance for a full year. After our closing remarks, we'll open up the call for your questions, so let's go ahead and get started. Next slide, please. As we return to page five, three key takeaways for today's call are, first, we delivered another solid quarter results. Second, we're increasing the bottom end of our full-year outlook. And third, we continue to be very well positioned relative to executing on our capital employment strategy. To double-click a bit, we grew total revenue by 12 percent organic revenue by 4 percent, and EBITDA by 13 percent, with EBITDA margins expanding by 20 basis points to 40.5 percent. Importantly, we saw good bookings momentum, with organic enterprise software bookings increasing in the high single-digits area during the quarter. Finally, we grew free cash flow 24 percent in the quarter and 35 percent on a GTM basis. Also, TTM free cash flow margins came in at 32 percent. We're also increasing our full-year 2024 guidance on the low end and maintaining our outlook for total revenue and organic revenue, reflecting our continued confidence in our outlook, notwithstanding some production efficiency challenges at Neptune, which we'll discuss in a bit. And we continue to be very active in the M&A market, an environment that continues to improve and, one, where we have a large pipeline of highly attractive opportunities. Net-net, we continue to be quite bullish about our ability to be active on the M&A front this year. So with that, let me turn the call over to Jason to walk through our P&L and key balance sheet metrics. Jason?
spk03: Thanks, Neil, and good morning to those joining the call. As always, thank you for your interest in ROPR. If you look at slide six, I will provide an update on Q2, both against prior year and against a longer historical timeframe. Revenue was $1.72 billion, which is 12% higher than prior year. Underpinning this was organic growth of 4% and an acquisition contribution of 8%, driven mostly by Procare and Centellis. Organic recurring software revenue grew 6% as we cycled through the tougher comps at FreightMatch and Foundry, which we've outlined in prior calls. We see signs of stabilization in both the freight and median entertainment markets, which Neil will discuss further. Given our leadership positions and continued innovation investments at DAT, LoadLink, and Foundry, we are confident that these businesses will capture growth upon market recovery. Also of note, organic growth in our tech segment was 5%, with some production delays at Neptune. EBITDA was $695 million, which is 13% over prior year, and yielded EBITDA margin of 40.5%, representing 20 basis points of expansion. Depths of $4.48 was above our guidance range of $4.42 to $4.46. Free cash flow was quite good at $367 million, up 24% over prior year and bringing year-to-date growth to 19%. Broadly, over three years, our Q2 revenue has compounded 13% through a combination of organic growth and our consistent, repeatable, and disciplined M&A process. Q2 EBITDA CAGR over the same period has outpaced revenue at 14%. On a trailing 12-month basis, free cash flow compounded at 10%. Adjusting for cash tax payments related to Section 174, which went into effect in 2022, the normalized CAGR is 12% over this three-year period. Just looking at our current trailing 12-month performance against the prior TTM period, free cash flow of $2.1 billion grew 35%, with free cash flow margins of 32 percent. We expect this to normalize in the second half, and for 2024, we continue to expect free cash flow margins of 30 percent or more. With that, we can turn to slide seven to go through our financial position. With our strong Q2 cash flow, we paid down the revolver by $300 million, which brings our drawn balance down to $1.45 billion on a $3.5 billion capacity facility. Our net debt to EBITDA ratio now sits at 2.7 times, which when coupled with future cash generation, provides us with capacity to deploy 4 billion or more towards market-leading VMS businesses. On the capital deployment front, we have been quite busy over the second quarter and expect that to continue into the second half. Now I'll turn back over to Neil to talk through our segment detail and updated guidance.
spk09: Thanks, Jason. As we turn to page nine, let's review our application software segment results. Revenue here grew by 21% in total, and organic revenue grew by 5%. EBITDA margins were 43.6%. We experienced strong performance across this portfolio of businesses with organic recurring and reoccurring revenue growing in the high single digits area. So let's start with Dell Tech, our software business serving the government contracting, architecture, engineering, and construction contractor markets. Dell Tech was solid in the quarter. We saw continued momentum across their private sector solutions and improved bookings activity and revenue within their GovCon business. Importantly, and as we started to highlight last quarter, Dell Tech's new GenAI-powered digital assistant, Della, is in the process of being integrated across Dell Tech's core suite of software applications. We're keen to see the customer workflow efficiency benefits take root as Della is deployed throughout the Dell Tech stack. Exciting, for sure. Turning to Adderant, our software business focused on the needs of large law firms continues to perform incredibly well in the market and had another great quarter with continued SaaS momentum and GenAI-focused innovation. The Adderant team is consistently delivering new GenAI-powered capabilities across their platform enabling meaningful efficiencies and creating significant value for their customers in areas like billing, receivables management, and time entry. Also, Verifor and Frontline performed well in the quarter with strong net dollar retention and bookings growth. Also during the quarter, we completed our periodic strategic reviews with each of these businesses and left the reviews encouraged by the long-term opportunities in front of each. Our financial planning and tax software business, serving heavy fixed-ask industries, was impressive yet again in the quarter and grew its ARR with strong net dollar retention and adoption of its new SaaS solution. Excited to see the progress the Power Plan team is making. Our healthcare IT businesses, led by Strata and Data Innovations, were also strong in the quarter. As it relates to Strata, the combination with Centellas continues to go very well with the vast majority of the cost synergies now in their rearview mirror. Great job by the team implementing this portion of the value creation plan. So at the completion of the transaction with Centellis, the sales pipeline has continued to fill with substantial growth opportunities, with several of these opportunities converting to bookings during the quarter. Further to this end, with the cost synergy phase behind the team, their full attention is now focused on long-term growth-related initiatives about which we are quite bullish and look forward to discussing in the quarters to come. As for data innovations, we saw accelerated growth in the quarter with customer decision-making returning to normal, encouraging for sure. Finally, ProCare, the most recent addition to the Roper family of companies, is off to a strong start. For the second half of the year, we expect to see mid-single-digit organic revenue growth trending to the upper end of this range for this segment. Please turn with us to page 10. Organic revenue in our network software segment grew 2 percent in the quarter and was impacted by the fact we continue to experience pressure with our freight matching businesses and work through the impact on foundry in the recent actors and writer strikes. Excluding our freight matching businesses and foundry, the segment grew in the mid-singles area, which demonstrates the underlying quality of this group of market-leading businesses. EBITDA margins continue to be strong at 54.8 percent. Let's dig into the details and start with our freight matching businesses, DAT and LoadLink, which declined slightly, as expected, due to the continuing challenging freight market conditions that adversely impact both businesses. That said, the market appears stable, both on the carrier and broker side, bouncing along the bottom, if you will. Notwithstanding this, and as typical for ROPR, We invest for long-term, sustainable, and improving levels of organic growth. In DAT's case, we're absolutely doing this, leading the industry with GenAI-enabled fraud detection and prevention tools. Also, and importantly, in the quarter, we welcome a new DAT CEO to the team, Jeff Clements. Jeff has a long and successful career in network and software businesses, and we look forward to working with him to deliver the next chapter of DAT's growth. Now let's turn to Foundry, our post-production media and entertainment software business. Foundry continued to roll out innovative product updates and ML-powered functionality this quarter, enhancing the creative process for high-quality visual effects. Given the continued impact related to the recent industry strikes, Foundry declined in the quarter as expected. That said, the current content production pipeline is filling and Foundry's customers are beginning to re-ramp their capacity, which gives us confidence Foundry will return to more normalized growth next year. As mentioned, the balance of this segment grew mid-singles organically in the quarter with solid execution across its portfolio of businesses. By pipeline, our life insurance and annuities network software business has strong renewals, customer expansions, and market activity, especially in the annuities market. ConstructConnect continued its solid march of improved financial results and bookings momentum. In addition, ConstructConnect continues to lead the market with their GenAI-powered takeoff and estimating solutions. Great job by Matt, Buck, and the entire ConstructConnect team. Finally, our alternate-site healthcare businesses performed well, with MHA benefiting from increased operational focus and rigor and improvement in senior care occupancy rates. SoftRiders, our LTC pharmacy software business, continued their cadence of solid execution. Well done. For the second half of the year, we expect the difficult freight market conditions to persist, which results in our continued low single-digit organic revenue growth outlook for this segment. Now, please turn to page 11, and let's review our TEP segment's results. Revenue here grew 5 percent on an organic basis, and EBITDA margins remain strong, at 36.2 percent. We'll start with Verathon. Verathon had very strong growth across all three of its product families and, once again, executed at an exceptional level in the quarter. The long-term success of Verathon is directly attributable to its leadership team building the business and all the underlying processes to enable sustainable long-term and improved organic growth. This long-term discipline focus is truly a competitive advantage for Verathon. Neptune continues to be solid and delivered another record quarter of financial results. Demand remains strong and consistent with our expectations. Also, the Neptune team did a great job commissioning substantial ultrasonic meter capacity during the first half of this year, both of which are great relative to Neptune's long-term success. However, Neptune struggled in the quarter to achieve the manufacturing efficiency needed to deliver on their mechanical meter demand. We anticipate this to progressively be resolved through the balance of this year. Northern Digital, or MDI, declined as expected in the quarter. As a reminder, MDI is our market-leading precision measurement business. MDI partners with the world's leading medical advice manufacturers to deliver innovative healthcare applications that require super-precise navigation, such as robotic surgery and cardiac procedures, to name a couple. Their long-term historical growth rate has been in the double-digit area. However, NDI is declining this quarter and this year based on customer program timing. Notwithstanding the first half performance, NDI continues to see strong OEM order activity, and we fully expect NDI to return to their normalized organic growth rate next year. Finally, IPA, Enovonics, and RFIDs declined against a difficult prior year comp. As a reminder, these businesses started recovering from supply chain challenges this quarter a year ago. For the balance of the year, we expect the TEP segment to grow in the mid-singles to high-singles range, which is slightly below our prior expectation of high-singles growth due to the mechanical meter production efficiency timing at Neptune. We do expect to return to high-singles growth in the fourth quarter as Neptune's efficiency improvements take hold. Please turn with us to page 13. Now let's review our full year 2024 guidance and discuss the third quarter outlook. Based on our first half performance, enterprise momentum, and our confidence in our outlook, we're maintaining our 12% total revenue growth and 6% organic revenue growth outlook for the full year. In addition, we're raising, at the bottom end, our full year guidance a touch to be in the range of 1810 and 1825. Our guidance continues to assume a full year effective tax rate in the 21 to 22% range. For the third quarter, we expect adjusted depths to be between 450 and 454. Now, please turn with us to page 14, and then we'll open it up for your questions. We'll conclude with the same key takeaways with which we started. First, we delivered a solid quarter of financial results. Second, we're increasing the low end of our outlook for the full year. And third, we are very well positioned relative to our capital employment strategy. For the quarter, we delivered 12 percent total revenue and 4 percent organic revenue growth, while increasing our EBITDA 13 percent. Importantly, free cash flow was strong, growing 24 percent in the quarter and 35 percent on a trillion-to-a-month basis. Free cash flow margins were 32 percent on a TTM basis as well. Next, we're maintaining our full-year outlook for 12 percent total revenue and 6 percent organic revenue growth and increasing the bottom end of our full-year guidance. We're confident in our outlook, given the mission criticality of our solutions, the ongoing expansion of our recurring revenue base, and seeing HSD growth in our enterprise software bookings. Finally, we continue to maintain a strong financial position with over $4 billion capacity for capital employment. The M&A markets are very active. We have a robust pipeline of attractive acquisition opportunities that we're excited to pursue with our unbiased and disciplined approach. We remain quite bullish about our ability to execute this part of our strategy over the balance of this year and into the future. Now, as we turn to your questions, and if you could flip to the final slide, our strategic flywheel, we'd like to remind everyone that what we do at Roper is simple. We compound cash flow over a long arc of time by operating a portfolio of market-leading, application-specific, and vertically-oriented businesses. Once a company is part of Roper, we operate a decentralized environment so our businesses can compete and win based on customer intimacy. We coach our businesses on how to structurally improve their long-term and sustained organic growth rates and underlying business quality. Finally, we run a centralized, process-driven capital deployment strategy that focuses in a deliberate and disciplined manner on finding the next great business to add to our cash flow compounding flywheel. Taken together, we compound our cash flow over a long arc of time in the mid-teens area. So with that, we'd like to thank you for your continued interest and support and open the floor for your questions.
spk11: Operator, please go ahead. Thank you.
spk00: We will now go to our Q&A portion of the call. We request that our caller limit their question to one question and one follow-up. If you would like to ask a question, you may do so by pressing star followed by the digit one on your touchtone telephone. If you're using a speaker, pick up the handset before pressing the keys. To withdraw your question, please press star, then the digit two. Again, we request that callers limit their questions to one main question and one follow-up. And we will now take the first question. And this comes from the line of DeAndre from RBC Capital Markets. Please go ahead.
spk04: Thank you. Good morning, everyone. Good morning. Hey, maybe we can start with the production efficiency issues at Neptune. And if I understand this correctly, so mechanical meters, it's an established platform. So I would not expect that be like a startup issue on this, but maybe just share with us what the problem is, what the remedy is and so forth.
spk09: Sure. Delighted to do that. Appreciate the question. So just to highlight what you talked about on the call. So first is demand at Neptune is consistent. with our expectations, so there's no demand issue here on either the static or the mechanical side. Second, the team did just a remarkable job standing up the static ultrasonic capacity in the first half. You know, that business is growing, you know, north of 20% year-on-year, so this capacity had to happen there. And we get to the mechanical, and I think the root cause here is just the simple fact that the team's attention was standing up the static and the ultrasonic capacity, and we lost a little bit of production efficiency on the mechanical side. The countermeasures are in place. We just have to get back to prior levels of efficiency. We don't have to have a breakthrough level of efficiency here. And so, like I said, the countermeasures are in process. It's got the full attention of the team, and this should be resolved this year.
spk04: All right. That's good to hear. And then a second question. How about any issues with the CrowdStrike fiasco earlier this week? Any impact? any new vulnerabilities across your businesses, and anything you could share there would be helpful.
spk09: Yeah, generally a non-event for us, and based on the information we have at this stage, this time we don't anticipate the event will have any general impact on us.
spk11: Wow. Okay. That's great to hear. Thank you.
spk00: Thank you. And the next question comes from the line of Joe Proving. Their line is now open.
spk01: Great. Thanks for taking my questions. There was a fair amount of discussion over the past quarter from others in enterprise software just around maybe deal delays as their customers contemplate AI and investments related to AI. It certainly That doesn't seem like that's happening at Roper application software. I was hoping you could comment just on what the portfolio companies at Roper are hearing from customers on AI. And are there either postponements or I might ask conversely, is Roper actually being brought in in new ways by customers to assist with their AI strategies?
spk09: Yeah, I'll take a first pass at this, and then if Jason has anything to add. So, first, it's been this year. Certainly, we're aware of the situation from the other companies, and so we're listening intently for this when we do our call-downs with the businesses. And not once in any of our call-downs or none of the first quarter, second quarter written summaries of business unit performance has this been noted as an issue in terms of our customers' IT spending diverting away from what we did as a first point. We've started to think about why that is. I think part of the reason is we're a teeny tiny portion of the IT spend of our customers, and we're mission critical in what we do. So I think it's a combination of the two. And our customers are very much looking to us to Gen AI enable our product offerings. And we're very much doing that. We've talked about it in the prepared remarks for the last several quarters. I think there's three or four references in today's call, and so we're super bullish about the opportunity. We noted enterprise software bookings up high single digits in the quarter, so some momentum there.
spk11: Yeah, that's right. And Joe, we talked about this a month or two ago.
spk03: Yeah, it's pretty consistent there. And I think, like Neil said, our enterprise bookings were strong across a number of businesses. Even Dell Tech was still down a little bit, so it was pretty widespread. So, no, like Neil said, nothing on our calls indicated that this is an issue whatsoever, at least at this point.
spk01: Okay, that's great to hear. Yeah, and I wanted to follow up on the high single-digit growth in enterprise bookings because that does seem like a positive change in trend. So, Dell Tech contributed, it sounds like, any other big needle movers to call out just in terms of the bookings developments?
spk03: And actually, Joe, Dell Tech was still down a little bit. So, that's with Dell Tech being down. But, you know, Neil highlighted some strength at Strata. So, we saw, like I said, Pipeline has been building and saw some good bookings in the latter part of Q2. Adderen has continued to be strong. Vertical or frontline also caught really good quarters as well.
spk10: Okay, great. I'll leave it there. Thank you.
spk00: Thank you. And the next question comes from the line of Julian Mitchell from Barclays. Please go ahead.
spk06: Oh, yes. Hi, good morning. I just wondered if you could give us some color around the Q3 EPS guide. Normally, you have a stronger sequential uplift, maybe 20 cents plus in the last couple of years into the third quarter. Is there much sort of happening there this year that's kind of weighing on that? Any kind of one-timers maybe on that point on Neptune that's weighing on the sequential growth?
spk03: Yeah, thanks, Julian. I think a little bit is Neptune. So just getting those operational efficiencies will push some of that revenue that we normally have in the third quarter into the fourth. And then if you just look prior year, I think we think AS margins are going to be down year over year in Q3. If you recall, last year was kind of the high watermark, Q3 was, of 2023. So we actually expect it to be stronger AS margins in Q4. So we'll have a strong Q4 there. So it's just a little bit of a shift on margin, I think, in the AS segment, which is obviously more than half of our revenue.
spk06: That's helpful. Thank you. And then just my follow-up question. would really be around the network software piece and going back to the freight market. Sounds like it's trending kind of as you thought. Maybe update us where we sit in terms of the timing of that cycle trough and what sort of slope of recovery you think we should expect there in the next kind of 12, 18 months, please. Thank you.
spk09: I'll give you our best crack at what's going on there. So as we all know, in recent years, past periods, DAT just really experienced abnormal growth that was consistent with the freight cycle. And then sort of the freight recession is what's been impacted business for the last several quarters. This quarter was flattish in terms of the volumes that we're seeing. And then maybe there's a little bit of green shoes happening. The spot market volumes are stable to slightly improving. Carrier attrition in the network has slowed a little bit more than originally expected or anticipated. And finally, and maybe most importantly, freight rejection rates in the market are improving. And so we're sort of bouncing, as I mentioned, we're bouncing along the bottom. That's our call for a balance of the year, and we're not going to bake in an improvement in our outlook until we actually see it, but maybe there's some green shoots happening here.
spk06: That's great. Thank you. You bet.
spk00: Thank you. And the next question comes from the line of Terry Tillman from True Securities. Please go ahead.
spk11: Thanks for taking my questions as well.
spk02: The first question, it's kind of a multi-parter. It's related to the Dell Tech business. And then I did have a follow-up. It's going to be on Adderitt. But in terms of Dell Tech on that large GovCon side, I assume that's where some of that volatility and some of the bookings weakness is still going on. Is there some seasonality dynamics and just kind of strengthening of the pipeline and visibility into the second half where you think that can turn positive in terms of bookings? And the second part of this first question is on FedRAMP. If I wasn't mistaken, FedRAMP could potentially unlock some large deals. And then I had a follow-up.
spk09: Yep. So we'll try to take both of those. So Dell Tech is not really a seasonal business. And just so we're clear, Dell Tech's got two parts of the business, about 60 percent GovCon, about 40 percent is the professional services and markets, architects, engineers, construction contractors. The professional services side has been solid, robust, consistent. The slowness has been on the GovCon side, particularly the enterprise, the very largest customers, as just the last 12 months or maybe a little bit longer of government spending uncertainty is what's driven sort of the slowdown or sluggishness in the market. In the second quarter, Delta, on the GovCon side, there was a little bit of enterprise activity, bookings activity, which was super encouraging to see. It's been a few quarters since we've seen that. And there also isn't really an election impact that's tied to this part of the business, at least historically there's not been. So it's just having some stability in the government spending outlook. It also doesn't really matter what the government spending is on. It just is the government operation of spending has been uncertain. I mean, you're right on FedRAMP. The company is, I think, FedRAMP moderate compliant today. And it's a definitive unlock for the SaaS migration on the GovCon side of the business, which is just in the very, very beginning, like the bottom of the first inning.
spk02: Right. Thanks for the update there. And I guess just a follow-up question. You know, I've been struck by just from our own primary research, just the the Adderent customer base and optimism about moving to cloud. Where are we in that upgrade cycle and moving to cloud? And is it unlocking kind of expansion sales opportunities? Thanks.
spk09: Yeah, Adderent's just so good at the moment for multiple factors. The one you list around the SaaS migration is just one. I mean, the company's just done a lot of market momentum. They're leading the market on the use of general AI tools and software applications. their net market share of winners that continue to gain net market share. And just to give everybody listening context, the last five to seven years has been a market share game, right? So we've gone from 30 to north of 50% market share over that period of time for large law firms. And most of that share gain was on premise. And with the advent of COVID, the large law firms decided they wanted to start the migration to the cloud. So we've got a multi-year journey of the lift and shift from our on-premise customers to the cloud. The product is enabled, and we're just beginning that migration now. Maybe this is in the second or third inning. It's very early.
spk03: Yeah, there's a few dozen conversions that's happened over the last three or four years, so we're still really early. It's obviously picked up in the last, call it, six quarters.
spk11: But yes, still plenty of room for there. That's great. Thank you.
spk00: Thank you. And the next question comes from Scott Davis from Elias Research. Please go ahead.
spk11: Hey, good morning, guys. Good morning, Scott. Good morning.
spk13: Is it fair to say it's getting a little harder to get price year over year? I'm kind of thinking specifically network software, but I guess application software as well. But I know you had some pretty big price increases the last couple years. Has it gotten a little harder to – to get price in those markets?
spk09: Scott, we would actually say we've not gotten an outsized price in our software businesses over the last couple of years. You know, price is part of the growth algorithm that we talked about. As a general matter, price is going to offset the trend on the ARR base, and then we're going to cross-sell and up-sell and add new to sort of get to the total growth of the business. there's been just maybe a teeny tiny amount of price that's above normal on both the network and application software side. So it wasn't a big benefit historically. We don't have to lap that going forward to the extent pricing were to normalize, because in our case, we've been normal through the period.
spk13: Okay. All right. That's good color. And then, you know, last quarter – My takeaway was your enthusiasm on M&A markets unlocking was pretty high. Is it fair to say you're still on the same level of enthusiasm about being able to get high-quality deals done this year?
spk09: Very much so. The market is – the commentary we talked about a quarter ago is the exact same commentary today. It's just an amazing amount of pent-up demand for opportunities. I think I said last time it's going to be three to three and a half years deals compressed in a couple of years. We still believe that's the case. Interesting thing happened in the first half is that the first half deals in the market were super binary based on asset quality. A-plus assets traded anything in the B or below did not, which is leading sponsors to really face the reality about value and valuations. And so the combination of that, the pent-up demand, interest rates, being higher should yield more reasonable valuations. We'll see, but we're super encouraged by both that dynamic around valuation and then just the volume of opportunities that we see. Final thing I'd say is that Jan and her team are much more proactive and proprietary in our pursuits, and that's being well received by the sponsors we're engaging with.
spk11: Okay, encouraging.
spk10: I'll pass it on. Thank you, guys.
spk00: Thank you. And the next question comes from the line of Joe Giordano from TD Cohen. Please go ahead.
spk05: Hey, guys. Good morning. Can you remind me of, at Neptune, the mix between ultrasonic and mechanical and what that is today, where you see that going, and is there any material margin difference between the two products today?
spk09: Yeah, so on the mix, we've been advised by Neptune for competitive reasons to sort of stay away from the specifics of the mix. Today, the market is declaratively going to static. There's a lot of benefit to static, and we believe we have a demonstrable product advantage with our static meter around being able to read accurately both high and low flow rates. Relative to the margin profile today, they're similar-ish in terms of margin profile.
spk05: Okay, and then If I just think about maybe more construction, but maybe a little bit on Dell Tech too, but it seems like construction starts and activity is still at a good level, but the starts are getting worse, and it seems like even on the institutional side, things are getting a little bit weaker, but from good levels. What are the implications there, and are you seeing any of that at either of those businesses?
spk09: Yeah, so on the Dell Tech side, the construction vertical Dell Tech remains strong. The pipeline activity is strong. The bookings activity is strong. Now, mind you, our customer base is very much on the S and M side. They're not the enterprise. They're not the largest customers, the Dell Tech services. So maybe, I mean, there's a gigantic unbended market. So even in the headwinds of maybe a little bit of slowdown, When these smaller contracts are looking for efficiency, they would look to using our software to do that, which might help with some of the pressure. At ConstructConnect, this business has just been – it's just good, old-fashioned execution that has led to better outcomes there. They've got a really good choice on their strategy and making choices to focus on the trade contractors and building product manufacturers there. They've done a great job enabling that strategy around the product and R&D and go-to-market sort of changes, the lead generation changes, the way they do their demos. I think we've been four quarters of double-digit bookings at Construct Connect, and so it's just been good old-fashioned execution there that's led to quite an improved outcome here. All right, guys.
spk00: Thank you. And the next question comes from Steve Tusa from J.P. Morgan. Please go ahead.
spk07: Hi, good morning. Good morning, Steve. On the Neptune side, what's the kind of backlog status there and what's your book to bill on that front? Just some color on the orders because, you know, accelerating into 4Q when your growth was, you know, 15% seems to imply, you know, quite a catch-up even beyond maybe just – fulfilling, you know, some of these other orders. And then secondarily, you mentioned high single-digit growth in software, I believe it was, bookings. Is that organic or reported? And if that's total software, shouldn't that translate to revenues, you know, more near-term in the second half? Doesn't look like you're accelerating there in the second half. Thanks.
spk03: So on Neptune bookings, I mean, we talked about the backlog coming in the year was still extremely strong, right? And so we had... three or four quarters, almost four quarters of backlog going into the year. And so that's what we've been working through this year. And then orders have continued to be strong, continued to be enough to, I guess, to answer your question around the fourth quarter for sure in our guide and then setting up for next year. And then on enterprise bookings, the way we define that is it's all of the software business outside of DT, LoadLink, and ConstructConnect because those are more SMB-type businesses. And those are annual contract value revenue. So it's the time of booking, and then you've got to, depending on the company, the delay between when the booking happens and when it converts to revenue, that can vary depending on the nature of the award. And so it doesn't always translate into revenue in the current year, but it certainly does help support where we think AS is going to be in the second half and then into 2025.
spk09: That's right. And just the only thing I'd add to Jason's thought on the software bookings is the majority, if not the vast majority of bookings, are subscription or SaaS related. So you've got the number of months left in the year. It's just hard to impact bookings in the second half or even sub-core. You've got six months left to go. So it really is about the launch-off point at AR for 25. Oh, yeah. Just to clarify, it is organic.
spk07: That's right.
spk11: Okay. Okay, great. Thanks a lot. Appreciate the call.
spk00: Thank you. And the next question comes from Alexander Blanton, individual investor. Please go ahead.
spk08: Oh, it's really Clear Harbor Asset Management, not an individual investor. I'm going to go back to the Neptune production issue. I really wasn't clear on the answer that you gave before, so perhaps you can make some clarifying comments. What What's the nature of the production holdup or problem? And I think you said that you expected it to be resolved by the end of the third quarter so that you would do some catch-up in the fourth quarter. Could you elaborate on that?
spk09: I'll do my best. So, as you know, Neptune at the highest level makes two forms of meters, a static meter and a mechanical meter. The static meter, we've had to add production capacity, which was successfully commissioned in the first half. So that's great news. To the existing factory. To the existing factory that we have in Alabama. The mechanical meter side, we have the capacity that's needed, but there was essentially a daily efficiency production rate that was below where it needed to be to meet the demand and deliver on the customer commitments. That's what's in the process of being countermeasured. Again, I mentioned before, this is just returning to levels of previous efficiency, not a breakthrough level efficiency that was not yet ever achieved. And so the teams are fully countermeasuring this at the moment, and we expect it's beginning to resolve itself in the third quarter, and we hope and expect it to resolve itself in the balance of the year.
spk08: Well, my question really was, what caused it to deviate from prior levels?
spk09: We think the root cause of that is you got a factory management team that was super focused on adding the static capacity in the first half and just got distracted or lost focus on the daily efficiency or production efficiency on the mechanical side.
spk08: Well, right. But what is the nature of the production efficiency problem? That's what I'm getting at.
spk11: Alex, we're delighted to take this offline if you want to talk about it in more detail. Okay, thank you.
spk00: Thank you. This concludes our Q&A session. I will now hand the call over back to Zach Moxie. Please go ahead, sir.
spk11: Thank you, everyone, for joining us today. We look forward to speaking with you during our next earnings call.
spk00: Thank you. This concludes our conference call for today. Thank you for attending today's presentation. You may now disconnect.
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