Roper Technologies, Inc.

Good morning. The Roper Technologies conference call will now begin. Today's call is being recorded, and all participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be a question and answer session, and further instructions will be given at that time. I would now like to turn the call over to Zach Moxie, Vice President, Investor Relations. Please go ahead, sir.

Good morning, and thank you all for joining us as we discuss the fourth quarter and full year financial results for Roper Technologies. Joining me on the call this morning are Neil Hahn, President and Chief Executive Officer, Rob Cresci, Executive Vice President and Chief Financial Officer, Jason Conley, Vice President and Chief 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 calls. 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. 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 SunQuest trade name and technology asset impairment related to the merger with Klinasys, and lastly, income tax restructuring associated with our pending divestiture of TransCorp. Reconciliations can be found in our press release and in the appendix of this presentation on our website. And now, if you please turn to page four, I will hand the call over to Neil. After our prepared remarks, we will take questions from our telephone participants. Neil?

Thanks, Zach, and good morning, everyone. Thanks for joining us. Let's turn to page four and review today's agenda. As usual, we'll start with our quarterly and full-year highlights. We will then provide details regarding our segment performance, followed by sharing our first quarter and full-year 2022 guidance. At the end, We'll leave plenty of time to address all your questions. Next slide, please. As we turn to page five, the main takeaways for today's call are, first, our strong finish to 21. Second, that we're set up very well for solid 2022 organic performance. And third, we have substantial M&A capacity given our rapid deleveraging last year. As it relates to the fourth quarter and close to 2021, Financial performance was excellent with double-digit growth in revenue, EBITDA, debts, and cash flow. Additionally, because of our strong cash performance last year, our balance sheet is in a great spot as we exceeded our deleveraging plans for the year. As we look towards our 2022 outlook, we have considerable tailwinds that helped set up for a very strong year. Underpinning this outlook is our software recurring revenue growth momentum. Given strong market demand, continued innovation in new products, and an increased shift towards our SaaS solutions, we exit 2021 with robust ARR growth that carries momentum into 2022. In addition, our product businesses are experiencing strong demand and record levels of backlog, which provides these businesses with an unprecedented level of in-hand orders and revenue visibility heading into the year. Factoring all this together, we expect 6% to 8% organic revenue growth in 2022. In addition to this organic outlook, our balance sheet is well positioned to allow us to be more meaningfully offensive with M&A in 2022. So, the table is set for us to have a great 2022 and continue our long-term track record of double-digit cash flow compounding. Now, let me turn things over to our CFO, Rob Cresci, to walk through our financial summary. Rob?

Thanks, Neil. Good morning, everyone, and thanks again for joining us. Turning to page six, looking at our Q4 income statement performance, as Zach stated earlier, all the financials here are reported on a continuing operations basis unless otherwise noted. Both organic revenue and total revenue for the quarter increased 13% to a total of $1.51 billion. EBITDA grew 12% to $576 million. EBITDA margin was down 10 basis points versus prior year at 38.1%. That all resulted in adjusted diluted earnings per share of $3.73, which was above our guidance range. Free cash flow grew 4% in the quarter on top of last year's 23% fourth quarter growth. Cash conversion was once again very strong at 35% of revenue and 92% of EBITDA. Q4 was a nice finish to a very strong year and positions us well for a great 2022. Next slide. Turn to page seven, reviewing the Q4 results by segment. Neil will discuss the full year segment performance in more detail a little later, but we wanted to just highlight the Q4 results by segment here. All four segments grew double digit organically as our businesses executed very well and continued to win within their niche markets. Application software segment grew 10% organically with broad-based strength throughout the segments. EBITDA margin increased to 43.8%. For network software, excellent 14% organic growth with EBITDA margin increasing to 52.3%. For measurement and analytical solutions, 15% organic growth was broad-based with double-digit growth at Neptune, medical products, and our industrial businesses. EBITDA margin was 31.3% as our businesses continue to navigate supply chain challenges. Lastly, for process technologies, a nice rebound from last year's declines with 17% organic revenue growth and EBITDA margins of 31.2%. Next slide, turning to page 8, which is a summary of our full year 2021 financial highlights. For full year 2021, organic revenue growth was 9%. We benefited from both our strong organic growth and meaningful contributions from our recent acquisitions to achieve 19% total revenue growth. EBITDA grew 22% for the year to exceed $2.2 billion. EBITDA margin increased 90 basis points to 38.2%. Full-year debts increased 23% to $14.18, which was above the high end of our guidance range. Free cash flow performance was outstanding for the year with 19% growth to $1.8 billion. Our free cash flow represented 31% of revenue and 82% of EBITDA. Excellent cash conversion, which is, of course, a key component of Roper's business model and value creation flywheel. We are well positioned to continue our double-digit cash flow compounding moving forward. Next slide. Turning to page nine, which is the latest installment in our successful deleveraging story. Including our discontinued operations, total operating cash flow for 2021 exceeded $2 billion. After CapEx and servicing of our dividend, Nearly all of our excess free cash flow went to debt reduction. In total, we were able to reduce our net debt by $1.7 billion in 2021, which exceeded the deleveraging outlook we shared with you last January by about $200 million. We ended the year with net debt to EBITDA of 3.1. Subsequent to year end, we closed the previously announced $350 million ZTECH divestiture, which has further reduced our leverage. The closing of the TransCorp divestiture expected for later this quarter will bring in over $2.1 billion of additional after-tax proceeds. We are pleased with our performance here as we once again demonstrated our ability to quickly delever after large acquisitions, reinforcing our commitment to our solid investment-grade ratings. So with that, I will turn it back over to Neil for the remainder of our prepared remarks. Neil?

Thanks, Rob. Let's turn to page 11 and walk through the 2021 highlights for our application software segment. Revenues here were $2.38 billion, up 8% on an organic basis, and EBITDA margins were 44.2%. Across this segment, we saw organic recurring revenue, which is a touch north of 75% of the revenue for this segment, increase 8% for the year. This recurring revenue growth is enabled by strong customer retention, continued migration to our SaaS delivery models, cross-selling activity, and new customer ads. Across this group of companies, the financial strength was broad-based. To highlight a few companies, Dell Tech, our enterprise software business that serves the U.S. federal contractor, architect, engineering, and other services in markets, had another great year. Dell Tech had nice gains in both their government contracting and private sector in markets, gaining share in each and driving considerable SaaS adoption. Dell Tech continues to benefit by having favorable secular tailwinds. Turning to Vertifor, a great year, exceeding the EBITDA expectations that we outlined at the time of the acquisition in 2020. Vertifor had impressive demand from their enterprise customers as they continue to partner with PNC agencies to tech-enable their customer acquisition, quoting, and underwriting workflows. Notably, VertiFOR had record quarterly bookings in Q4, which only adds to their ARR momentum. Amy, to you and your team, congrats to a phenomenal start as part of the Roper family. During the fourth quarter, we combined ClinAssist and SunQuest to create the largest global lab diagnostics and informatics business. Together, the businesses will begin integrating their go-forward product roadmaps and innovation efforts and operate under the ClinAssist brand. Also of note, both Clinassys and Data Innovation set records by a wide margin for bookings activity in 2021. Finally, as it relates to this group, we recently completed the acquisition of Horizon Lab Systems, which adds public health, water, and environmental laboratory cloud-based software to the global Clinassys product portfolio. Adderick continues to be a solid performer for Roper, taking share in 2021 from our primary large law competitor. Also, starting in 2020 and gaining momentum last year, Adderant is seeing a meaningful shift towards their cloud offering, helping drive substantial increases in their recurring revenue stream. Finally, we completed a small tuck-in acquisition, American LegalNet, which will extend and enhance Adderant's court docketing software solution. Finally, Strata's combination with EPSI has worked out wonderfully well. Today, Strata partners with about half of the U.S. acute care hospitals to help them manage, forecast, and plan their operating and capital expenses, and continues to extend both market share and product cross-selling. Looking to the outlook for 2022 in this segment, we expect mid-single-digit growth that is driven by our ARR, or recurring revenue momentum, making for a solid year for this segment. And with that, let's turn to our next slide. Turning to page 12, as a reminder, the financial performance for this segment, as well as the next two, MAS and PT, are shown on a continuing ops basis. 2021 revenues in our network segment were $1.34 billion, up 11% on our organic basis, and EBITDA margins clocked in at 51.1% for the year. The exceptional organic growth performance in this segment was underpinned by very strong growth in recurring revenue, which is roughly 80% of the segment's revenue. The growth and margin performance in this segment was broad-based and well-distributed. As we dig into business-specific performance, our U.S. and Canadian freight match businesses were just amazing throughout 2021. Market conditions were very favorable, which led to record levels of network ads, especially on the carrier side. More so, the leadership team at DAT did a terrific job scaling infrastructure to meet the market's demands while maintaining aggressive new product innovation efforts, which led to higher ARPU as well. Over the longer arc of time, our freight match businesses continue to be well-positioned to enable the digitization of the spot freight markets. Also, all of our other businesses in this segment saw increasing levels of ARR growth throughout the year, which helped set up for a strong 2022. To highlight a few, Foundry did a terrific job of continuing to extend their product advantage by using AI ML to automate tasks within the media and entertainment post-production workflows. In addition, Foundry has benefited by the continued increases in content creation budget for streaming, animation, and theatrical releases. iTrade, our network food supply chain business rebounded very nicely in 2021 following the 2020 COVID shutdowns. In addition to benefiting by food service reopening, iTrade was able to meaningfully expand their food supply chain network in 2021. iPipeline continues to benefit from the tech enabling of the life insurance distribution model and our long-term care GPO, pharmacy software, and home health analytics businesses continue to benefit from the post-COVID recovery and the longer-term demographic aging of America. Finally, both RFIDS and Endovonix had good years, improving in the second half, especially within their healthcare applications. Turning to the full-year outlook, we expect to see high single-digit organic growth for this segment, driven by a combination of strong recurring revenue momentum and favorable market tailwinds. Please turn to the next slide. As we turn to page 13, revenues in our MAS segment were $1.56 billion, up 8 percent on an organic basis. EBITDA margins for the segment were 33.1 percent for the year. Again, these results are on a continuing ops basis. Before getting into business-specific details, across this segment, demand continues to be very strong. As previously mentioned, product backlogs ended the year at record levels. Also, each of these businesses are navigating the current supply chain environment. Strong demand at Neptune continued throughout the year, picking up in the back half as Neptune's end markets continue to fully reopen. Also, the Neptune team continues to do a great job innovating their core product offering, both in terms of the metering and the meter reading technologies. These innovative product advances helped set Neptune up for many great years. Verathon was very good last year. Remember, they had a great 2020, which was aided by COVID-related demand, but Verathon's 2021 was meaningfully higher than 2019, roughly 40% larger. Over the last two years, this team has innovated like crazy, going from zero to number two in the US single-use bronchoscope market. launching several new video laryngoscope products, and developing a new ultrasound core platform. Perhaps more importantly, in 2021, Verathon's largest product offering is now a mission-critical, consumable medical product. Our other medical product businesses, especially NDI and Civco, recovered nicely in 2021 as healthcare spending started to normalize. These businesses entered 2022 with record levels of order backlog. Demand across our industrial businesses rebounded with better end market and capital spending conditions, but somewhat hampered by supply chain challenges. As it relates to the 2022 guidance, we expect to see high single-digit growth for this segment underpinned by strong demand and backlog levels, but somewhat constrained by the current supply chain environment. Net-net, we expect a very strong year for this group. Now let's turn to our final segment, process tech. As we turn to page 14, revenues in our process tech segment were $499 million in 2021, up 8% on an organic basis. EBITDA margins were 32.2% for the year. These results are also reported on a continuing ops basis. The story here is we saw improving in-market conditions across virtually every one of our businesses in this segment and very strong demand in the second half. Cornell continues to perform well for us. This is partially based on marketing conditions, but also based on Cornell's product innovation, as they're seeing very nice demand pickup for their IoT-connected pumping solutions and the share gains they're enjoying as a result of their niche-focused go-to-market teams. Similar to that of our MAS businesses, these businesses are being impacted by supply chain challenges, but continue to navigate well through the issues. Across this group, the businesses exited 2021 with record levels of order backlog. As we turn to the outlook for 2022, we expect mid-teens organic growth based on strong levels of backlog and solid market conditions. Now, please turn to page 16 as we'll walk through our 2022 guidance. For 2022, we're establishing adjusted depth guidance on a continuing ops basis of 1525 to 1555. Underpending this depth guidance is organic revenue growth of 6% to 8% and a tax rate of 21% to 22%. As we said throughout the call, we feel quite bullish about our 2022 based on our 2021 recurring revenue growth and the momentum it carries into this year, the strong product demand, and the record levels of order backlog. As you look to the first quarter, we're establishing adjusted depth guidance to be in the range of 363 and 367, again, on a continuing ops basis. Now some concluding comments, and we'll get to your questions. As we turn to page 17 and our closing remarks, we want to leave you with the same three points we started with. We had a strong 21. We were set up very well for a solid 2022 organic performance, and we have substantial M&A capacity heading into the year. As it relates to 2021, our revenues grew 19% to $5.8 billion and 9% on an organic basis. EBITDA grew 22% to $2.2 billion, which was 38.2% of revenue. Free cash flow grew 19% to $1.8 billion, 31% of revenue, and 82% of EBITDA. Finally, we exceeded our deleveraging plan by reducing that debt by $1.7 billion and ending the year with 3.1 times leverage. As we discussed throughout this call, we're set up to have a very strong 2022. Our 2021 software recurring revenue growth provides significant momentum heading into the year. Additionally, our product businesses had and have broad-based demand and record levels of backlog. Taken together and further aided by favorable market tailwinds, we expect to see 6% to 8% organic revenue growth this year. In addition, we have reloaded our balance sheet and continue to have a highly active and engaged pipeline of M&A opportunities. We anticipate having about $5 billion of available M&A firepower over the course of 2022. As a result, we have a high level of conviction that will continue our double-digit cash flow compounding in 2022. And 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 questions 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 touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star then the digit 2. And once again, ladies and gentlemen, we request the callers limit their questions to one main question and one follow-up. And today's first question comes from Dean Dre at RBC Capital Markets. Please go ahead.

Thank you. Good morning, everyone.

Morning, Dean.

Hey, maybe we can start with the impact of Omicron supply chain, etc., It did come up a couple parts in your prepared remarks, but in the scheme of things, it did not sound as impactful as we've heard from other companies. So not surprising in measurement and process, it did have an impact. So could you size there? what might have been either revenue push outs, because I've seen record backlog, so that implies that you might not have been able to get some of the product out the door. And then just confirm on the software side what the impact is, if any. I mean, it's probably limited site access, maybe some landing new logos and so forth. But just how did that play out and what's the expectations in the first quarter when hopefully we get to some sort of normal level of activity and access?

Yeah, so, Dean, I'll start maybe going in reverse order, and then there's a handful of... ...side. There is no supply chain, fortunately, so there wasn't an impact in any meaningful or non-meaningful way on our software businesses... You know, the businesses have been working remote for the last two years. And so that's a complete, the Omicron spike, if you will, is a complete non-factor. You know, bookings activity, as we talked about, was super strong at Q4 there. So that's our view there. On our product businesses, yeah, it was more about supply chain, less about, you know, Omicron and shutdown of facilities. I mean, it happened for a week here and there, not an impact really in the quarter. And the issue on supply chain, as you hear from, I'm sure, other companies, it's not one thing. It is really sort of a hornet's nest of small things. One of the nice things about our organization, as you know, is we've got 25 or so product businesses and 25 groups of people focused on their bespoke issues. And they did a very nice job in Q4 working through that. Little bit of margin pressure in those businesses at the gross margin line in Q4. Just sort of expediting and sort of pulling things forward to be able to meet demand. A couple other things I'd say, and then we'll turn it to Rob, is as we look to 2022, those issues haven't abated. We expect them to sort of lessen in the second half, but still persist to some degree. And the final thing is the companies, their teams have done a very nice job of sort of taking the price, taking price and offsetting, you know, going forward in 2022. the impact of the inflationary environment associated with this. Rob, anything you want to add?

Yeah, that's right. So, yeah, you know, it clearly impacts the product margins a little bit. You saw that in the fourth quarter. We're assuming Q1 is similar and then a little bit of gradual improvement throughout the year on margins for the product businesses.

And did you size or can you size any missed revenues or was it not meaningful?

It was not meaningful.

yeah, you know, I mean, we're, we're at record backlog levels as, as all other businesses are that, that sell products. And so, um, you know, we will benefit from that moving forward, but we wouldn't say it was meaningful to, you know, sort of revenue and in the quarter.

Thank you. And ladies and gentlemen, our next question today comes from Christopher Glenn at Oppenheimer. Please go ahead.

Uh, yeah, thanks. Good morning, everyone. Um, so, uh, congrats on rebooting the balance sheet there. Just, uh, I wanted to ask about the pipeline. How are you seeing the toggle between what's currently most actionable versus decision trees around holding fire? I think sometimes you've talked about don't do the very good at the expense of great.

Well, I want to make sure we understand your question. I mean, I think in terms of the opportunities that are out there for acquisitions, I mean, there's a lot of opportunities. There are always a lot of opportunities. The pipeline activity is full. There's lots of discussions. Diligence, we're always in some phase of diligence at some point, something. The thing that we said for a very long period of time, the 10 years I've been here, is that we continue to invest through cycle. We're a permanent home. We're trying to find the very best businesses we can find because we're going to own them over a very long arc of time, and that the compounding effect overwhelms any sort of short-term value we've been here or there, and compounding overwhelms any sort of cycle benefit. That's going to be the perfect visibility of what the future holds, which we don't claim to have.

That's great. Helpful. Thanks. You're pretty bullish kind of even multi-year comment on Neptune. I'm just wondering if you could drill in there a little bit and what you're seeing specifically for 2022 for Neptune and the particular compounders into 2023, 24.

Yeah, I think it's, we're not going to, we try not to give guidance on the forward year for a specific business. But you're right, the commentary and our view of Neptune and what Don and the team's doing there is quite bullish. It's rooted in three things, principally around the products, both the meter itself going more static from mechanical, the reading technology going to more cellular. And then once you have both of those elements in place, then Neptune becomes more of a data business, helping its customers sort of navigate the data and work with their customers in a more meaningful, impactful way. Importantly, on the first two, especially the meter technology itself, we think we have some very real proprietary advantages in the static ultrasound technology that we're using both on the residential side and the commercial side that we're quite bullish about going forward.

Thank you. And our next question today comes from Allison Poliniak of Wells Fargo. Please go ahead.

Hi, good morning. I just want to talk. I know you mentioned, you know, strong freight matching. Obviously, I'm a little biased here in terms of what I cover. But, you know, when we think about that, obviously, the network challenges put a huge spotlight on that market. And I know, you know, DAT certainly supports some of the new entrants. But how are you managing, I would say, that risk in terms of the viability of some of the new entrances that are coming onto your system or utilizing your system as well as competitive dynamics? Any thought there?

Yeah, so DAT, as you know, is wonderfully positioned in the spot freight market, you know, as one of two primary, you know, competitors or players that help match the shippers and the brokers and the carriers, I should say. And as you think about the tech enabling of the brokerage model, DAT sits right in the center of that and is their business model and future is only aided by that. In terms of the tech-enabled brokers, all brokers are becoming tech-enabled. There's some that are native tech-enabled and some that are sort of migrating their business models, all of which are customers and all of which are helping do their job to do their business with less human interaction and more computer-driven connectivity.

Got it. That's helpful. And, you know, I guess leaning on that competitive dynamic, meters, obviously, you know, the growth and opportunity certainly attracts, you know, new innovation there. You know, any change in competitive dynamics or, you know, things that you're concerned around, obviously, Neptune seems like it's growing quite nicely for you. Any thoughts there?

Was your question, Allison, on the competitive dynamics on DAT and freight matching or on Neptune? On Neptune.

On freight matching originally first, but this one will be next.

Yeah, so on – no, so, hey, it's something that we pay very close attention to. The team at DAT, you know, has a very open ecosystem. You know, they partner with many folks, and so we pay attention to all of that. But this is a very vibrant, two-sided, scaled network. Scale matters a ton here. And I mean, when I say a ton, I mean, it is a huge rate limiter for competition. You've got to have scale on both sides of the network to be effective. Very hard, not impossible, but super, super hard to create de novo. But we pay attention to that and any competitive activity, and we need to think about how to counteract that. On the Neptune side, hey, I think this is over a very long arc of time. when we think that the metering technology can render a market share advantage. I'll remind you that Neptune seemingly every year for 20 years ekes out 50 to 100 basis points of market share. I think we're clearly the leader in the North American water utility metering space, and we expect that'll just continue eking out a little bit of share gain each year.

Thank you. Our next question today comes from Julian Mitchell at Barclays. Please go ahead.

Hi, good morning. Maybe just wanted to dial into the EBITDA margin guidance a little bit. So you're guiding sort of EPS up around 9% for the year at the midpoint, sales up maybe a point or two lower than that right now. So when we're looking at EBITDA margins, you know, are we expecting those to be up sort of 20, 30 bps or so at the midpoint? And any color around those product businesses just to understand in measurement and analytics and in process, are we expecting margins up much for the full year as a whole in those two divisions?

Yeah, so we have EBITDA leverage on our organic growth around 40%, which is generally pretty normal, so that on a full-year basis, I think you're right, we've got total EBITDA margins up a little bit, sort of embedded in the guidance. The software businesses are... Right. You know, 44% EBITDA for application, 51% for network. We've got that, you know, about the same year every year. Very stable there. You're growing, you're investing, you're, you know, we're having very nice organic growth in those businesses this year. So that'll drive a lot of organic EBITDA growth at those margin levels. And as we mentioned on products, it's a little bit lower margins in the first half of the year, similar to Q4. And then I think we'll benefit from a lot of the price cost things that we've been doing as we get to the second half. Margins get a little better. So I think on a full year basis, again, there, margins are pretty flat year over year. Maybe a little bit of improvement as we get to the second half.

That's helpful. And just my follow-up question on the free cash flow outlook, very good performance last year with sort of 82% conversion out of EBITDA. Anything you'd call out sort of one-time-ish helping that, and how should we think about cash flow conversion in 2022?

Yeah. So, uh, there were a couple of things that helped us this year for sure. I mean, we had great working capital performance, which, uh, which we view will always have, um, especially when you have, you know, highly negative net working capital revenue, you know, minus 15%, um, that, that drives great conversion. Um, in 20 in particular, there were some tax benefits, uh, that we benefited from. Um, and so, you know, the 80 to 83% conversion is great. Um, we're generally feel like if we're plus or minus 80% conversion, And that's kind of where we start, and then we see sort of the one-off items that happen year over year. So we always sort of think we'll be around 80%, and then sometimes it ends up a little bit better.

Thank you. Our next question today comes from Scott Davis, Emilius Research. Please go ahead.

Good morning, guys.

Hey, good morning. Good morning.

Neil, can you talk a little bit about what you're trying to accomplish with combining ClinAssist and SunQuest? And how do you really combine businesses like that? Can you integrate that? Can sales, for example, be combined? I certainly understand many other functions, but just trying to think about holistically how that helps you guys out.

Yeah, I appreciate the question. Good morning to you. So first, I would say, as we've gone through just our portfolio work over my time as being CEO, we've tried to see if there are small pockets where it makes sense to put businesses together. We did it a couple of years ago with Seaboard and Horizon that were both doing very similar things into the education market. And now with Klinasys and Sunquest, as you know, they're doing literally the same thing, just Sunquest historically in the U.S. and Klinasys across Europe. So in terms of this integration, there's still going to be three core technology platforms for lab information, U.S., U.K., and global. But this integration is really all about then sharing the innovation from that point forward. You know, the microservices or service-oriented architecture allows us to do that. The first three in the queue are advanced analytics to help the laboratorians do their job and make better decisions. The acceleration of anatomic pathology, which is the tissue side of a lab into the cloud. and then increasingly the adoption of molecular or genetic into the lab space. So this is more about the product integration, if you will, on a go-forward basis. Go-to-market teams remain very similar as they're selling, you know, bespoke into their very specific geography. So the go-to-market motion's the same. Final thing I'd say here is the teams are totally geeked up about this internally. There's a ton of enthusiasm and excitement. The team now is 1,300 people, 12 countries, 21 languages, and they're part of the largest lab diagnostics business on the planet now.

Okay. That makes a lot of sense. Just a quick follow-up on that. Are the customer needs essentially the same when you go around the world now, Neil, when you think about that product offering?

The customer needs are remarkably similar in that you have the fluid side of the lab, the tissue side of the lab, and increasingly the genetics or molecular labs. And then the integration of the ologies, if you will. Rarely now do you have a genetic test without some sort of tissue or blood or urine test. So how do you integrate the pathologies is a major theme. So those things are very similar. And if you're a lab in the UK, an NHS, or you're a lab at in the U.S. or a lab in France or Spain or wherever it is, the needs are very similar. Okay.

That's what I thought. Good luck, guys. Thank you. Appreciate it. Thank you.

And our next question today comes from Joe Giordano with Cowan & Company. Please go ahead.

Hey, good morning. This is Rob on for Joe. I just had a couple questions about, like, Foundry and iPipeline. You know, you called out some of the secular tailwinds behind these businesses. And I was just kind of curious how much, you know, you have good penetration there already, but how much of the growth and further gains you're going to see in the future is from like new enhancements or upgrades to the existing platforms or products that you offer there? And is there like an opportunity to maybe increase like spend per customer or deepen that wallet as you go forward?

So the answer is it's, I'll try to generalize them because your question around Foundry and Pipeline, totally different markets, obviously, in entertainment and life insurance distribution sort of workflows or channel. Both businesses have net retention well north of 100%, right, which tells you that you have an appreciating asset from your customer base. You're selling more into your customer base. in any given year, that is largely a result of two things. One is your customers are growing with you. They're growing, so you're growing with them. And then two, you're selling them more value, more things. So you're correct in that in Foundry's case, a lot of their growth has been, they're going to sort of ride the tailwinds of the 8% to 12% of content spend that happens in media entertainment between streaming animation and theatrical. But then the workflows in post-production are remarkably tedious and manual. And so as we automate those workflows, those are modules that we can sell to monetize the investment and innovation that we're doing there. Similarly, conceptually at least, at iPipeline, This is a business that we bought it several years ago. It was all about, and the strategy continues to be what they call straight through processing. How do you get from a quote of life insurance to underwriting life insurance? How does that happen with minimal to no human touch? And so being able to do that and automating those workflows is a huge task. But as you do that, you're creating a ton of value for the distribution channel and you're able to monetize that through the product.

That's great. Thank you very much. I'll pass it along. Thank you.

And our next question today comes from Rob Mason at Baird. Please go ahead.

Yes, good morning. Thanks for taking the question. Neil, you've spoken in the past about a heavy focus on software in the M&A pipeline, and I'm just curious, given what we've seen around public market valuations there over the last couple of months, how private market valuations have responded, and Is it requiring more patience on your part if a reset of some sort needs to happen there, just what you're seeing in private market?

Well, we're always patient. So we should start with that. And so we're patient and disciplined relative to the asset selection, the value that we ultimately try to transact at. I'll tell you, the experience here at Roper for a decade and the experience that predated Roper by 15 years sort of being in tech M&A for 20 or 25 years now is the private markets always lag by some, you know, quarter or two or three, the public markets relative to valuation swings to the extent they're meaningful. And so that's what our, my personal expectation would be to the extent that we have, you know, structurally lower public valuations for software businesses, then it might take, you know, a couple, three quarters for those to filter into the private markets. Unclear if that's the case. And so we will be patient. I also said earlier that our analytics, we always are reviewing the analytics, and our analytics suggest that it's better to buy a great business at the market clearing price at the time and let the compounding sort of begin there. rather than it is to try to see if you can wait for that asset and save, you know, 0.5 of a turn of EBITDA. Or buy a lower quality business. Or buy a lower quality business. That's right. But we will be, and we always are patient.

I understand. And just as a follow-up, you had commented on Vertifor's EBITDA coming in above plan for the year. I'm curious, two questions, I guess. What drove that? And then, When you purchased Vertifor, you talked about a mid-single-digit growth revenue expectation there, but believe that could be conservative over time. As you've owned the business a year, what needs to happen to move that mid-single-digit growth perspective higher?

The overdrive on the earnings was – They just, they did a better job of managing their costs and the way the mix came in on the revenue line. So it was, and also a little bit as it, you know, first part of the year, they're still having a hard time spending money sort of with COVID. So it was a little bit of that. But more importantly, the momentum that the business left, I mean, record bookings in Q4 and just the feedback that we're getting from the customers, you know, at the enterprise level. then a nice little tuck-in that helps them get some customer acquisition on the lower side of the P&C agency space that's going well in the first few weeks. In terms of, you're right, the expectation when we bought the business is a mid-single-digit growth business. It still very much is that. Is there an upside to high single digits over a longer arc of time? We'd like to hope so. Amy and her team have a very well-articulated, data-driven, market-driven, outside-in strategy. And there's some execution associated to sort of inflect the growth rate a bit higher. But right now we'll hold it mid-singles and want to see Amy and the team post a few years of better performance before we call it high singles.

Thank you. And our next question today comes from Steve Tusa at J.P. Morgan.

Hey, good morning. Hey, good morning to you. Good to hear you. Can you give us some color on the first quarter organic trend, just what the guide is for first quarter organic growth? And then, sorry, I just wanted to clarify on the EBITDA margins, what do you guys expect for the first quarter kind of on an area basis?

Yeah, so we have the six-date organic revenue guide for the year. It's really pretty consistent throughout the year. For the first quarter, the software businesses are a little bit stronger given all the ARR momentum we have coming out of Q4, and then the product businesses are a little bit lower given some of the supply chain challenges we've spoken about. And then I think, as I mentioned, the EBITDA margins we have for Q1 are flat sequentially to what we had in Q4 for the company.

Okay, great. And then just on that kind of comment about double-digit free cash flow growth in compounding continuing, is that kind of a high-level guide for the year? And will you be growing free cash flow double-digit without another acquisition, or would that take another acquisition to grow?

Yeah, so, I mean, it's not a guide. It's a, you know, what we do here at Roper. So I think if you take our organic and you take capital deployment and you look at us over, you know, any given year or certainly over a couple years, we're a double-digit compounder. So I think that'll continue to be the case. And we've got, you know, a lot of firepower for M&A that will certainly help that number here the next couple of years.

Thank you. Our next question today comes from Brian Lau, Wolf Research. Please go ahead.

Hey, good morning, everybody. So I just wanted to talk about the network software and systems guide. So high single digits and 22 after a couple of strong mid to high teens quarters and 3Q, 4Q, kind of meaningfully ahead of the historic trends of like mid single digits. Is this the new medium term kind of algorithm for the segment? And is this where you think application software can get as you kind of continue the SaaS transition there as well?

Yeah, well, you know, just historically, um, you know, Transcore was in that segment, right? So the, the software business have a little bit higher organic, uh, growth profile than the old segment did with, with Transcore with a little bit of more, um, up and down given on, you know, on various projects. And I'll turn it over to Neil to.

Yeah. I mean, Hey, I think it's networks. Hey, it's been strong. It's been strong across the board. As we highlighted this quarter, much of 2021, there was like super strength in our, at our freight match businesses, both in North America. and Canada. So that super strength will moderate a little bit while the rest of the portfolio improves a little bit. But, you know, this has been a great couple of years last year, this year for network. Application software, the businesses are great. You know, I think all of them sort of are very steady, eddy, mid-single-digit growers. As we transition, you know, more of our revenue stream away from perpetual into recurring Over a long arc of time, is there a chance that that can inflect a little bit higher? I believe so, but it's going to take a few years to do that.

Okay, great. And then just on measurement, could you just clarify what the growth would look like in 22 without supply chain constraints versus that kind of high single-digit outlook? Thanks. Hard to say. Yeah, that's tough to quantify.

Very hard to say. I mean, I think probably in the same ballpark.

Thank you. Ladies and gentlemen, our next question today comes from Brandon Luhi with Alliance Bernstein. Please go ahead.

Morning, all. Thanks for taking my question. Pleasure. As I look at application software and network software and systems, just speaking to the recurring revenue growth, would you say that sort of active SaaS transitions are a drag on the top line here, or we sort of entered the phase where they're driving top line growth disproportionately?

So appreciate the question. Love talking about this one. So we believe in the application software business that the transition to SaaS is a net growth driver. You have two opposing factors going on. You have, as you transition new clients to the SaaS recurring models, obviously that's the classic J curve as it relates to perpetual or end year, that's a bad guy. Over the long term, that's a great guy because you have a higher level recurring revenue. Offsetting that is, as we have these businesses that have very large installed bases of customers that are paying maintenance. In fact, it's about $900 million a year, plus or minus, is what our maintenance stream is across our businesses. That maintenance gets transitioned to SaaS at a, I don't know, call it a 1.7 to 2.5 uplift. And so it becomes a net growth that that growth driver in year tends to offset the negative J curve, if that makes sense. So we believe it's a net growth driver over a long arc of time. We also just as a postscript on that, we don't force the migration on our customers. We the customers are pacing the migration to the cloud. That's why this is going to take five plus years to maybe tend to sort of fully migrate to the cloud. because we're going at the pace of our customers. But that's our view on the net growth driver as we migrate to the cloud.

Excellent. Thank you.

Thank you.

Our next question today comes from Alex Blanton at Clear Harbor Asset Management. Please go ahead.

Hi. Good morning. Good morning, Alex. I didn't see in the slides your working capital to sales ratio. What is that doing? Yeah, I know.

We used to have a slide. It's very consistent, you know, mid-teens negative, right? It's, you know, it is just part of the model now, you know, especially post-trans score when the working capital went away. So we're not updating it each quarter, but it's the same as it was last quarter. Okay. Minus 13% is where we sit today. Thanks.

Minus 13? Yes, sir. Yeah, okay. Thank you. On Transcore, when do you expect to complete that?

We expect to complete it in this quarter.

This quarter. So are you, you probably can't answer this, but are you waiting to get that money to make an acquisition?

No. No, we have the ability to make acquisitions before the cash comes in.

And ladies and gentlemen, this concludes our question and answer session. We will now return back to Zach Moxley for any closing remarks.

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

Thank you. The conference is now concluded, and we thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.