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, then zero. You may get in line to ask a question by pressing star, then one on your touchtone phone. Press star, then two to withdraw your request. And now I'd like to turn the call over to Zach Moxie, Vice President, Investor Relations. Please go ahead.

Good morning, and thank you all for joining us as we discuss the second quarter 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 call. We 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 for the quarter primarily on an adjusted non-GAAP basis. During the quarter, ROPA announced an agreement to sell a majority stake in our industrial businesses. Results for these businesses are reported as discontinued operations for all periods presented. Unless otherwise noted, the numbers shown in this presentation are on a 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, purchase accounting adjustments to commission expense, income tax restructuring expense associated with the pending sale of our industrial businesses, and lastly, we have adjusted our cash flow statement to exclude the cash taxes paid related to our 2021 divestitures. GAAP requires these payments to be classified as operating cash flow items, even though they are related to the divestitures. 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'll 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. This morning, we'll start by reviewing our second quarter highlights and financial results, then we'll review our segment detail and our increased outlook for the year, then get to your questions. Next slide, please. As we turn to page five, the main takeaways for today's call are, first, we had another great quarter of operational and financial performance, and we're increasing our outlook for the year. Second, during the quarter, we entered into an agreement to divest a majority stake of our industrial businesses And third, we have north of $7 billion of available M&A firepower. Looking at the second quarter, we continue to be pleased with the quality of execution across our enterprise. This quarter is characterized by having very strong order activity and solid organic growth of 11%. Of particular importance, our growth was quite broad-based across our three segments. Consistent with our commentary during the last several quarters, Not only did we grow nicely within the quarter, but the quality of the underlying businesses also improved as we saw our software recurring revenue base grow 12% on a organic basis. In addition to our strong software growth, our product businesses performed very well in the quarter, experiencing very high levels of demand and record levels of backlog. Once we complete the divestiture of the majority interest of our industrial businesses, the quality of our portfolio will be significantly improved across several dimensions. First, we will be meaningfully less cyclical with about 75% of our portfolio being software and the balance being medical and water products. Second, we'll have higher levels of recurring revenue with 80% of our software revenue being recurring in nature. Also, a large percentage of our product revenue is reoccurring in nature, such as Neptune's replacement demands and our medical product consumables. And third, we'll be even more asset-light, given a vastly improved working capital profile, one that generates significant increasing amount of cash as we continue to grow. And finally, with the closing of our industrial divestiture, which we anticipate will occur later this year, will have north of $7 billion of M&A capacity. We are very active in the M&A markets, but also remain super patient and highly disciplined to ensure optimal deployment of our available capital. We are confident in our ability to deploy this capital wisely, which in turn will further improve both the quality and scale of our enterprise. We are proud of our operating team's further execution of very solid quarters. Now let me turn the call to Rob, who will walk through our financial summary. Rob?

Thanks, Neil. Good morning, everyone. Turn to page six. Here we want to briefly cover our Q2 performance compared to our guidance, including the industrial businesses now reported as part of discontinued operations due to the pending sale. On that apples-to-apples basis, our Q2 depths of 395 compares quite favorably to our guidance of 380 to 384. an 11-cent beat at the high end of our guidance, a very strong quarter. Next slide. Turning to page 7 and covering the Q2 financial highlights. Here we will review some of the key financial metrics on a continuing operations basis, which is our reporting basis for earnings and guidance moving forward. Total revenue increased 10% to $1.31 billion. Organic revenue increased 11% with strength across each of our three reporting segments. Application software grew 7% organically as our two largest businesses, Dell Tech and Vertifor, continued to perform very well. Network software grew 15%, led by continued exceptional performance at our freight matching businesses. Finally, our new technology-enabled product segment grew 13% organically, aided by an excellent quarter from Neptune. EBITDA margin was 39.3%. resulting in EBITDA increasing 10% to $515 million. Depth on a continuing ops basis was 343, 16% higher than last year. Networking capital is now negative 17% of Q2 annualized revenue as a result of our higher quality portfolio. Q2 adjusted free cash flow was $252 million, which was 19% below prior year, but still represented a 17% three-year CAGR versus 2019. Notably, like many technology companies, our cash flow was negatively impacted by the Section 174 R&D capitalization change that took effect for 2022. We paid $49 million in Q2 related to Section 174, and we expect to pay an additional $50 million for Section 174 in the second half. Importantly, this tax law change only impacts the timing of when the taxes are due and not the overall amount of tax owed or our tax rate. Additionally, in the quarter, we made tax payments related to the gains on the 2021 divestitures of Transcor ZTEC and Civco Radiotherapy. Per our normal convention, those payments have been adjusted out of our cash flow. Finally, we are very pleased to announce the completion of our new five-year $3.5 billion revolving credit facility. We are grateful for our bank group and their continued support, and I personally like to thank Shannon O'Callaghan sitting next to me for the excellent work in leading the process for ROPR. So in summary, with a $3 billion cash balance, our new revolver in place, and the future proceeds from the closing of our industrial sale later this year, We are very well positioned for meaningful capital deployment. So with that, I'll turn it back over to Neil.

Thanks, Rob. Congrats to you and your team for upsizing and extending our revolver, especially in these market conditions. As we turn to page nine, we summarize for your go-forward portfolio of 26 businesses arrayed across three segments, application software, network software, and tech-enabled products. In the 8K issued a few weeks ago, we provided historical annual and quarterly financial disclosures on this segmented basis. Also, for the first time, we're breaking down our revenues by type. As you see, 61% of our total revenue and 82% of our software revenues are recurring or reoccurring in nature. 74% of our total revenues are software-related. For several quarters, we've communicated how the quality of our revenue stream continues to improve. You can see this point well illustrated here. Our 11% organic growth is underpinned by 12% growth in our software recurring revenue base. Further, you can see the breadth of the growth, growth in software and products. Our strategy for nearly two decades now has been to improve the quality of our enterprise, and this is clearly reflected on this page. We could not be more excited for our future. Let's turn to page 10 and walk through the two key highlights for our application software segment. Revenues here were $627 million, up 7% on organic basis, and EBITDA margins were 43.1%. Across this segment, we saw recurring revenue, which is about 75% of the revenue for this segment, increase 8% in the quarter. This recurring revenue growth is enabled by strong customer retention and continued migration to our SaaS delivery models. Across this group of companies, the financial strength was quite broad. As we highlight a few businesses, we'll start with Dell Tech. The Dell Tech team posted another great quarter of strength across all in-market serves, with particular strength in their construction, contractor, and market. In addition, Deltek continues to gain momentum driving adoption to their cloud-based product offerings. Vertifor had an excellent quarter, which was highlighted by strong ARR booking activity and revenue growth. Also during the quarter, we completed the acquisition of MGA Systems. This token acquisition enhances Vertifor's ability to compete and win in the managed general agent segment of the property and casualty insurance ecosystem. Clinicis and Data Innovations continue to exhibit strong demand and operational strength. Clinicis continued its market share gains in the UK. DI continues to demonstrate product market fit by gaining share of wallet across large health systems and the VA. Strata continues to be super solid for us. The acquisition of EPSI has been exceedingly strong as Strata has successfully expanded lifted and shifted many EPSI customers to the Strata cloud-based offering. At the same time, Strata continues to improve the legacy EPSI product release and support capability. We remain committed to meeting the EPSI and Strata customers where they are. Finally, Adderick continues to be a solid performer for Roper, extending their share gains in the large law space. Adderick continues to see an acceleration of SaaS bookings activity driving substantial increases in the recurring revenue base. Looking to the outlook for the second half of 2022 in this segment, we expect to see mid-single-digit growth for the balance of the year driven by continued ARR momentum. Turning to page 11, revenues in the quarter for a network software segment were $343 million, up 15% on an organic basis, and EBITDA margins were strong at 52%. The 15% organic growth in this segment is underpinned by 19% growth in recurring revenue. As we dig into business-specific performance, our U.S. and Canadian freight matching businesses continue to be exceptional. The market conditions, while slowing a touch on the carrier side of the network, continue to be favorable. During the recent surge in transportation volumes, the market share of the ecosystem represented by the spot market increased as it became easier to transact volumes in the spot market compared to the contracted market. We believe this is a secular trend that DAT will benefit from over a multi-year arc. In addition, DAT continues to do a nice job of increasing revenue per user by both adding features and improving value capture. Finally, Over a longer arc planning horizon, our freight matching businesses continue to be well positioned to enable the further digitization of the spot freight market. Moving to Foundry, our software business that enables live action filming and computer generated graphics to be combined in a single frame continued their recent financial strength. Net retention is north of 110% and ARR grew double digits again. Foundry's success is rooted in their fast-paced innovation capability and favorable long-term market conditions. iTrade, our network food supply chain business, and iPipeline, our life insurance SaaS business that tech-enables the quoting and underwriting processes, each had solid customer additions which helped drive strong error growth in the quarter. Finally, our businesses which focus on alternate-site healthcare, namely skilled nursing, assisted living, and home health grew nicely in the quarter, despite their customers' growth being constrained by staffing shortages. Proud of the execution here. Turning to the outlook for the balance of the year, we expect to see mid-single-digit organic growth for this segment, driven by continued recurring revenue momentum and moderating growth for our freight match businesses. As we turn to page 12, revenues in our tech-enabled product segment were $340 million, up 13% on an organic basis, despite the very challenging supply chain environment. EBITDA margins for this segment were 34.9% in the quarter. Let's start with Neptune, which had record orders, revenue, and quarter ending backlog. For a few quarters running, Neptune has been able to gain market share by being successful in keeping product lead times at industry-leading terms and releasing new products both in terms of cellular connectivity and static meter reading technology. As a fun fact, NetTune turns 50 later this quarter, and next year will mark our 20-year ownership anniversary, a great run so far with an even better forward view. Congrats, Don, to you and your team for building such a great company. Verathon, Northern Digital, and each of our medical product franchises continue to see very strong ordering activity but were hampered by a variety of supply chain challenges during the quarter. That said, the teams are executing exceptionally well, and we remain confident in our ability to execute through these challenges. Looking over the horizon, each of our medical product businesses are benefactors of secular tailwinds, namely the increased demand for single-use devices and the aging of the population. As it relates to the outlook for the balance of the year, 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 challenges. Now, please turn to page 14 and let's review our updated and increased outlook for the balance of the year. As a reminder, last quarter, we increased our adjusted depth guidance to be between 1550 and 1575, which included 230 from our industrial businesses. Given our agreement to divest our industrial businesses, we're removing the 230 from our guidance model going forward. So, on a new continuing ops basis, our previous guidance equates to 1320 to 1345. Based on our strong Q2 and second half visibility, we're now increasing our continuing ops guidance to be between 1346 and 1362. Embedded in this guidance is full-year organic growth of 8% to 9%, again, on a continuing ops basis. As we look to the third quarter, we're establishing depth guidance to be in the range of 342 and 346. Now our concluding comments, and we'll get to your questions. As we turn to page 15, we want to leave you with the same three points with which we started. We had a strong quarter performance and were increasing the outlook for the full year. Second, we took strategic actions to invest a majority stake in our industrial businesses. And third, we have a tremendous amount of M&A firepower north of $7 billion. As it relates to our strong start, we grew revenues organically 11%, EBITDA 10%, and DEPS 16%. And free cash flow has grown 17% on a three-year compounded basis. We are lifting our full year organic growth and depth guidance based on the factors outlined during the call, specifically strong recurring revenue growth and record demand for our product businesses. Finally, we have reloaded our balance sheet and continue to have a highly active and engaged pipeline of M&A opportunities. We have north of seven billion of M&A available firepower. As mentioned at the start of today's call, our high levels of activity are equally matched with our patience and discipline And we remain confident in our ability to deploy this capital to further improve the quality and scale of our enterprise, just as we've done over the past two decades. Finally, kudos to Rob and Shannon and the finance team for increasing the size and term of our $3.5 billion revolver. As we return to your questions, let us remind everyone that our strategy is the same. We compound cash flow by acquiring and growing niche, market-leading technology businesses. This is what we've done for over 20 years and will continue to do so. In addition, our value creation and governance model remains unchanged. We operate a portfolio of market-leading businesses and defensible niches. Each of our businesses has high levels of recurring revenue, strong margins, and competes based on customer intimacy, which yields highly resilient organic growth rates. We operate a highly decentralized operational structure that focuses on long-term business buildings. Our culture sets a very high bar for performance and focuses on continually improving. We're all paid to grow, which reinforces our culture of transparency, nimbleness, and humility. Finally, we redeploy the vast majority of our capital to acquire the next great business. We do this with a centralized corporate resource team in a highly disciplined, thoughtful, and analytical manner. This strategy, unchanged, delivers compounded and superior long-term shareholder value. So thanks for joining us this morning, and with that, let's open up to your questions.

Yes, 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 would do so by pressing star and 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 answer 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. Please give us a moment to assemble the roster. And the first question comes from Dean Duray with RBC Capital Markets.

Thank you. Good morning, everyone.

Good morning, Dean. Good morning.

And congrats on the first earnings report under the new look roper.

No, thank you. Thank you.

Hey, if we could start, I really like the new breakout on revenue on page nine, as well as page 19 in the appendix, which shows you the same information broken out by segment. How do you expect that mix to change over the next couple of years, especially in the conversion and migration to SAS?

Yeah, Dean, so really in the recurring line, that 54% line on page 9, embedded in that line is both the on-premise maintenance and the SAS, and so the migration will happen inside of that line. Now, what you'll see is it'll, as that happens, we get an uplift from the on-prem maintenance to the SaaS because you're delivering more value. And so you'll see sort of it's a long-term, you know, multi-multi-year tailwind in that line, but it happens and the conversion happens within that singular line.

Okay, that's helpful. And then for Rob, Look, we're all kind of calibrating the Section 174 and the impact, and I'm glad you added that one sentence that says it doesn't change the total amount, it just changed the timing of the tax payments. Just clarify how that plays out for the course of the year and the comps for next year. And then is there, on the working capital, that negative 17%, is that the new run rate based upon the new earnings

and uh mix for roper going forward is there still upside to that yeah yeah so yeah so uh on the working capital yes i mean the 17 is the run rate i think there is upside right we we expect to grow these software businesses and as they continue to grow they'll generate more cash and work capital should get more negative over time um yeah on 174 it is It'll be a total $100 million headwind for this year. So it's basically around $25 million a quarter we paid. As you know, we make two tax payments in the second quarter. That's why it was $49 in the quarter. Yeah, so obviously there's been a lot said about this. The law could change at some point, and then we'd get that money back. So it's really just you'll get the same deductions over time, but certainly now you have to wait for the deductions basically.

Thank you. And the next question comes from Christopher Glynn with Oppenheimer.

Thank you. Good morning.

Good morning.

So I wanted to talk about the new segment a little bit in the medical products, seeing if you could break out some of the supply chain impacts on margins, you know, the revenue gating aspect and any abnormal kind of levels of backlog, how you'd characterize that, how you'd think about it.

Yeah. So, you know, the performance was very good. So we're certainly like everyone else who, you know, who sells products have some supply chain issues. I mean, backlog is, I think, double, you know, if you look where we are this year versus the same time last year. So there's there's plenty of opportunity to continue to grow the revenue there. You know, a little bit of margin impact. We think that gets a little bit better in the second half. You know, I think our business has done a great job of pushing through price. And so that takes some time to, you know, to start to sell the products that, you know, at the higher price versus the cost. So I think it gets a little bit better over time, but everyone's managing it really, really well. So we feel really good about our operations.

Okay. And for follow-up, if you look at slide 12, the tech-enabled products, EBITDA margins are down about 5.5 points Q2 this year versus 2020 second quarter. Can you talk just conceptually about that bridge, what that gap represents?

Yeah. So, you know, 2020 was an outlier because of the big Verathon quarter in the heart of COVID. So that's when Verathon had that, you know, just extremely strong growth as we're trying to fight the virus. And so I think probably 19 is a little bit more normalized from a margin standpoint. But we do think that those margins should tick up over time.

Thank you. And the next question comes from Scott Davis with Milius.

Hey, good morning, guys. Good morning.

Hey, Scott.

I wanted to talk a little bit about price. Is there – I imagine there's price escalators in the – SaaS, is there some sort of basis like CPI? Is it, you know, is it half a CPI? I mean, can you give us just a little bit of how you think, how price gets passed through and those things?

Yeah, so there's, and price is, obviously you're specifically talking about software. I mean, the way you sort of spread our capture price and die capture in software is a little bit different than the product. So in the software, you're right. For all that subscription and maintenance is generally tied to a CPI+. a touch, um, the, which is, so we were able to see price. The other thing that's just also just naturally embedded in the software business is price. I mean, it's, it's a part of the growth algorithm in each and every year. The customers are used to, you know, taking price and it's, uh, and obviously with inflation interest rates higher, then there'll be a little bit more price. The offset to that is the cost structure in the, in the software businesses, um, increase through increasing labor wages, but it happens over a longer arc of time, and it's less spiky than what you see in the product businesses. So naturally, the punchline of that is you get a nice matchup of the increased labor costs with the pricing on the software part of our business.

And is there a difference in kind of pricing when you think about recurring versus non-recurring? It's kind of Dean's question. I was a little confused in your answer. Maybe just because I only had one cup of coffee. But is there a difference? I mean, you mentioned you kind of add more value and you get a little bit more price. But go back and talk to me like a three-year-old.

So apologies if I was confusing. So there's two issues we're talking about. So on price, on software... if you're a well-run software company, you're taking price on both the cost of the software in a perpetual world and the maintenance on that. So you move them up in tandem where you don't end up in sort of a challenging thing that some software companies do that ends up being a bad thing is they only take price up on the maintenance and not the initial software. Our companies take them up in tandem so they stay together. So that's the pricing point. Dean's point was asking about What's the relationship between on-premise maintenance, which we get paid once we deliver the perpetual software, and SaaS and the SaaS shift? And so as we migrate or quote-unquote lift and shift a customer from on-premise to our cloud, as you're doing that, you're delivering more value. Not only hosting the application and all the security, you're also delivering the most recent versions or keeping them on the most recent versions so they take advantage of the most recent features. and you're just generally eliminating sort of the headaches of running the software for the client. Because of that value bundle of SaaS, you are able to capture more value, oftentimes two times on a recurring basis or a touch more. So that's about the value proposition of moving to the cloud versus your straight question of what happens in a in a price increase environment for the software.

And just to give you a sense, you know, we're roughly 75% subscription and 25% maintenance today. So we're still, you know, we're already largely in the cloud. There's, you know, roughly 200 million of license revenue that would go away over time and convert to that subscription revenue that Neil mentioned. But, you know, as you know with us, that's a long period of time driven by the customers. And so it's a really good story, I think, on the recurring revenue lines.

Okay. That's really helpful. Thank you for that. I'll pass it on. Good luck, guys. Appreciate it.

Thank you. And the next question comes from Joe Giordano with Cowan.

Hey, guys. Good morning. Good morning, Joe. So now you've gone through the GIX code change and all this. I'm just curious, Neil, Rob, what your initial kind of conversations were with the new cohort of investors that you likely talk to now and

know what were some of the things that maybe some initial pushback you're getting from them uh some things that they liked and how those discussions kind of overall done so far yeah i would say the gigs code change is not like this light switch that's happened or all of a sudden every conversation we're having with you know the buy side is a different person in fact it's quite the opposite i mean it's gonna it's a slow evolutionary sort of change here we've been to a singular um software conference where we had half a dozen conversations um They were generally the same conversations we have with our legacy shareholder base, which is what's your business model, what's your flywheel, what are the risks, what's the durability, and quite similar. Little discussion, obviously, on growth, a little bit on the cash flow dynamics of the business, a little bit of the business model mix between the recurring and non-recurring, but they're the same questions, really.

And I would just say, you know, a lot of excitement, right? Because I think, as we said at that conference, we were at intra-quarter that, you know, we're the fourth largest application software company, I think, in the S&P 500. And a lot of these analysts are just getting to know us. And I think they're really excited when they look at our past and our future prospects. So, you know, we're excited to expand, you know, to a new shareholder race. Well, of course, also making sure that our current shareholder base is continually happy with our investment in Roper.

So... When you think about M&A, the divestment, is there a step change function that happened internally with CRI that makes finding new companies that clear the threshold harder? I'm guessing just mathematically, taking out the industrial businesses makes CRI higher or more negative or however you want to look at it. And then maybe you could have slotted in a business that previously could have improved the profile of Roper, but maybe now that business might not meet the threshold. Is that accurate, or is it just not material enough to worry about?

It's not material enough to worry about, but let me tell you why. I mean, for essentially my entire almost 11 years I've been here, we've looked at the same cohort of targets, which are wonderful asset-light software businesses, and that's the cohort we're looking at now, right? So it's just So it's not about becoming even more asset-light once you're as asset-light as we are. It's about staying as asset-light as we are. That's why the universe of targets is plentiful.

Thank you. And the next question comes from Allison Poloniak with Wells Fargo.

Hey, good morning. On that network software business, understanding that freight matching, sort of the growth and sort of the moderation there, Could you maybe talk to the balance of the businesses in that segment in terms of the overall combined, you know, is it mid to high single digit growth? I'm just trying to understand the impact that the freight match had on it.

Yeah, you know, most of the businesses in that segment are normally, you know, sort of mid single digit organic businesses that, you know, occasionally do higher than that, very rarely do lower than that. And so I think as you get into the second half of the year, you know, those are sort of doing what they do. And then you just have a little bit of moderation in the in the freight matching growth.

Got it. And then just kind of pulling on to that last, the M&A question, certainly the software is a focus in terms of M&A. What about tech-enabled products? Is there anything you guys are kind of looking at that would maybe clear that hurdle, or is it sort of off the table there at this point?

No, it's definitely not off the table. It has not been off the table. We just haven't actioned anything there in quite a while. So if it's an asset-light, tech-enabled product, then a business that is a leader in a small market, that the competitive forces are stable, all of our criteria, then it's definitely something we would look at.

Thank you. And the next question comes from Julian Mitchell with Barclays.

Hi. Good morning. Maybe I just wanted to ask a couple of questions on the software business. First off, in terms of freight match, you know, help us understand the cyclicality of that business. There's been a lot of scare stories about freight recessions all year long in the US. You know, how should we expect that business to perform in that type of macro? And I guess NSS has enjoyed fantastic, you know, operating leverage. We see the margins going up to the low 50s in Q2. What's the risk to that sort of incremental margin, if you like, from freight match rolling? And then any color in application software about the license business? Again, there were some questions after the SAP update earlier this week.

So let me take the DAT one and the application software license one, and I'll let Rob talk about the margins, if that's okay, at NSF. So first on DAT, DAT grew through the 2019 freight recession. But it has been just spectacular the last couple of years at DAT for two reasons. There's certainly a cyclical tailwind it's had, but there's also a secular tailwind that it's enjoyed. The secular tailwind endures. That's why the business was able to sort of grow through in 19. And principally, in summary version, that secular tailwind is that the spot freight markets are just a more liquid, easier to transact in market today than it was two years, three years, five years ago. So you see that the spot market share of the total freight increasing over this time arc, and that's been a benefactor of DAT and its customers, and that's going to continue. as DAT and the market, you know, it'll continue period, but then it may accelerate over the next five plus years as we further tech enable the broker's business model, right? As it relates to the license, excuse me, the perpetual and license activity application software, it's solid orders in the first half and in the quarter. You know, I think we're maybe modestly different than like an SAP because our price points are much, much lower, right? I mean, our than something like that. So we're not, these are, we're important and we're sizable for our customers, but these are our price points. I mean, a big deal for us is a one, two, $3 million deal, not, you know, multiples of that. So Rob, you want to?

Yeah. And then on the, on the margins, I would, I would not be concerned that margins would, would take a step backwards as, as growth were to slow there. I mean, these are, these are businesses that sort of all have those structural EBITDA margins in that 50% plus range. And so I'd expect that to continue, even if growth were to slow a little.

That's helpful. Thank you. And then maybe sort of following up, you know, more for Rob, this one, just, you know, you haven't out this big divestment, you've got restated numbers out there. How did we think about, you know, any changes from here around or changes in the sort of go forward run rate for things like tax rate in the P&L, maybe corporate costs, and then kind of free cash flow conversion, you know, any changes in those three areas? metrics as we look at the sort of new go-forward ROPA?

Yeah, there shouldn't be any meaningful changes in terms of tax rate. I think in terms of conversion, clearly there's a lot of noise around cash taxes this year as we've been talking about, and that's sort of part of the price to pay also when you do these transactions that we think are the best thing to do for the company in the long term. So I think if you look forward to next year and beyond, I mean, our free cash flow conversion should be at the levels it's been historically and probably a little bit better because we have even more negative working capital, you know, just better quality portfolio, less cyclicality. And so I think the cash flow conversion should get a little bit better over time. And then corporate, yeah, I mean, I think the run rate, you know, that you see now sort of worth continuing ops is the right run rate moving forward.

Thank you. And the next question comes from Steve Tussauds with J.P. Morgan.

Hey, good morning, guys. Hey, Steve. Good morning. Just a question on the cash. I know you guys don't guide on cash, but usually it gets, you know, on kind of an underlying basis seasonally better in the third and the fourth. Anything change from that perspective and any kind of color on how you'd expect it to kind of bounce back here in the third and the fourth from second quarter levels? You know, it was a little bit lumpy in the first and second quarter.

Yeah, I think that's right. So seasonally, fourth quarter is always our best working capital quarter because that's when you're getting a lot of the renewals and software. So we would expect working capital to be a pretty good guy in the second half. And we sort of talked about the cash tax situation. And I think everything else is performing really well to generate a lot of cash.

Okay. And then on the revenue side, when you think about your recurring, is there on the accounting there in 606, do you book a percentage of of those deals, you know, the three-year, five-year type of deals, do you book a percentage of those up front as per the 606 accounting? I know you have different businesses in there, so maybe they behave differently from an accounting perspective. But is there an element of that in the, you know, in the revenue there?

Yeah. Hi, Steve. This is Jason Connolly. A lot of the term licenses, there's a portion of that that does get recognized up front. So multi-year term licenses is very small for us. Only a couple of businesses have that. And then our professional licenses are also booked up front as part of 606, a portion of it.

Thank you. And the next question comes from Joe Ritchie with Goldman Sachs.

Thanks. Good morning, everyone. Hey, Joe. Good morning.

Yeah, maybe just the first question on this question. you know new portfolio going forward how do i think about like the right long-term organic growth rate for this business over time i think we've historically kind of thought about your your legacy businesses kind of like somewhere in that four to five percent type organic growth rate but i'm just wondering if this business is going to achieve healthier growth longer term so it's um when we did the announce the the transaction with the industrial process businesses we showed a chart

that showed the long-term growth rate, the historical long-term growth rate of the go forward portfolio is about 6%. So that's, that's where we would expect that the baseline. And then obviously we work every day to try to make that better. Um, but right now that we would sort of say 6% of the new norm.

Okay. Got it. That's helpful. And then I guess this whole, um, this whole conversion from, you know, from, from on-prem to, you know, to your SaaS business, it seems like you guys are well, well on your way there. I'm just curious, like how much is that kind of like added, you know, to, to, to the growth rate, you know, in recent years and then, and then, you know, that extra, you know, call it, I don't know if it's an additional 20 to 25% that you are expected to convert. Yeah. How do we think about that as kind of like a, you know, an added benefit that you'll continue to see in the coming years?

It's been, as we said for a while, there's, it's been a modest growth driver. And just to go through it for a minute, there's the good guy and there's a bad guy, right? So the bad guy is if you're in a year where you're selling a perpetual deal, let's say it's a million-dollar deal, you book the vast majority of that revenue in that year. If that deal converts to a subscription or a SaaS deal, maybe that's priced at, I don't know, $300,000 a year, plus or minus. So in that end year, there's a $700,000 bad guy. between the upfront license versus the SAS. And that's assuming you booked the SAS deal on January 1st. So there's a little bit of bad guy when that happens, but what is overwhelmed that for us to that slight net positive is the lifting and shifting of our large installed base of maintenance customers. So if you take, in this same example, if you have a cohort of customers paying you $300,000 a year, you're going to lift and shift them into the cloud in the plus or minus $600,000 a year. So you get that, and that's out to be a slight good guy. We've gotten many years of that dynamic. Even if I had to guess, it's seven to ten years of that dynamic because we're not forcing our customers to migrate. We're very much in the posture of meeting our customers where they are relative to wanting to do this. And that's why it'll take a while to do it.

Yeah, I'll just add that every business is on a different sort of phase of this journey, right? I mean, many businesses have been SaaS from the very beginning, and they're always 100% SaaS. Other businesses were mainly on-prem, like in Adderant. That's really the one business we have we talked about where really their customers are really starting to move to the cloud. Dell Tech has been a mix over time. Most of the rest of the businesses are really kind of already SaaS. at least several of the businesses that we bought in the last four or five years.

Thank you. The next question comes from Jeff Sprague with Rural Research.

Hey, thanks. Good morning, everyone. Good morning. I guess as we're transitioning to software, I'll just ask an annoying industrial question. Just going back to the deal itself and the structure, You know, there was some additional detail on that 8K. Obviously, that certainly wasn't clear to me at the time the deal was announced. And what's still not clear to me is what the back end might look like for you guys on this deal, right? With CD&R paying $829 million for 51% of the equity, and then with new debt on the deal of $1.950 billion, I mean, it looks like the enterprise value is 3.6 billion and 11 times multiple, right? If you guys are taking 2.6 out up front, it's very unclear how we think about the back end.

Yep. So the way that we would think about it, I'll put it through the lens of our new partner, right? So by the way, the math he just went through we would say is correct, right? And so it was that 3.5, 3.6 is the enterprise value up front. That's 11 times this year, 13.5 times last year. In terms of EBITDA, more like in that 13 range, if you look over the last five years, given the cyclicality. We, too, so the amount of capital that CD&R put in is basically equal to our amount of capital that's still in the business. CD&R's business model is to drive a three times plus money on money return over their investment horizon. So, you know, if we and they are successful, then you get a triple of our stub of equity, right? It's sort of a framing of how to think that. So maybe there's a couple billion plus or minus in of upside in addition to getting the liquidity on the eight or nine hundred million that we have there. So call it two and a half to three billion on the back end if, you know, underscore and capitalize if things go successful over the next five or so years.

Is that based on the premise that they actively do other things with the business? For example, you know, other MA in the business, and wouldn't that dilute you, or would you participate in kind of incremental investments in the business to get it ready for eventual sale?

Yeah, so we're totally aligned. Two questions in there, right? So the implied is around the growth thesis of the company. So we're completely aligned with our partner on the growth thesis. It centers on continuing to invest in the organic growth that we've been doing with these businesses for the last four or so years, and then building it at sort of a capital climate or M&A flywheel or repeatable flywheel. Without getting into the details of how the company is going to execute that, because it's still very much being formed, but at the highest level, one, it's a cash generative asset, right? So the goal for all of us is to run a levered asset and use that leverage in the cash generation as a primary source of funding so you don't have a dilutive effect. If there is a transaction where CDR is going to kick in equity, then we have the option to consider that. It will make that a deal-by-deal sort of decision. We think it's in the best interest of our shareholders. And so, yeah, there could be a little bit of dilution, but that dilution sort of somewhat factored into the math that I gave you before.

Thank you. And the next question is from Rob Mason with Baird.

Yes, good morning. Just first a technical question around the guidance. So the core growth guidance for the years 8 to 9, did that change versus where it would have been on an apples-to-apples basis three months ago?

I would say slightly higher, maybe like half a percent or so. But, I mean, I think we were 7 to 9 in our last guide, and the businesses we divested were slightly higher. those go away and we've raised to eight to nine. So I think it's, you know, a little bit of a net raise, but not by a lot.

Where would you slot that increase within the segments, the three segments now?

So I'd say that the biggest business that has a better outlook is Neptune. They're just doing incredibly well, as we said in the prepared remarks and in their second half, given their backlog, given their ability to execute and deliver to their customers, it looks really, really strong. So that's really the one I think that's gotten quite a bit better. Everything else I'd say is about the same as we had it three months ago.

Thank you. And the next question is from Alex Blanton with Clear Harbor Asset Management.

Good morning. Yeah, I just wanted to look at this $2.30 for a minute. What was that in the first quarter?

Yeah, it was about $0.50 in the first quarter and, what, $0.52 in the second quarter.

And then what is your guidance for that for the third quarter?

So we're not guiding it by quarter, right? Because it's, it's in disc ops, but it's, it's two 30 for the full year. So, you know, generally the fourth quarter is the, is the best quarter for those businesses given the cyclicality and the, and the, you know, oil and gas markets.

Yeah. Well, the thing was, I was trying to work out what the total would have been with that in there for the rest of the year by quarter. But I guess I can, I can do it. That's what you just said. I'd like to talk about the future. And the future is acquisitions, of course. How does that look now? What's the pipeline like? How far are you along in putting the work to $7 billion? What are you working on? What kinds of things are you working on? Just give us some color on that because I think that really is... what is going to give investors confidence?

Appreciate the question opportunity to address it. So it's been a, it's been a very above average level of activity really for this year. Obviously we've not posted anything of size, just a couple of small tuck-ins. We're being, while we have 7 billion, we're continuing to be just, you know, ridiculously selective as we've always been. We run this sort of, we have our criteria. We stay committed to the criteria. There's a lot of analytics. There's a tremendous amount of discipline and a ton of patience. And the reason we have that posture is we're making decisions to put companies in their portfolio, which we view as a forever thing. And so every deal matters. Everyone's got to be right, and everyone's got to meet the criteria. But we're super busy, and we'll continue to sort of keep this posture. and, uh, to grow, grow the quality and the scale of the enterprise. But we, there's no timetable on that. We're just gonna, we're gonna do the right deal at the time of which it presents itself.

But do you think that you'll be able to do some this year?

Uh, We would like to do it, but again, there's no timetable. There's no clock ticking in the back of mine or this team or our board's head about we have to get X dollars deployed by X date. I think that leads to bad decision-making, but it's an active market, so the odds are we'll get something done this year, but we'll just have to see how it goes.

Yeah, we're very active working on a lot of different projects like we always are, so we're certainly very active.

And just characterize the pipeline process. of how many businesses are available compared with the past and what are the prices like compared with the past and so on?

Yeah, so I mentioned it's a, we don't, we never want to quantify the number of deals either by number or dollar size in a pipeline. We think it's, for us, it's, is it sufficient or not? And so it's clearly sufficient. I said at the beginning of your question, it's been an above average level of activity for this year. Valuations, hey, it's high-quality assets are still highly priced. I mean, that's a bit of the reason why we're being patient. And we believe that market comes to us over time, and so we remain patient for the right company with the right characteristics at the right price.

Okay, thank you.

Thank you. And this concludes our question-and-answer session. I would now like to turn the call back over to Zach Moxley for any closing remarks.

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

Thank you. This concludes today's presentation. Thank you for dialing in and you may now disconnect your lines.