John Humphrey - Executive Vice President and Chief Financial Officer Brian Jellison - Chairman, President and Chief Executive Officer Rob Crisci - Vice President, Investor Relations.

Andrew Krill - RBC Capital Markets Robert McCarthy - Stifel Joseph Giordano - Cowen and Company Brian Gesuale - Raymond James & Associates Richard Eastman - Robert W. Baird.

The Roper Technologies' Third Quarter 2016 Financial Results Conference Call will now begin. Today's conference is being recorded. I will now turn the call over to Rob Crisci, Vice President, Investor Relations. Please go ahead, sir..

Thank you, Audra, and thank you all for joining us this morning as we discuss the third quarter financial results for Roper Technologies.

Joining me on the call this morning are Brian Jellison, Chairman, President and Chief Executive Officer; John Humphrey, Executive Vice President and Chief Financial Officer, and Paul Soni, our Vice President and Controller. 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 or also available on our Web site. Now if you will please turn to slide two. We begin with our Safe Harbor statements.

During the course of today's call, we will be making forward-looking statements which are subject to risks and uncertainties as described on this page and as further detailed in on our SEC filings. You should listen to today's call in the context of that information. And now please turn to Slide 3.

Today, we will be discussing our results for the quarter primarily on an adjusted non-GAAP basis. A full reconciliation between GAAP and adjusted measures is in our press release this morning and also included as a part of this presentation on our Web site.

For the third quarter, the difference between our GAAP results and adjusted results consists of two items. First, a $2.2 million purchase accounting adjustment to acquire deferred revenue relating to software acquisitions. This represents revenue that those companies would have recognized, if not for our acquisition.

Second, $0.9 million debt extinguishment charge related to the replacement of our former credit facility with a new $2.5 billion facility that closed in the quarter. And now, if you will please turn to Slide 4, I'll turn the call over to Brian Jellison, Chairman, President and Chief Executive Officer.

After his prepared remarks, we'll take questions from our telephone participants.

Brian?.

Thank you, Rob, and good morning, everybody. We will start here with the Q3 enterprise results, so next Slide. We had a record for just about everything again in the third quarter.

Our orders were an all-time record at $929 million, and by the way if we had booked the MTA order couple of days earlier but it wasn’t quite ready to go, we would have been -- we would have had our first $1 billion order quarter in our history. Revenue was strong. Net earnings were, of course, a record EBITDA cash flow.

Revenue was up 7% to $947 million, which gave us 2 points of organic growth despite the headwinds in oil and gas. FX costs us 1 point, and then acquisitions and divestitures netted out plus 6% because this was still the last quarter without all the divestment in.

Growth was led by both the medical and RF technologies, software businesses and certainly Neptune. We had an outstanding quarter, you will see in a minute. Declines in oil and gas were basically about what we thought. We thought they would be sort of down 20% or so and they were.

Gross margins were up 60 basis points to 61.3 and EBITDA was up 8% to $328 million. Our net earnings reached $169 million, which gave us a DEPS earnings per share number of $1.65 ahead of our guidance. Free cash flow was up 40%, really an astonishing quarter, where free cash flow was up 11% year-to-date but up 40% in the third quarter.

And then our ConstructConnect acquisition, which we are announcing today, and which will close this week is another terrific business for us. It's a SaaS network business for the pre-construction industry, and we will detail that later in the call this morning, and it should close yet this week. So we had very strong cash quarter.

We had record results and then we had this pre-acquisition. So the next Slide. Here if you look at the income statement, you can see orders were up 4%. The book to bill was 0.98, which is okay because of lumpy activity.

It's in the wheelhouse but had we been able to book the MTA order, our book to bill would have been 1.05, which would give you just some idea about how strong really the core orders were. The only thing in the quarter that was odd is the normal fourth quarter delivery schedule stuff was not very strong. Revenue was up 7%. Our gross profit was up 8%.

You can see we are up 60 basis points in gross profit. The operating income margin because of the acquisition and amortization in these things, you can see it going to 28.5%, which is still spectacular but down 20 basis points.

The reality is, on the next Slide you will see the EBITA margin actually went up 30 basis points, which is the right way to look at a cash oriented business like ours. And then net earnings were up 4%. Tax rate at about what we thought. Next Slide.

If you compare the operating and the EBITA margins, we certainly have not reported leading first with those kind of numbers, but our EBITDA margins, you can see in 2014's third quarter were 32.5%, last year at 33.4% and this year at 33.7%.

So our margins on the operating cash side are up 120 basis points in just two years, and our gross margins continue up as well.

If focusing on the operating profit margin where you get a lot of non-cash amortization charges which lead people to the wrong conclusion, it's the wrong way to think about a cash business like ours even though the results are outstanding. So we are really focused on continuing to improve our EBITA margins which were up 30 basis points. Next Slide.

We continue to comp out cash flow at a quite strong clip and we don’t see that slowing down any time soon.

We really have a terrific operating cash flow in the quarter, $317 million, both operating and free cash flow were up 40% and you can see the comparison to last year at $660 million, year-to-date operating cash flow, and now we are at $731 million, up 11% despite less than robust end markets in our industrial and energy businesses.

Conversion was pretty spectacular, you can see our year-to-date conversion on operating cash flow was 146%. So excellent cash performance. Next Slide. Our asset-light business model which five years ago people told me you couldn’t make it any better than it was, continues to improve at really phenomenal rates.

Here you can see inventories down 80 basis from two years ago, receivables are down 150 basis points, and payables and accruals are actually up 160 basis points. So, two years ago we had 5.8% net working capital to revenue in the way we measure it.

Today, we closed the quarter at 1.9%, that’s a 67% reduction as a function of revenue in just two years, 390 basis points.

So the quality of the asset-light acquisitions that we have been doing the last couple of years in addition to our own governance process around improving everything we own, is really having just astonishing impact on our ability to compound cash and deploy future capital. Next Slide.

If you look here at the financial position of the company, you get some sense of the balance sheet. Just as a quick note, this is absolutely the biggest balance sheet that we have ever had to capture capital employment opportunities.

We now have an undrawn revolver of $2.5 billion, and we have $882 million of cash, so nearly $3.4 billion of powder, and even after paying for the ConstructConnect business, our acquisition powder is right around $2.8 billion. We have deployed capital since January 1 of 2015 at a rate of $2.7 billion during that 21-month period.

So our compounding of the cash and the strength of the balance sheet and the flexibility that our new credit facility gives us, is all great because we are going to be able to put that to good use with an incredible acquisition pipeline that we continue to see. And you can see our net debt to EBITDA number is only 1.7.

After the acquisition it's still just around 2. So we’ve got a lot of ramp space here to be able to continue to make transactions that are accretive to the company. Next Slide. We will look at the segment detail of each of the four segments the way we had reported and then talk about the detail of the business here after that. So the next Slide.

Here if we look at the Q3 segment performance of energy, you can see it's EBITDA margin was 29%, industrial tech 32%. The first point about thinking around these businesses is how remarkable there margin performance is in these challenging markets. The nimble execution that we have inside the presidents to run those businesses is really amazing.

In 2003 those businesses, the industry and industrial businesses taken together, had about $377 million in revenue and this year taken together they had $303 million. And yet the EBITDA margin in '14 was 32% of those combined businesses and here this year it's 31%. So despite a significant fall off in revenue, the margins have been able to maintained.

The second point of the Slide is that of course our future and nature of the enterprise you can see, continues to compound towards the RF, the application software, the medical software and the medical products businesses which now make up nearly 75% of the EBITDA of Roper's entire entity. And they also have done remarkably well.

Two years ago those businesses had about 39% EBITDA, today those businesses have about 41% EBITDA. We look at the first, in our controls and energy systems now is down to barely 10% of the company, and its organic growth was down 13%, generally the way we thought it would be.

The segment while down as expected really did modestly better than it did in the second quarter and is likely to do modestly better again in the fourth quarter. Terrific profitability. You know the OP margins in this segment in the third quarter were 25.4% and the EBITDA margins were 29.2%.

When we look at the fourth quarter, we think oil and gas will be down about another 20% in this particular segment, same as it was in the third quarter but we don’t think we are going to get much growth in terms of fourth quarter seasonality. We didn’t get much last year but generally it's been quite substantial.

So we are sort of assuming that we won't get that this year. Margins will improve again in the fourth quarter. You know we started the year out in energy with 20.4% OP. Second quarter went to 22.5%, the third quarter is already up to 25.4% and the fourth quarter will be substantially materially above that.

So these businesses still in our view represent sort of a free shot on goal for us and the only represent 10% or less of revenue. Next Slide. On the industrial technology side, you can see that this is the, fortunately, the last quarter. We will talk about this divestiture of ABEL.

If you adjust for the divestiture, the segment was actually flat despite the upstream oil and gas piece that’s in industrial technology being down 35%.

So how did that happen? Well, it happened from double-digit growth at Neptune who continues to gain market share and very strong demand for the R900 automatic meter reading and AMI technology with lots of migrating upgrades. We had a significant number of wins last quarter, over ten.

And really the $50 million that we put into R&D in the last three years at Neptune has gotten us into a very outstanding position that people will begin to appreciate just how much we have done and how far advanced we are going to be over the next couple of years in this space.

We did get some sequential improvement at Roper Pumps and that we expect to have a little bit better results again in the fourth quarter despite the basically that two other businesses in here that are really purely related upstream and have been severely hampered.

The rest of our businesses in here, it's kind of test businesses, are all doing relatively well. Some of them actually have record quarters and on balance we don’t see any deterioration in those businesses. In the fourth quarter we think we will have sort of similar revenue and margin performance to what we had in the third quarter.

And while upstream markets are sequentially flat, there is a tiny bit of improvement that we are seeing. Next Slide. Here we look at the RF technology and software segment.

It's really increasingly right to think about three legs in this segment with the RF product side of activity and then you have the tolling side of activity and then you have all this applications software business and of course now in addition to that with ConstructConnect.

So here the businesses revenue was up 20% in the quarter, the operating profit was up 26%. The OP margin is 31.7% but the EBITDA margin was 38%, up 230 basis points. We had organic growth of 7% in the segment and had about one point of foreign exchange headwind and acquisitions helped by 14%.

Very strong growth at toll and traffic on project activity in Florida and Texas, Pennsylvania. Sounds like swing states in the election. Continues high single digit growth in software led by freight matching and CBORD. We did some really exciting things at freight matching.

We moved to a more modern software-friendly location in the Portland, Oregon area and that we have put together the freight matching networks of DAT in the U.S. and get loaded into a new software development. A process that’s going to expand our customer base. We had double digit growth in the RF products business. Lot of that’s driven by senior living.

There are several of our businesses that touch senior living. And then toll and traffic would have had spectacular orders, of course, if we would have been able to book the bridge and toll project -- toll and tunnel project which we hoped would happen a little bit earlier in the year.

We had a five year extension of our toll mandate in Dubai and the Saudi project sort of back on track. We wound up with our about 30 installations here in the fourth quarter we think which will get us to about 70 of the 350. So we feel much better about the progress in Riyadh.

In the fourth quarter, TransCore was awarded the $70 million plus MTA project to convert nine bridges and tunnel around five boroughs. All of you who go back and forth in that are well aware of what that’s like in others, like 800,000 people a day going through that process.

And conversion with our Infinity technology will people to not have toll booths and there will be fines, of course based on video tolling. But if you have a normal toll tag you will be able to get through. The growth in toll and traffic we think will continue to manifest itself in the fourth quarter and certainly into 2017.

The software business universally remains strong. We had kind of mid-single digit organic growth in the whole segment which gives really strong momentum going into '17, certainly the best position that we have had in the segment in a long time. And now we have acquired ConstructConnect which we will talk about here in a second, for $632 million.

It's got about $150 million in revenue and sort of Roper type expected EBITDA margins which will get better as it gets inside the Roper to govern its process. Next Slide. So talking about ConstructConnect for a minute. We issued a separate press release on this.

I think today is an interesting day in addition to being a record quarter, it's a record number of press releases. This is really an amazing business. When our teams made the trips and the diligence process, and working with Dave Conway's staff, you get to work in their training center and you can watch the network live.

It's really -- it’s just like watching the floor of the exchange with all this activity going, you realize how many people are interacting with this thing. They have $55 billion of bid activity. It's just remarkable.

It's like our freight matching network where something is up for maybe 1, 1.2 seconds, before it's grabbed by somebody else in the network and here you are seeing all this usage around the data which is just unprecedented that is inside the network that’s accessible to everybody. So it's all cloud-based technology.

The network allows people to see what projects are coming up. They can see what contractors, form their own opinions about who might be competing for it, what the call up is for everyone's specifications.

There are also going to be benefitted by the way because they will work together with our On Center business that was just dry wall construction only. And their own niche things that are going to be able to fold into ConstructConnect going forward.

Those 800,000 users were laughing about this -- in preparation of the call, basically there is 800,000 people that use the bridge and tunnels in New York every day. So we have decided to, perhaps every person going through the tunnel represents the ConstructConnect user. This business is headquartered in Cincinnati.

It's revenue for next year should be something, hopefully about $150 million. It's got to generate something in the $50 million plus of EBITDA to us and remember lots of non-cash amortization in these things. So terrific cash business. It will meet all of our acquisition requirements. It's got a great management team.

Dave's been running this business through its acquisition phase and through its evolutionary shaping of the preconstruction industry. So he really is the domain expert. Very high recurring revenue. It's a subscription business. So you have all those great cash characteristics.

It has deferred revenue so have very few assets of any kind, and it really has multiple growth opportunities. And that’s another reason why we have found it to be a very attractive acquisition. I think a great home for ConstructConnect who can now focus really on continuing to shape the evolution of the pre-construction industry. Next Slide.

The medical and scientific imaging business. You can see here we were up 12%. 8% on acquisition, 4% on organic. A little less than one point of negative FX but around its down as opposed to up.

The medical businesses are 85% of this segment and they grew organically at 5% and interestingly throughout the year, the medical businesses have grown organically at 5%. Each one of the separate businesses are sort of hospital software or alternate type solutions business and the medical products, all three groups grew.

Sunquest, the way we look at order intake is surely different than bookings against the entire business because there are so much recurring revenue that doesn’t really change from a bookings space. But on an order intake basis, they had a record and the third quarter was up by the most it's ever been. Scientific imaging was about 15% of the segment.

It did okay in the third quarter. It had modest growth but actually it's a bifurcated situation where the life science portion, because of cryo-EM market opportunities, grew over 100% in the quarter, while the physical science business continued to be pretty weak and was down about 20%.

So the opportunity in front of these businesses is best it's ever been. In the fourth quarter, we think we will have continued mid-single digit growth for the medical businesses, led really by the Alternate Site Solutions business.

Scientific Imaging we think will be terrific on demand and bookings for new products but most of those probably will have early 2017 deliveries, which is another reason that you maybe get some here in the fourth quarter, we would just have to see, but we are going to assume that mostly that’s going to be the first half of next year. Okay.

The next Slide is the guidance update. Turning to page, here is the specifics on the guidance. We are going to go in -- for the fourth quarter we had $1.77 to $1.89. It's a broad range, probably not really a broad range given how much money we make and how few shares we have.

So seasonality in the industrial and energy business is not something that we think will help this year. We could be wrong about that and if get normal seasonality, then we will towards the higher end of the range. The New York City MTA ramp is very important in the fourth quarter.

There was a commitment to get the first three projects completed by January 1 and how that project ramps will have a direct effect on whether we are towards the low or the higher end of the guidance. And then customer preferences around delivery. We talk of third quarter orders were satisfactory but not carrying immediate delivery kind of results.

So I think there is some hesitancy in the industrial and energy markets about exactly when they want things that they are booked and committed to. The full year guidance, given the fourth quarter addition to our year-to-date results, would give us somewhere around $648 million to $660 million.

Most of our internal projections and external projections are on around $655 million to $660 million. Full year cash flow conversions would still be spectacular, 140% or so. And that will allow us despite terrific oil and gas headwinds this year to have 5% to 6% revenue and EBITDA growth for the year. Next Slide.

If we look at the summary of how we did in the third quarter, it's kind of a long list of good things. We got record orders, revenue, net earnings, EBITDA and cash flow. Four standout businesses there. Medical software, tolling and Neptune were really quite good. Because, remember, we got 20 plus negative on the energy side of the business.

EBITDA got up to 34.6% of revenue and our free cash flow was phenomenal. The New York City MTA bridge and tunnel all electronic tolling project, we really expected to win this for sometime but the news about it, the commitment around it didn’t come until last Friday.

So we have been planning for a Q4 kick-off and we will do what we said we will do for them, which is get the first three projects done. But almost the vast majority of this work is going to come in 2017 and not in the fourth quarter.

We acquired a great SaaS network business in ConstructConnect and it along with the things you can do with On Center in a cooperative way, will be very beneficial for us in 2017. The cash performance that we have year-to-date along with a brand new balance sheet with a much better credit facility, supports our continued ability to deploy capital.

It's the most powder we have ever had and eh opportunities that we see are excellent. So we had outstanding results in the third quarter and we are very well positioned for 2017 and ready to take your questions..

[Operator Instructions] We will go first to Deane Dray at RBC Capital..

This is Andrew Krill on for Deane. I want to start off on ConstructConnect, this is the second meaningful deal you guys have done recently in Software-as-a-Service after Aderant. So I am just wondering if you could talk about market share within construction, and if there are any unique barriers to entry versus peers for the business..

Well, this is John Humphrey. So as far as barriers, I mean the barrier of course for a networks business is the strength and size of the network, and the ability for all of the different users to be able to transact business and grow their own businesses by utilizing the ConstructConnect network and software solutions.

And I think it goes to the size of the network. When Brian talked about 800,000 users and 55 million invitations to bid every year encompassing almost 400,000 different commercial construction projects.

I mean the size of the network and the combination that ConstructConnect has been able to put together between their different brands of iSqft, Bidclerk and Construct Data, and really turn that into a single integrated platform and that’s truly unique inside the industry. So from a competitive position.

I think for most of those customers, the way that variable to grow their business and to bid on more projects and to win more, is through connection to the ConstructConnect network. And so that’s really the strength of that in the competitive position.

There are a couple of competitors out there that also provide, particularly on the construction data side, but on the network and the integrated data, we really don’t think there is anyone of size there..

Okay. It is very helpful. And then just as a quick follow-up. Do you have any sense of potential accretion and then I guess kind of where you guys that EBITDA margin could eventually go versus the sort of 33% or so you are expecting next year. Thank you..

Well, we still have a lot of work to do. I mean we are going to close on the transaction but it is worth thinking about it as probably somewhere in the $0.10 to $0.15 accretive for next year. We will be able to update you on that of course as we finalize the purchase accounting. And the margin profile here is also very good, right..

We are talking about something that’s already in the mid-30% EBITDA margin. And so as it continues to grow, it will grow with high incremental margins. And so that’s how we see the margin progression over time as this network continues to get bigger..

I just want to add to the understanding that these acquisitions have a lot of non-cash amortization. So on a GAAP DEPS basis, people are looking at expensing that amortization and depressing what otherwise looks like earnings per share. Reality is, it will be very cash accretive. But on a GAAP DEPS basis it may only add $0.10 or $0.15.

I think you get paid as a shareholder for monitoring what's happening to the quality of the cash earnings. The cash earnings of ConstructConnect will be great..

And we will move next to Robert McCarthy at Stifel..

I guess, first, just talking about the -- again, congratulations at a very strong cash generation quarter. These questions will relate obviously to DEPS. But in terms of the medical cadence for the fourth quarter and energy, could you just expand on your comments about what kind of brought the guide down for the fourth quarter..

I think two things in terms of the DEPS. It's just our view of that is that we are not going to get much in the way of seasonality. When we look to the orders that came in the third quarter, we get a lot of footprints and we call them booked and so they are booked with a quarter, shipped within the next quarter.

And we didn’t see any uptick that would give us a reason to think we would have normalized Q4 seasonality, but we could be wrong about that, that would be upside that could happen to us. So, I think it's more than any one item and then we have been ready to go on a couple of projects that we expect and we are ready to [indiscernible]. Okay..

Energy is not particularly surprising but the medical cadence.

Could you just expand upon that because I think your expectation was kind of high-single-digit growth as kind of an exit rate for fourth quarter?.

Yes. Rob, I think you are right about that. And once again, it goes back to what Brian was talking about. When we look at the product orders, and I am talking specifically around medical products.

Well, we expected that kind of last time we talked, that’s exited closer to the 10% growth rate, that’s existing closer to the 5% growth rate, and that combined with the timing of imaging orders and deliveries. So all the life science things that Brian talked about earlier, those are actually very sophisticated instruments and cameras and filters.

They aren't as kind of the -- it's not like just machining and creating a pump. So the process in order to be able to turn that from order to delivery can easily be 60, 90, 120 days depending on yield and throughput, particularly from suppliers around some of the centers.

And so as we look at the deliveries and the delivery schedule, particularly on the imaging product side and also on the medical product side, that’s where we see a slight difference from what we would have thought before, but we still see this segment exiting at the mid-single-digit rate, very consistent with where it has been over the past 2.5 years..

Okay.

So you see no underlying deterioration in the core organic growth rate of that segment?.

No, we do not..

No, no..

Okay. And then in terms of the M&A pipeline, obviously you have transacted on a very interesting deal this quarter. But I mean what's the state of play in terms of how you look over the next, kind of 12 to 18 months in terms of capacities of these deals and the environment to get deals done.

Because it has been, in the main, kind of a difficult environment to get deals done..

Yes. You know if you go back to January '15, in that 21-month period we have deployed $2.7 billion in capital. I mean in the next 21 month period or much sooner I would think that that kind of run rates are impossible.

You know we have got hundreds of millions or billions of dollars of capital to be able to put to work and getting the new $2.5 billion revolver which is [on ] [ph] done, was a big deal because it's given us some flexibility around how much we can deploy at anyone point in time and that’s very helpful.

So there are a number of small deals that we are engaged with at the moment and a couple of larger transactions which would be even bigger than ConstructConnect that we are involved with, we think are very attractive. So you never know, in terms of your word, cadence, how that will happen.

But I would be very very surprised if we didn’t deploy that capital in the next 12 months..

The final question is just around, you have heard this many times, but would you consider doing something akin to what some of your competitors have done, simply not competitors but public comps, in terms of perhaps just shifting to EPS excluding amortization..

Well, there's a lot of smiling in the room because that’s the proper way to measure us. I guess we are not interested in stepping on the SEC.

Those people that are doing that, they can continue to do it for a longer period of time and if the SEC doesn’t say anything about it, that’s a smart thing to do, because it's the proper way to measure the business. It's just not the way GAAP measures the earnings.

So we had $50 million of amortization in the third quarter and what do we have, 101 million or 102 million of shares, you can do the math. I am apparently now allowed to say what that math generates. EBITA, earnings per share for the company will be and are spectacular..

Brian, you would have banging my head against the wall for that for about 15 years and I am a slow learner. So I will leave it there..

We will move to our next question from Joe Giordano at Cowen and Company..

Do you get the sense that given where rates are and when you are looking at deals, are you having to stretch a little bit more in terms of multiple because competitors who are looking at the same assets are able to kind of do some funny math with rates being here in terms of returns?.

Well, I wish it were funny math but it isn't funny math. The difference is, we don't like to go above like four times debt to EBITDA, and those guys are willing to take [that staples] [ph] and banks put on things in non-bank entities, but [on times] [ph] at eight times EBITDA, right.

So, they don't deploy much more equity in a transaction that we do, we just don't want to have seven or eight times debt to EBITDA. We are going to remain investment grade and to do that you want to be around four times debt to EBITDA coming back to 3 or 3.5 or something.

So you know we are very disciplined about wanting to and guaranteeing ourselves to maintain investment grade status. The prices that people are paying for things are really bifurcated.

Oddly enough, the industrial assets are trading at really more than they're worth in a normalized interest environment in the M&A world, because they don't have a lot of EBITDA even though they all require a lot of capital spending to maintain that EBITDA. So those multiples are interestingly high.

Then the asset light business trade at a premium to that but the arbitrage for us on the asset light businesses is more favorable than those people that are buying the more capital intensive businesses.

So something like ConstructConnect, it will be a long-term compounder of investment for us which is great as opposed to the guys that are buying the capital intensive businesses thinking that, gee, you know, it looks like I'm paying a lot but there is the nature of their cyclical activity and when there is this higher number, this will happen.

We will leave that field to everybody else. It is not where we're going..

Thank you. I just wanted to touch on Neptune as well. I mean the results this quarter, obviously very, very strong. There's this story out there, that has been out there for a while, fair or not, about a lack of investment. You talk about $50 million of M&A.

Can you just talk about your positioning there on the highest technology type products, like on the AMI development and how you're capitalizing on your installed base? I mean the numbers speak for themselves but this has kind of been out there for a while and I guess, maybe give you guys a chance to address that..

Yes. I think $50 million was what we have done in R&D, not M&A..

Sorry if I misspoke. Yes..

In the last three years we have put $50 million of work there. We are also opening a new software development center for Neptune that will really help us and a lot of things we're doing.

So we're not going to provide a lot of information about what we're doing but I can just suggest you that we have the best reading technology that’s available and has the highest integrity results. We have an enormous installed base and maybe people forget that the way our 900 product works, we can upgrade that, the AMI status.

And there is a lot of ways to collect the technology but if you have got the right core unit that can use multiple ways of gathering the data, you will be a little bit ahead of the game. So we are able to do upgrades for people in the AMI arena that they always, if they ever migrated to it, they do that and we have won a lot of those.

Over $30 million of that just in the third quarter. You saw other things. Mobile activity, you see Verizon picking us as the person that they are working with development on mobile technology.

So there's a lot of different things going on and we are not going to provide more information than we have around that but Neptune will have record performance in 2016. So if anybody thought it didn't have some kind of long term reason for performing well, explain to me why they are growing so much..

Fair enough. And last if I could, John, you talked last quarter about, we were talking about Sunquest, some small hospitals, they were taking maybe [indiscernible] and you said that made sense for that size of a customer and your core being large hospitals.

Can you just talk about how that went through 3Q? Is that kind of stabilized and then the customer base that you focused on, you remain to be -- the capture rate there is being consistent..

Yes. It has been consistent. And you are absolutely right, in fact Brian talked about the order intake, right. So remember that fully two-thirds, if not more, of Sunquest revenue is recurring revenue in terms of maintenance on installed software that's already been out there.

And so when we look at the order intake, it's a much smaller piece of their total revenue buy. But when they look at their order intake which is about the new Lab 8.0, it's about the new blood bank solution, it's the new outreach solution.

So the nurses can start the testing process right at the bedside and be able to start that data flow and workflow to the lab right from the bedside. So all of those upgrades are driving that order intake to be a record level for the third quarter.

It is true that on the lower end, the smaller hospitals and integrated solution can make economic sense for them, but the competitive environment and the solution that Sunquest delivers is, it continues to be very good and our competitive position continues to be very strong, particularly in those larger hospitals..

And we will go next to Brian Gesuale at Raymond James..

I am wondering if you could expand a little bit on Sunquest. You talked about record orders. Maybe just the richness of this product upgrade cycle that we have seen and maybe give us a little bit of a preface as what we might expect in 2017..

I think it's early to talk about 2017. We actually have a review coming up with Sunquest in about a month. So we will be talking about not only 2017 but importantly 2018 and 2019, and the plans that they have around the investments there.

So one is what I was kind of just mentioning in terms of the continued on the upgrade side around Lab 8.0 and the new blood bank solution. But also wouldn’t ignore the investments that we have made around genetic testing and the workflows associated with that.

So you really have the blood side which is the core lab, high volume testing environment that every hospital has to have. And I think of the other side, which is the anatomic technology and the emerging genetic workflows around genetic testing.

That’s where we have made important investments with the acquisition of GeneInsight and continued R&D around to be able to make that workflow as efficient and as quick with getting information back to the doctor as timely as happens today on the blood side.

And so for all those reasons, I think the Sunquest and our entire platform of hospital software solutions, which of course includes Data Innovations and CliniSys, and GeneInsight and a variety of other things, all of those businesses really deliver those software solutions to hospitals.

I think there future looks very bright as a result of the investments that we continue to make there..

Great. That’s helpful. Maybe just a follow-up on the M&A pipeline. It sounds robust. You certainly have a lot of dry powder. Can you maybe talk about the quality of those deals? This ConstructConnect looks very asset light, negative working capital. It appears that the quality is actually increasing as the pipeline is.

Could you maybe discuss that?.

Yes. You can really see that when you look at that net working capital chart where you are down 5.8, people think you could never get lower and now we are 1.9. Certainly a lot of that as you get deferred revenue and you get paid in advance for work you do and most of the things that we look at these days have those qualities.

So I thought, we get to zero ultimately negative at some point but I don’t see us going up. The amount of small niche businesses that work in kind of oligopolies where customer [indiscernible] is critical and then those that have the ability to have kind of a network effect, there are most of those things out there than you might imagine.

Because when you are focused on product businesses, you don’t necessarily see some of these kind of things. But all of the people that are involved in transactions and banking businesses and then private equity businesses, kind of meddle what we favor, what we look like. And so the funnel what we have of incoming opportunity is really amazing.

And just incumbent on us to sort through that funnel, find the best management teams. So that’s the end market opportunities that are in favorably competitive environments. And believe me, there is more high quality things available that our balance sheet could tolerate. Fortunately, we have got a big enough balance sheet to capture some of them..

We will take our next question from Richard Eastman at Robert W. Baird..

Brian, could you just talk for a minute or two about the New York MTA contract. I think you had mentioned there sites should be performed in the fourth quarter, kind of accelerated.

Given the size of that contract, are we talking about maybe $20 million to $25 million of revenue in the fourth quarter and then the balance of the sites, the other six sites, does that all fall into the first half of '17?.

No. No. I think commitment in the contract is pretty specific in terms of what they've been willing to release. And it will be done by November of 2017, is what we're told. There was really even one -- remember you have got the, like ramp, right.

So we've been doing some engineering work with them to assure that the overhead kiosk and everything that were being built-in, are going to be okay. So it will start slow.

I don't know, maybe we could get $10 million in the fourth quarter of revenue that we have with the rest being -- whatever is it, it's about $72 million for the entire period and it will be really up to them at the pace they want us to do the installation and release of the technology..

Okay. Understood. And just then just a last question, I have, just around MHA. There is a lot of noise around drug pricing, both generic as well as branded. And then also I noticed in the Slide that you had, that there was a suggestion that the alternative site solutions business would kind of be a leader here in the fourth quarter.

Can you just kind of pull all that together? Has the noise around drug pricing impacted just the revenue stream in the pasture there at MHA, and then also is this alternative site solutions business being kind of the fourth quarter leader? Is there timing there or is there contract renewals or what would drive that in the fourth quarter?.

Yes. Sure. So in terms of its contribution on the growth side, it was up in the 3% or 4% in the third quarter and we expect that to be modestly better in the fourth quarter. From a drug pricing standpoint, I mean you are right, that is something that we look at.

A lot of the headlines that you see around drug pricing are really targeted for our being sold to the senior population. Remember MHA is around alternate site healthcare and the largest portion of their revenue is coming from skilled nursing homes, long-term care facilities.

It's not really the headline prices around EpiPen or whatever else that you might read in the Wall Street Journal. It's really for kind of the longer chronic illnesses that are being sold through the MHA contracting vehicles. So, we do look at drug pricing. It's been lower than what we would have seen in years past but still positive in 2016.

We're not counting on an awful lot of drug pricing lift as we think about the future for MHA. They continue to expand in their solutions in non-drug supply chains, including food and other things around long-term care facilities and other nursing homes. So they continue to expand that.

And then they also expand their software solutions around data analytics. You have seen us make a couple of acquisitions that also serve the alternate site healthcare which are not GPO but are really around software solutions that allow those members and customers to run their businesses more efficiently. That's where we look for growth.

We don't really count on underlying drug price increases as something that is going to drive our performance, although it does have an impact on our revenue..

And we will go next to Alex Blanton at Clear Harbor Asset Management. Mr. Blanton, your line is open..

Audra, we will have to follow up with Alex, I think..

All right. And that will end our question-and-answer session for this call. We now return back to management for any closing remarks..

Well, thank you very much for joining us and we look forward to speaking to you again in about three months..

And that does conclude today's conference. Again, thank you for your participation..