ROP - NASDAQ

Good morning. The Roper Technologies Conference Call will now begin. Today's call is being recorded. [Operator Instructions] I would now like to turn the conference over to

Good morning, and thank you all for joining us as we discuss the fourth quarter and full-year 2023 financial results for Roper Technologies. Joining me on the call this morning are Neil Hunn, President and Chief Executive Officer; Jason Conley, Executive Vice President and Chief Financial Officer; Brandon Cross, Vice President and Principal Accounting Officer; and Shannon O'Callaghan, Vice President of Finance. Earlier this morning, we issued a press release announcing our financial results. The press release also includes replay information for today's call. We have prepared slides to accompany today's call, which are available through the webcast and are also available on our website. Now, if you please turn to Page 2. We begin with our Safe-Harbor statement. During the course of today's call, we will make forward-looking statements which are subject to risks and uncertainties as described on this page, in our press release and in our SEC filings. You should listen to today's call in the context of that information. And now please turn to Page 3. Today, we will discuss our results primarily 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, the financial impacts associated with our minority investments in Indicor and Certinia. And lastly, transaction-related expenses associated with our completed acquisitions. 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 4, I'll hand the call over to Neil. After our prepared remarks, we will take questions from our telephone participants. Neil?

Thank you,

Great. Thanks, Neil. I'll walk-through the enterprise and segment results for Q4, and enterprise results for the full-year along with a review of our balance sheet. Starting with Q4 on Slide 7. We had an excellent finish to a strong year, revenue over $1.6 billion was 13% over prior year, led by 8% organic growth with acquisitions adding four points and less than a point of currency benefit. Organic outperformance was led by our TEP segment, highlighted by Neptune and Verathon. Gross margin of 69.7% was down 30 basis points versus prior year given the higher mix coming from our TEP segment. EBITDA grew 11% to $659 million with EBITDA margin coming in at a solid 40.8%. With the offsetting impact of interest and taxes, this translated into DEPS growth of 11% to $4.37, above our guidance range of $4.28 to $4.32. Also from a cash perspective, free cash flow finished strong at $596 million, up 30% over prior year. This was in-line with our expectations with a good renewal season across our software businesses. We turn to Slide 8, I'll briefly click into the segment performance in Q4. Application Software delivered revenue growth of 15% over prior year to $852 million with organic growth contributing seven points and the balance coming primarily from our bolt-on acquisitions of Syntellis and Replicon. EBITDA margin of 43.2% in the quarter was below prior year's high watermark of 45.6%, which as we discussed last year, was driven by lower incentive-based compensation. Network Software was up 3% to $363 million with EBITDA up 10% to $208 million. As we have discussed before, our freight matching businesses are navigating a drawdown of carriers, following exceptional marketplace growth over 2021 and 2022, which is mixing down the growth rate for the segment. However, our business leaders DAT and Loadlink have aligned the cost base with reduced carrier subscribers to still drive solid EBITDA growth in the quarter. Our TEP segment grew by 17% in the quarter to $399 million with EBITDA of 13% to a $134 million. Growth was led by exceptional performance at Neptune, with continued increasing demand for ultrasonic technologies and overall favorable market conditions. Also Verathon continued its remarkable growth with strengthened single-use products across Laryngoscopy and Bronchoscopy. EBITDA margin of 33.6% was down from prior year given some one-time investments and incentive compensation in the quarter. Turning to Slide 9, I'll walk through our full-year 2023 performance. As Neil just mentioned, revenue was just under $6.2 billion, up 15% over prior year with organic growth of 8% and acquisitions contributing seven points, mainly Frontline and Syntellis. Looking at a three-year revenue CAGR on this slide, similar to 2023, it's also at 15%. Further, the organic -- average organic growth rate over the three-year period has been about 8%. So as Neil mentioned, we benefited from some market conditions over that time period. EBITDA of just over $2.5 billion was up 16% over prior year yielding EBITDA margin of 40.6%. Our three-year EBITDA over this period was also up 16%. So the story remains the same at Roper. We own and continually grow a portfolio of high gross margin businesses and generally convert EBITDA -- growth to EBITDA in the 45% range, which allows for ample investment back into the business for future sustainable growth. Free cash flow for the year was just shy of $2 billion, which represents a 32% margin and is coincidentally up 32% over 2022. Full-year contribution from our Frontline acquisition and excellent performance across the enterprise drove this result, underpinned by strong renewals, favorable DSO and improving inventory turns. Of note, our net working capital as a percent of annualized revenue was negative 19% in Q4 to the new record for Roper. Importantly, over a three-year period, we have compounded cash flow at 16%. Our consistent focus on growing cash flow and the strength of our new portfolio following our divestitures demonstrates a solid base from which to continue our long-term growth algorithm. To that end, we expect free cash flow margin to be 30% or more in 2024. With that, we can flip to Slide 10 to discuss our strong financial position. From a liquidity standpoint, we finished the year with $3.14 billion available on our revolver, with over $200 million of cash. Regarding leverage, we brought down net-debt to EBITDA from 2.7 times at the beginning of 2023, to a year end figure of 2.4 times despite deploying $2.1 billion towards acquisitions. We expect to close on Procare later in Q1 and will utilize our revolver to fund the transaction. So this will be our pro-forma leverage to about 3 times. Our solid balance sheet coupled with strong cash generation gives us capacity to deploy $4 billion or more of capital, while remaining committed to our solid investment-grade rating. Since our October call, deal activity has demonstrably increased with a corresponding lift in asset quality. That said, our market optimism remains balanced by our disciplined process in patient posture. With that, I'll turn the call back over to Neil to talk about our full-year segment performance and the indications for 2024. Neil?

Thanks, Jason. As we turn to Page 12, let's look-back on the year for our Application Software segment. Total revenues grew 21% and organic revenues grew 6% to $3.19 billion, while EBITDA margins remained strong at 43.7%. Within the segment, results were consistent with strength at Deltek, Aderant, Vertafore, Strata and Frontline. Deltek continued to see strong gains in our SaaS solutions, especially in the private sector markets. As discussed throughout the year, the GovCon market was tempered given all the uncertainty regarding government spending, notwithstanding Deltek delivered mid-single-digit organic growth for the year. In addition, they continue to innovate and add capabilities during times of uncertainty, which is a hallmark of Roper strategy, highlighted by the bolt-ons of Replicon and ProPricer. ProPricer, a smaller transaction about $80 million purchase price that closed late last year and delivers the leading contract pricing solutions and software for government contractors and federal agencies, an ideal strategic fit for Deltek's cost point product family. Aderant was just amazing last year. They had record bookings and significant adoption of their anchor SaaS solutions and add-on products. Also, Aderant is one of the leaders within Roper and the legal software market as it relates to productizing generative AI solutions within their product stack. Great job by Chris, Rossi, and the entire team at Aderant. Continuing on, Vertafore was solid with strong ARR gains throughout the year. Additionally, Vertafore made great strides with our product strategy deployment and the MGA systems bolt-on is trending well-ahead of our investment case. Strata also was quite good last year, both in terms of organic ARR gains, and their acquisition and integration work associated with Syntellis. Finally, Frontline executed well, delivering strong retention and cash flow during the year. As I mentioned earlier, we will report Procare solutions in this segment and expect the deal to close this quarter. As it relates to our 2024 outlook for this segment, we expect to see mid-single-digit organic revenue growth. Please turn with us to Page 13. Full-year organic revenue for our Network segment grew 5% to $1.44 billion and margins were strong at 55.2%. We'll start with our freight matching businesses, DAT and Loadlink, which both grew in the year despite the year long muted freight market conditions. Similar to that of Deltek, both businesses continue to innovate during the sluggish market with particularly interesting Gen AI innovations at DAT to help combat industry fraud. Pipeline delivered record bookings and had very strong customer retention and expansion activity, leading to strong ARR growth. Foundry, our post-production media and entertainment software business muscled through the year given the writers and actors strikes and made meaningful progress in the transition to a full subscription revenue model. Finally, our alternate site healthcare businesses, MHA, SoftWriters and SHP were strong throughout the year as census levels and senior care facilities improved. As it relates to our full-year 2024 guide for the segment, we expect to see low-single digit organic revenue growth based on the expectation of continued muted freight market conditions, but with continued strong EBITDA margin performance. Now please turn to Page 14 and let's review our TEPs segment's results. Organic revenues for the year grew 15% to $1.55 billion and EBITDA margins remain consistent at 35.3%. As we look back over the year, we entered the year with a high degree of supply-chain uncertainty. During the year, the vast majority of these uncertainties are resolved and our business has done a tremendous job of capturing the opportunity. As we exit '23 and look to '24, we do not see meaningful supply chain constraints. As usual, we'll start with Neptune, our water meter and technology business. Neptune was just great and continues to see strong demand and momentum for their residential and commercial ultrasonic or static meters, and increasing adoption of their meter meter data management software. We remain bullish about Neptune and the market in which they compete. Verathon was awesome as well for the year. Verathon was strong across all three of their product families, ultrasonic, bladder volume measurement, video-assisted intubation and single-use Bronchoscopy. As. As a reminder Verathon's reoccurring single-use offerings now make up about 55% of the business' annual revenue stream. Just an amazing product and business execution journey to both scale and improve the underlying quality of the business. Finally, our RF product businesses, Inovonics and rf IDEAS did a terrific job managing through their supply chain challenges and delivered very strong 2023 financial performance. Looking to our 2024 guidance for this segment, we expect to see high single-digit organic revenue growth for the full-year, and the expectation that Q1 will grow in the mid-teens area. Now please turn with us to Page 16. This morning, we're establishing our 2024 full-year and first quarter guidance. For the full-year, which includes the impact of Procare solutions, we expect to see total revenue growth between 11% and 12%. On an organic basis, we expect to see full-year 2024 revenue grow between 5% and 6%. And finally, we expect to see full-year adjusted DEPS to be in the range of $17.85 - $18.15, which includes about $0.10 to $0.15 of DEPS dilution associated with the Procare deal. Assumed in this guidance, the tax rate in the 21% to 22% range. We want to take a moment, set our guide in context of our long-term strategy and execution model. To remind everyone, historically we operate at a 5% to 6% organic growth portfolio. Our strategy and ambition to structurally improve organic growth rate to be in the 8% to 9% area. Over the last three years, we grew 8%, 9% and 8% on an organic basis. So these years were benefited to some extent from certain market conditions. As such, our view is our current course and speed of organic growth rate is in the 7% to 7.5% area. We are very pleased with our progress to date and continue to work to achieve organic growth aspirations. As it relates to organic revenue outlook for '24, we enter the year mindful of two factors; continued subdued large customer activity in our Application Software segment and our freight matching businesses within our Network segment being below trend based on our expectations for continued muted freight market conditions. As it relates to the first quarter, we expect to see adjusted DEPS in the range of $4.30 and $4.34. Now please turn with us to Page 17, and then we'll look-forward to your questions. As per our custom, we'll will conclude with the same key takeaways with which we started. One, we delivered another great year performance. And two, we have continued positive momentum heading into 2024. Relative to 2023s performance, we delivered 15% revenue growth, 16% EBITDA growth and 32% free cash flow growth, with free cash flow margins also at 32%. Our total revenue growth of 15% was underpinned by 8% organic revenue growth. Importantly, free cash flow was growing 16% on a three-year compounded basis and we delivered our first-ever quarter of a $1 billion of software recurring and reoccurring revenues, quite an important milestone for enterprise. In addition, we deployed $2.1 billion towards high-quality vertical software acquisitions, highlighted by our bolt-ons of Syntellis and Replicon, and year we're deploying capital was structurally challenged and we did so at very compelling values, leading the strong value creation for shareholders. As we enter 2024, we do so with strong momentum. We continue to see robust demand for our mission-critical solutions, a strong outlook for organic growth. Also, you can count on Roper to improve the underlying business quality as we scale our enterprise. Adding to the momentum for the year are the contributions from our 2023 acquisition cohort and last week's announcement of Procare Solutions. Finally, we are well-positioned to continue our capital deployment execution. We remain very active in the M&A market and environment that expect to be notably improved in 2024. We do this with a strong balance sheet, a large pipeline of attractive opportunities and unwavering levels of patience and discipline. Now as we turn to your questions and if you can flip to the final slide, our strategic flywheel. We'd like to remind everyone that what we do at Roper is simple. We compound cash flow over a long arc of time by operating a portfolio of market-leading application-specific and vertically oriented businesses. Once the company is part of Roper, we operate a decentralized environment so our businesses can compete and win based on customer intimacy. We coach our businesses on how to structurally improve the organic growth rates and underlying business quality. Finally, we run a centralized process-driven capital deployment strategy that focuses on finding the next great business to add to our cash flow compounding flywheel. Taken together, we compound our cash flow in the mid-teens area over the long arc of time . So with that, thank you for your continued interest in Roper, and let's open it up to your questions.

Thank you. [Operator Instructions] Today's first question comes from Deane Dray with RBC Capital Markets. Please go ahead.

Thank you. Good morning, everyone.

Good morning, Deane.

Can we just start with Procare, and it's interesting. This is the first time I recall where you made a deal announcement and I had not one but two people at RBC Research contact me and say, hi, that they were you're active customers. And so -- and they show them the apps on their phone and it was really interesting to see that dynamic. And my question here is, I'm really glad that you highlighted how they're a maturing leader and within that category. And what surprises me is how much growth there is, I mean, low-single digit, maybe a low-double-digit to mid-teens. As you start to see that type of growth, might the private equity sellers have a bias, where maybe that's a public company exit, that's always been the kind of adage if you go for these more orphan businesses, there is no public company exit, they're more apt to sell to you at a reasonable price. If you start looking at some of these growth to your businesses like Procare, even at a maturing leader category, might that stretch the multiples because the private equity players might have a public company exit in mind? So maybe we can start there.

Yes, so I think -- first, appreciate the comments on Procare. I think there's like 80,000 five-star ratings in the app store. So your colleagues are a couple of many about the liking the application and the engagement with their kids in their early childhood education centers. Relative to the question about the IPO is a competitor, I mean maybe on some transactions, but most of what we're going to look at are going to be sub-scale for the IPO market. The TAM here is sub $1 billion, that's not a very IPO-able type market. So this is again small market leader. The market is growing low-double digits that we talked about, which underpins the mid-teens growth rate we're underwriting to hear. In terms of valuation in multiples, I think we're just in a world where sellers, especially private equity sellers understand the cost of capital, where the world is. They have constraints from their LPs. They need to get liquidity back to them. They can't raise new funds without it. And so, I mean, it's hard to guess with this asset would have traded for 12 months to 18 months ago, but substantially -- substantially higher on a multiple basis. So we think for the moment the valuations are coming to us because of the market for us that we just talked about.

I think in this current environment liquidity is really key. So, if you do an IPO, you don't get your liquidity right away. So I think that's pretty important

And this might be more of a nuance, but at your Analyst Day you talked about a willingness to look at businesses that might be at an earlier stage of development. And is -- on that spectrum, this Procare is a maturing leader. Is that something you could have acted sooner on? And when Jason talked about the level of activity, how -- within the funnel are there businesses that are at that earlier-stage that might look attractive?

I think Procare is like a perfect example by earlier stage, right? So these are not early-stage companies. They are earlier than what we've typically acquired in the past. So they meet all of our criteria. I have to emphasize that every time we talk about maturing leaders. So it's a leader in a small market. The base, the competition is understood and observable in the marketplace. The relative market share advantage this company has is particularly interesting. So those are common traits of everything we've always acquired. In this case, the market is growing a little bit faster and the underlying business model -- margins are going to scale as the business grows. So that's the earlier part of what we're talking about. Historically, we would have maybe waited by Procare until the next trade, the one after, the one that just occurred. And so when we look at the model of this over a long arc, it's just much more value for our shareholders to do this type of transaction. In terms of the pipeline, it is as Jason said in his comments, as I said in my comments, just a noticeable change in activity since our last call in the marketplace for some of the reasons that we talked about, and it's a variety of opportunities. I mean, we know we're leaning into doing more bolt-ons, so there's a fair amount of bolt-on activity in there. That's a lot of what Jan and her team are working to build, and then there's a fair number of these emerging, maturing leader, excuse me, maturing leader type profiles and will just ask them, we'll be patient and disciplined to figure out the right ones for us.

That's all great to hear. Thanks. Congratulations.

Thank you.

And our next question today comes from Julian Mitchell with Barclays. Please go ahead.

Hi, good morning. Maybe just following up on Procare. If you could clarify a little bit just the financial impact. I think you said maybe $0.10 to $0.15 hit for the year in that guide. So maybe just sort of clarify around that. Is it kind of a smaller hit in Q1 because of the timing of the deal close and then we just spread the rest out over the balance? Any thoughts on kind of the seasonality of the Procare business and then how quickly you'll get that sort of related debt down?

Yes, sure, Julian. So we expect to close in March. That's sort of our assumption right now. So the way that plays out is of the $0.15, maybe $0.02 in the first quarter. So we expect for the calendar year around $75 million of EBITDA. And then we'll obviously from an interest perspective, we'll reload on the revolver, which is going to be at around 6%. And so, and obviously, and so that will cast out through the rest of the year. So that's how you get to your $0.10, $0.15 for the year. In terms of seasonality, not a ton of seasonality for the business. And then, of course, it's growing nicely. So that's sort of works through any aberrations you'd have between quarters

That's helpful. Thank you. And then, just homing in on Network Software for a second. So you have that sort of softness in the freight markets, just been sort of well understood for some time. Foundry was also weak for some of last year. So are we thinking that in the context of that low single-digit organic growth guide for the year in Network Software, just trying to understand are you assuming kind of a slower start and then a pickup in the back half? Or it's a steady sort of 3% growth rate dialed in, Just like how you exited 2023?

I'll take the first to that and then ask Jason if he wants to add any color. So you're right, the call -- I mean the principal driver of the growth rates in this range for '24 is DAT & Link and freight matching businesses. Foundry had, as we talked about, had a tough '23 with the actors and writers strike. On top of that, they started that migration to a full subscription model. And so, '24 will be a bit muted for Foundry as well, but that's a small relative to the impact of DAT and the Canadian Freight Match businesses. We've assumed sort of muted conditions throughout the whole year. There certainly are market prognosticators that are suggesting a second-half pickup. We've not assumed that in our model. We want to see it before we load it in, and that's our core assumption relative to the Freight Match businesses hitting that.

That's right. Great. Thank you

And our next question today comes from Brent Thill with Jefferies. Please go ahead

Thanks. Curious just to get the thoughts on organic growth in '24, obviously you've taken a pretty meaningful step down from what you did last year. And maybe if you can explain that in the initial guide and what you're baking in for the overall guide for '24?

Sure. I mean it's -- I'll just comment and share a few of the thoughts, we said in the prepared remarks, right? So the our long-term aspirations are to grow organically in that 8% to 9% range and we believe we have the possibility to do that. It's going to take a few more years to get into that run-rate. That's the aspiration of what we're all working towards both in the group executives and all the operating teams across the company. As you know, the last three years there was an 8%, 9%, 8% throughout that whole period of time. We said those were benefited by some market tailwinds, some back from the pandemic, you know, a raging freight market, things like that. Supply chain sort of bottlenecks and releases. And that was sort of in the last three years. So as we look at this year compared to history and then also, or the possible in the arc, we think our current course and speed is in the 7% to 7.5% range organic growth through all that noise. So as we compare, we're doing in '24 against all that, it really is two simple reconciling factors. One is, we just talked about in the last question. The freight markets being slow. Our expectation for them to be slow throughout the whole year. And as we talked about for a few quarters last year in our Application Software segment, there was notably less large customer activity, like enterprise class customer activity. Deltek, a little bit, we talked about Frontline. A little bit of smaller business called Data Innovations, which all makes sense. The large companies anticipating a slowdown. They just got cautious in their buying behavior. The good news is, Deltek ended Q4 with a fair amount of momentum. I think they're up low-double-digit, either high single low-double digits in the quarter. So they exited with a fair amount of momentum, it's one data point. We want to see a few of those thrown together. And so we're -- those are the two reconciling items, the freight slowdown, expectation slowdown in large activity in Application. That's embedded in our model and those are reconciling factors between last year and where we are this year and also pretty much a reconciling factor between where we are this year and where we think we are from a run rate.

Great. Thank you

Yes.

And our next question comes from Joe Vruwink with Baird. Please go ahead

Great. Thanks for taking my questions. I guess, I wanted to pick off on the last answered and maybe contextualize a bit more the outlook specifically for Application Software. Appreciate the comments on subdued activity with large accounts. Do you happen to maybe have the trend in Enterprise bookings and then any other forecasting considerations to call out, because I guess I'm trying to reconcile the good step up at year end against the mid-single outlook, but that might just be related to the planning kind of assumptions you just mentioned, Neil?

Yes. I think the step up at the year, I mean Deltek was strong in Q4. And it's one data point. The pipeline looks attractive. The pipeline for Frontline looks attractive at both the Enterprise and SMB portion of their business, but we've been through the better part of three, four quarters where the Enterprise activity was slow and we're just not going to underwrite that in our guidance at the moment.

In terms of Enterprise bookings, they were up low single digits, which is consistent for the full-year this year and sort of consistent with what we've said all year long around -- around just lower activity at the Enterprise level

Okay, great. And then I wanted to ask, there is some exogenous events like you mentioned Foundry. I think they communicated that they are now exclusively subscriptions here in 2024. You also have a lot of other businesses that have big on-prem maintenance streams that can get a multiplier over time. So there's things that are hurting and helping I suppose. Do you have a sense on a blended and net basis what this might be contributing to the model in 2024? And when you think about growth improving from the 7% to 7.5% range, what these types of items might ultimately mean over the next couple of years?

So I can take the first part of that, Joe, and then maybe Neil can take the second. So in terms of the Application Software, we still expect it to be strong in mid singles. I think nonrecurring revenue will still kind of be flattish. We still expect that sort of shift to SaaS to continue and that's kind of been a small headwind for us throughout in the last couple years, but it's been overcome by the things we talked about, which was Enterprise bookings, which we didn't get-in '23. So, again, recurring is going be strong. Nonrecurring will be flattish. If Deltek picks up in '24, especially in the large GovCon Enterprise, there could be upside in the year because a lot of those customers are still buying on-premise licenses. So that could be an opportunity, but we didn't bake any of that into our guidance. And then when we look at Network, recurring will clearly be down low-single digits just based on DAT & Loadlink, at least based on our current assumptions. And to your point, I think nonrecurring will be fairly muted as well because we'll still be -- will be at the last point of that conversion of Foundry off license to subscription. So they didn't -- they didn't mandate that in '23. They will mandate in '24, so we'll be digesting that last piece there. And then on the 7%, Neil...

Yes. I think just more longer-term on the SaaS migration. We have a little bit over $900 million and an on-premise maintenance. That -- as that converts, it converts -- is our recent history, the last two or three or four years it is north of two times on an ARR basis as it converts from on-premise maintenance to SaaS and cloud. So when we do that, it's actually going -- we believe historically it's been a bit of a net growth driver. While we might -- we will convert perpetual licenses which are end period one-time revenue to SaaS and that's a classic J-curve. The companies that are undergoing this transition, we're going to convert this $900 plus million of maintenance at a clip that will overwhelm that J-curve effect. So we believe it's a net growth driver. Foundry is a bit unique, in that they are making a, just a -- almost like a day-one pivot and their business model shift, and the other companies are doing more of a migratory approach

Okay. That's all helpful. Thank you.

An our next question today comes from Allison Poliniak with Wells Fargo. Please go ahead.

Hi, good morning. Just wanted to turn to tech-enabled products. Obviously, a strong year. As we think about that guide, Neptune and Verathon are certainly big components of that growth. Does that kind of diverge to some extent as one start to appease the other, it seems like there's a lot of development at Verathon that can drive some of that. Just any thoughts there?

So I mean both, and as we talked about, both Neptune and Verathon were just great. And last year both grew faster than the segment. Obviously, they are a predominant element of the segment. We believe that the long-term growth rate at Neptune is probably in the high single digits area. And we believe that the long-term organic growth rate of Verathon is probably a bit higher than that. It's -- we want -- we want to believe that it's going to be a low double digits. We want to see a couple more years of that, some more R&D productivity. We're super encouraged by the pipeline of R&D and the momentum they have in the market across the three product categories. So that's where we expect the long-term growth rates to be there.

Got it. And then just following up on the M&A side of things, leverage at 3 times, obviously strong cash flow generator. But it sounds like the pipeline is incredibly active with quality transactions. What's the comfort level in terms of going above that range? Is there a way to think through that, just any thoughts? Thanks.

Yes, I mean, we're always -- our long-term policy is between 3 times to 3.5 times. If you look back to 2015, '16, you can never be right at that level, some you go above it and come below it. It's always this this process and where do you draw a line through those swings. We're going to just -- we're business model pickers. As you know, we're going to continue to look for the very best businesses at the most attractive valuations that meet all of our criteria, and then we'll look for the best way to finance those from that point. We certainly understand, I think acutely risk, both risk in the businesses, risk in the capital structure, and that's a big part of how we think about deploying capital and how we value assets.

Got it. Thank you.

And our next question today comes from Christopher Glynn with Oppenheimer. Please go ahead.

Thanks. Good morning, guys.

Good morning.

I had a question about the TEP segment. So you commented on the supply chain issues from the last couple of years are resolved. So curious if you are seeing some nice benefits emerge from production planning and if that drive some natural margin and productivity tailwinds that we should see in the margins in 2024?

Well, I think scaling certainly helps. We've added a fair amount of capacity at Neptune. We've added supplier capacity at Verathon. We've added supplier capacity at the rf IDEAS -- the RF products businesses. And certainly were not the similar for most companies. The supply chain operations teams are going from a -- from a model that was focused in the last three or four years on resiliency to maybe a more balanced between resiliency and sort of just-in-time, which certainly will help with inventory turns and asset velocity. So we do think there's a little bit of money trapped in inventory for us, so will be more of working capital advantage if we can execute on that plan. In terms of margins, I'll look to Jason. I think it's probably more just scaling infrastructure. I mean, what we -- our cost of goods is so low relative to industrial type companies that the input cost are a fraction of the cost structure of our Enterprise, but your thoughts about that?

Yes, no, I think we'll have leverage that, that will be a little bit above what the EBITDA margin is for the business. I mean, you do have some of the growth that we're seeing is in single-use products, which are great because they have a lot of recurring revenue -- reoccurring revenue. But they come at a little bit of a lower margin. And then when Neptune grows, it has a little bit of impact to the segment too. So, I would expect leverage to be consistent with what we've seen in the last couple of years just based on those factors.

Great, thanks. And then about the aspiration to 8% to 9% organic growth and driving things higher, certainly understand you have a lot of coordination of experts and best practices across the enterprise. What would you characterize this top of the list businesses with particular action plan opportunities in that respect?

So, we appreciate the question, right? So we started this portfolio of 5% to 6% growth. We're in a point of, we think 7% to 7.5% on the way to 8% to 9%. So we've made a fair amount of progress over the last four or five years. It's less about which company. It's more about the process and discipline across all 27, now going into 28 companies. And you've heard us talk about this on repeat in the past, but it's just if anything were consistent. So it's about how do each of our businesses design a strategy in terms of where to play and how to win, and where they have the right to win for durable long-term growth. The second thing is, then how do you process enables the execution of that strategy so that you're on repeat. We can use our long-term forever ownership period as a long-term competitive advantage. So as we stack capabilities that become enduring, then we can outpace our competitors. And then third, is how do we run a talent offense, where we use talent as a long-term competitive advantage. We've talked a lot about the upgrade at the field leadership level over the last three or four years. The expectation for performance is much higher, much, much higher. The alignment of our compensation is tighter to that expectation. And so it's all three acting in unison, that you get the Verathon's that a decade ago were low-single digit growers and now hopefully low double-digit growers. You take businesses like Deltek, they have the mid and they come solidly mid-plus or maybe they can inch in the high singles over time. So it's about every business doing a little bit better on a sustainable basis.

Thanks, Neil.

You bet.

And our next question comes from Joe Giordano with TD Cowen. Please go ahead.

Hi guys, good morning.

Good morning.

Hi, like, on DAT, obviously the free market is weak. Can you just -- I know we've talked about that relationship Kind of being somewhat inverse in weak markets where they actually tend to do better. Is that -- like just to put a finer point on that. Is that more like on negative inflections in the market where it kind of spikes and then if it's like prolong weakness, that it ultimately is forced to like trickle into DAT? is that how we should really think about that?

So DAT dynamics are a little bit different than what you described. DAT is when the freight markets are very strong, DAT grows in-line or maybe ahead of that strength. When the freight markets are weaker, they tend to slow down and then they sort of -- so therefore if you looked at their growth, it's more like stairstep type growth in this particular case, because we're coming off such a search for a couple of three years, it's a little bit more exaggerated. The dynamic that you're describing perfectly describes our ConstructConnect business, which is the construction analytics business, where -- when you think about building product manufacturers and contractors and subcontractors, subscribed or content about what commercial real estate buildings are in the process of being planned and built, they want to look for where their next jobs are going to come from. So in the construction markets, real estate markets are white hot and contractors are fully subscribed years out. You the value of our information is less when the market slows and their backlog is standing, then the value of what we offer is much higher. So we tend to have a little bit of a countercyclical sort of demand driver inside the ConstructConnect. We go by the way, Matt and his team for their ConstructConnect are working to balance out and have done a good job. So hopefully the go-forward will be up in up that markets and up-and-down markets. But that's the -- that's what our product strategy is trying to execute.

That's good color. Just a -- like a broader question. Obviously, we're getting like more-and-more layoff announcements, like I guess that companies across the spectrum from tech to UPS. So how are you guys, like in your discussions with your customers. And what's the most recent kind of read they're having on where head count stands and what the implications are for your businesses there that somewhat dependent on that?

I think unfortunately our read across the macro market is in a great win, right, because we operate at these relatively insulated end-markets, government contractors, property and casualty insurance, or brokerages where employment is higher, life insurance where employment is higher, healthcare where employment is higher, education where employment seems stable if not higher, right? We're in the sort of relatively isolated protected end-markets where the macro swings aren't -- don't impact that much. It doesn't have that much impact on the way we drive compliance bookings across our portfolio. I will say for labor market generally loosening up. It's been advantageous for us. We're also been able to not just fully staff at our business level, but use this opportunity to last probably 12 months plus to significantly upgrade talent across the organization.

Fair enough. Thanks, guys

Thank you.

Thank you. And our next question comes from Terry Tillman with Truist. Please go ahead

Yes. Can you all hear me okay?

Hi, Terry. Good morning

Hi, good morning, everyone, and thanks for fitting me in as well. Maybe just one question for you. I guess it's for you, Neil, is what we've seen with our vertical SaaS companies and even horizontal SaaS companies in the past, when they get those customers on the new modern architecture, it really can start to reduce the friction to buy those other add-on modules. And so what I'm curious about is, you just called out some of your businesses in the past like Deltek that have seen improving growth. Anything you can share around net revenue retention from those customers that move to cloud? And I know it's still early days, but is there a propensity to buy those add-on modules? Does it speed up? Does it quick in? And that's just one of these things that could be a cumulative benefit over time, and also help on that organic growth. And then I had a follow-up

Super. Appreciate that question. The short answer is categorically yes. And we see that -- first when you when you do the lift and shift from a legacy product to the current cloud-delivered product, there is a -- there is migratory benefits as we talked about Strata as a good example. Same-store sales, 2 to 2.5 times uplift. But then while they're doing that, the checkbooks open and they buy more modules at that moment where total ARR goes up over 3 times and they lift and shift their customer base. Same can be said, saw a different metrics, Aderant, Vertafore, etc. And so, what you're talking about is one of the principal benefits both to the customer and to us, our companies for delivering cloud-delivered, SaaS deliver software, which is being able to be on the most recent release. So, be able to take advantage of all the R&D innovation and more easily be able to take additional products because the delivery mechanism is faster and the implementations are more smooth. So you're exactly right , we're seeing it across the portfolio and expect to see a lot more of that in the years to come.

That's great. I appreciate that. And I guess just a follow-up question. And I know you want to be careful and not revealing too much. But if the M&A environment does start opening up more and there's more shots on goal and just more things that are interesting, albeit, taking into account your discipline, I'm curious just bigger-picture, usually it's vertical SaaS, but what about interesting niche horizontal SaaS solutions? Whether it's back-office or kind of middle office or front office and/or second secondarily the idea of maybe software companies with a meaningful payments business. Thank you.

So, as we always said we're going to be business model pickers. The reason, historically we've been attracted to vertical, small market verticalized software businesses is because the basis of competition needs to be able to be understood and observed. We want to be able to compete based on both the value proposition of the product but also the intimacy with the customer and the customer relationship. The vast majority of our companies. Their customers want us to win, right, that we are so integral to what they do, they want us to win there always giving us input and feedback about how to be better how to deliver more value to them. And so it's those dynamics that we look for. There were certainly some nichey horizontal type things that meet those criteria, but not a lot. Right. A lot of the horizontal have gigantic TAM to compete on the base of an algorithm. There's very little loyalty to the company. So those types of things will never invested in. Relative to your comment about. Payments business models are we have a variety of business models, software, there's on-prem their SaaS. We just bought a business that is the integration of SaaS, software and payments. Where you have deep embedded integration with what the company does and products do with the payment stream. And so it's a business model , we're open-minded to the business model construct as long as there is immense amount of durability embedded in the business model.

Thank you. And our next question comes from Alexander Blanton with Clear Harbor Asset Management. Please go-ahead. Good morning, thanks. May I have some questions on. Broker. And. The first one is

And our next question comes from Alexander Blanton with Clear Harbor Asset Management. Please go ahead

Good morning, thanks. May I have some questions on. Broker. And. The first one is. You've indicated that is not accretive to. Adjusted EPS. Well, this year. Yes, and if not, then there is some dilution. How much is that you might have mentioned that earlier, I might not have caught it

Yes, hi, Alex, it's Jason. So we assume around 75 million of EBITDA. And then the interest is going to be. 1.6 billion at, Call-IT, 6%, which is our revolver, our current revolver rate. And so that's how you get to your calendar dilution number. What is that number in EPS. $0.10 to $0.15

Okay. So that accounts. For the shortfall. And. In the. Guidance versus consensus tender. Did you say $0.10 to $0.15. Per diluted, okay. Now going-forward, if you're. Growing at double-digits. Mid-teens. That implies you're going to get some pretty. Good. Accretion. In 2025, correct

Absolutely, yes. We're looking for. Is it the accretion after 24 and it will come to like said it's grown mid-teens. Very good cash conversion dynamics. Have a little bit of a tax benefit this year and next year. And couple of years out after that. So, feeling good about. Contribution to our, to our growth going-forward

Now can you give us an idea of what. The total available market is in their business. And I assume it's all domestic. At this point. And how do they look compared with that. In other words, what's your market-share or approximate. I mean I just. I understand that the leading provider, but it looks like it might be a fragmented market

So the TAM today is about $750 million. It's growing about 10% a year. Yes. So you can do the math on what we said that's in the next 12 months-to March 25, it's 260, so you've got to grow the market at 10%, do the math. On their current market-share and their relative market-share position. So, their size relative to their next largest competitor is about 1.5 times. The market we would characterize as having a number of legacy technology players and pro care and the principal competitor are generally re-platforming. The market from a technology perspective

Okay. Finally. In that market. There are different sizes to the. The. Groups that you might be. Serving there are nursery schools, for example, that have several 100. Students. And there are small ones that are much smaller. Where do you fit-in that. Do you are you aiming at the. Or serving the smallest schools as a larger ones or both

Really appreciate the opportunity to address this question, because one of the aspects of the business that we like quite a bit. So. The way that we segment the market are basically, enterprise, mid and single operators. So 10-plus centers, one to 10 centers and a single operator center. Pro is the demonstrable leader relative market-share advantaged substantially higher than the 1.5 times at both the enterprise and the mid. And the growth rates and the enterprise and the mid is actually growing faster than the overall market. So the markets the segments where broker also is highly compete very well in the single operator. I don't want to. Comment on that. They compete very effectively there as well. But the strongest and have the largest market-share in the enterprise and mid, which means that as the market consolidates ever so slowly over-time that accretes to our advantage

Okay. And finally, is there any foreign business there available, or are you looking to get into that or not

Yes. International is not a meaningful part of the business today. It is certainly something that we will consider in the long-term strategic outlook for the business, but not something and probably the near-term because there's so much opportunity domestically to get after.

Okay. All right. Thank you very much.

I appreciate the questions and have a great one.

This concludes our question-and-answer session. We will now return back to

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