Good morning. The Roper Technologies Conference Call will now begin. Today's call is being recorded. [Operator Instructions] I would like to turn the call over to Zack Moxcey, Vice President, Investor Relations. Please go ahead..

amortization of acquisition-related intangible assets and the financial impacts associated with our minority investment in Indicor. 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?.

Thanks, Zach and we hope everyone is doing well this morning. We're looking forward to sharing our Q1 results with you which were quite good. As we turn to Page 4, let's look at today's agenda.

We'll start with our enterprise highlights and financial results, then turn to our segment-specific discussion and wrap up discussing our raised 2023 enterprise guidance. So with that, let's go ahead and get started. Next slide, please.

As we turn to Page 5, the 3 main takeaways for today's call are, first, the year is off to a strong operational and financial start as our higher-quality, enhanced portfolio is obviously performing really well; second, we're increasing our full year guidance both in terms of organic revenue growth and adjusted DEPS; and third, we continue to be very well positioned for disciplined capital deployment.

As it relates to our first takeaway, a strong start to the year, we saw total revenue grow of 15% and organic revenue grow 8%. Consistent with our long-standing strategy, we continue to not only scale our enterprise but also simultaneously improve its underlying quality and recurring revenue base.

Importantly, we had very strong cash flow performance with free cash flow margins in excess of 30%. Our results this quarter are another proof point that our higher-quality, less cyclical portfolio was purpose-built to consistently perform at a very high level.

Finally and also during the quarter, we held our first ever Roper Leadership Summit, where we had our 27 business unit presidents together and shared best practices and learnings across a variety of topics, including strategy development, strategy enablement and team and talent.

While honoring our high trust autonomous model, the operating and corporate teams left feeling a true sense of community. It was a terrific week.

Given the strong start to the year, we're increasing our full year organic growth outlook 100 basis points from 5% to 6% to 6% to 7% and increasing our full year DEPS guidance to be to $16.10 to $16.30 or $15.10 at the midpoint. Our previous diluted EPS guide was $15.90 to $16.20.

And finally, we continue to be well positioned relative to capital deployment. We remain quite active in the market as we evaluate an actively diligent many high-quality opportunities. Jason, I'll turn the call over to you so you can walk through our first quarter results and our strong financial position.

Jason?.

Thanks, Neil and thanks, everyone, for joining us this morning. Turning to Slide 6. We're very pleased with how Q1 shaped up. Revenue came in at $1.47 billion or 15% over prior year. This was through a combination of strong organic growth of 8% and an 8% contribution from acquisitions, led by Frontline and this was slightly offset by a 1% FX headwind.

Growth was broad-based across the segments and a little better than expected. Broadly speaking, customer demand was favorable in the quarter and order pipelines remain strong. EBITDA was $582 million or 15% of our prior year with margins roughly flat and in line with expectations.

DEPS of $3.90 was up 19% over prior year and $0.06 above the high end of our guidance range of $3.80 to $3.84. Free cash flow of $445 million was 4% higher than prior year. In our Q4 earnings call, we highlighted a $45 million settlement of a patent dispute for certain Verathon sales dating back to 2004.

We paid that this quarter, so adjusted for the settlement, free cash would be 33% of revenue and up 14% over prior year. We saw very good cash performance, especially in our software businesses. Our Q1 renewals and related collections came in strong as expected.

As I mentioned last quarter, Frontline will collect most of the renewals in the third quarter. So it's a bit of a drag on conversion in the first half. So overall, just a really great start to 2023. Now turning to Slide 7, we'll spin through our balance sheet. Coming off solid Q1 cash flow performance, our balance sheet continues to strengthen.

Gross debt was around $6.7 billion and our cash balance has grown to just under $1.2 billion which yields net debt just shy of $5.5 billion. This puts our net debt-to-EBITDA ratio at 2.4 which was down from 2.7 at year-end. This, coupled with our undrawn revolver of $3.5 billion gives us capacity to deploy $4 billion or more in the near term.

To that end, we've been quite active in 2023, evaluating a number of platform and bolt-on opportunities. As always, we will remain disciplined and patient in our capital deployment process. With that, I'll turn it back over to Neil to talk about our segment performance and outlook.

Neil?.

Thanks, Jason. Let's turn to Page 9 and walk through our Q1 highlights for Application Software segment. Revenues here were $761 million, up 6% on an organic basis and EBITDA margins were 43.2%. Performance in this segment was strong across the board. To highlight a few of our business' performance, we'll start with Deltek. Deltek was solid.

As we mentioned last quarter, Deltek did see some slower customer decision-making but that was largely rectified this quarter. Deltek had double-digit bookings in the quarter with strength across both enterprise class and SMB-sized customers as well as government contracting and private sector solutions.

As usual, both gross and net retention at Deltek remained strong and consistent with recent history. Aderant, our software business focused on the needs of law firms, continues to compete and win and take share from our competitors. In the quarter, Aderant experienced record bookings and continued success in the adoption of their SaaS solutions.

Great job by Chris, Rafi and the entire Aderant team. Vertafore, our software business at tech-enabled property and casualty insurance agencies, posted another solid quarter and continues to perform quite well for us.

Of particular note, Vertafore's recent acquisition of MGA Systems, a software solution targeted to manage general agents, or MGAs, is proving to be highly strategic and bookings activity is tracking ahead of plan. Frontline continues to perform quite well for us in the first couple of quarters of ownership.

Frontline's mission is to empower the front line of education. As many of you know, hiring of teachers and administrative staff is particularly challenging and Frontline software solutions better equip K-12 school districts to navigate these challenges.

Because of this, frontline solutions are mission-critical and of high importance to their school district customers. For the segment, EBITDA margins were down 90 basis points year-over-year, in line with our expectations.

Our Acute Care software businesses, especially CliniSys, Data Innovations and Strata are ramping up their implementation capacity based on recent bookings momentum. We expect to see similar margins in Q2.

Looking to the balance of the year, we expect to see organic growth in the mid-single-digit area for this segment based on our leading market positions and growth in recurring revenue. Turning to Page 10. Revenues in the quarter for Network Software segment were $355 million, up 6% on an organic basis and EBITDA margins were strong at 53.1%.

As with our Application Software segment, growth and performance was broad-based across this segment. Relative to business-specific comments, we'll start with our U.S. and Canadian freight matching businesses, DAT and Loadlink which both grew nicely in the quarter.

While freight market conditions are softer than this time last year, our businesses in this space are critical to the operation and execution of the spot freight market. In addition and importantly, the spot market is a long-term secular beneficiary in terms of the volume of future freight shipments.

Throughout and across the freight and economic cycle, DAT and Loadlink continue to innovate and launch new products and offerings to help drive enhanced customer value and share of wallet with the current product strategy focused on tech enabling the connectivity between brokers and carriers.

iPipeline, our network software business that tech enables the distribution channel for life insurance and annuities, is coming off a terrific 2022 and continued its high level of execution this quarter with very strong bookings, retention and customer expansions.

Foundry continued its string of strong performance in the quarter and had terrific seat growth for their flagship product Newk [ph] which enabled continued double-digit recurring revenue growth.

As we mentioned last quarter, Foundry commenced their subscription pricing transition for Newk [ph] and in Q1 had north of 50% of the new seats sold under their new model ahead of their plan. Finally, our alternate site health care businesses, MHA, SoftWriters and SHP were strong in the quarter.

Execution was solid and the business has benefited by an improving census in skilled nursing, assisted living facilities and home health reaching the highest occupancy levels in patient volumes since the onset of the pandemic. Turning to the balance of the year.

We expect to see mid-single-digit organic growth for this segment based on broad and sustained growth across this group. As we turn to Page 11. Revenues in the quarter for our Tech-enabled Products segment were $354 million, up 14% on an organic basis. EBITDA margins for the segment were 34.7% in the quarter.

Across the segment, business performance and execution was solid. Importantly, the broad-based supply chain issues continue to wane. Though we're not entirely out of the woods, we can now see a path to a more normalized supply chain environment. Neptune, our water meter and technology product business, continues to be just great.

In the quarter, they had record revenue performance and set records for backlog levels. Importantly, Neptune continues to see increasing demand and momentum for their residential and commercial ultrasonic static meters.

We remain bullish on Neptune and the market in which they compete as this market tends to be quite steady as Neptune's customers' budgets are typically fixed year-to-year and not tied to broader macroeconomic trends or cycles. Great job at Neptune and congrats. Verathon was strong in the quarter as well with double-digit order growth.

Specifically, Verathon saw strength across the reoccurring single-use products, both bronchoscope or B-flex [ph] and video innovation or GlideScope as well as bladder scan capital purchases. Importantly, Verathon has 4 product launches scheduled for the next few months which will help continue their market share gains and momentum.

Northern Digital or NDI was also strong in the quarter and continued to see terrific demand for their optical and EM solutions. NDI's enabling measurement technology is used by scores and medical product OEMs and solutions such as robotic-assisted surgery and across multiple cardiac-specific modalities.

NDI's high level of market focus and operational discipline will enable them to continue to be the market share leader for these measurement technologies long into the future.

Our outlook for the balance of the year for this segment has improved to be in the low double-digit area and is based on continued strong orders and improving manufacturing productivity at Neptune as well as an improved growth outlook across our medical product businesses. Now please turn to Page 13 and let's review our increased 2023 guidance.

For 2023, we expect total revenue growth to be north of 12%. In addition, we're updating our organic revenue growth outlook to be in the 6% to 7% range, an increase from our original guidance of 5% to 6%.

As a result, we're increasing our DEPS guidance to be in the range of $16.10 and $16.30 in up from our guidance of $15.90 to $16.20, assuming that this guidance is a tax rate in the 21% to 22% area. Specific to the second quarter, we're establishing our DEPS guidance is to be in the $3.96 to $4 range.

Now please turn with us to Page 14 and then Jason and I will look forward to answering your questions. As we turn to Page 14, we want to leave you with the same 3 points with which we started. First, 2023 is off to a great start. We saw revenues increase 15% to $1.47 billion in the quarter.

This growth was underpinned with 8% organic revenue growth and 8% recurring revenue growth. In addition, margins were quite strong. This quarter's financial and operational performance is yet another proof point of our capabilities and frankly, the expectations of our improved higher-quality portfolio of businesses.

Most importantly, our revenue growth translated to impressive cash flow growth with our underlying free cash flow growing 14%. As you know, we view cash flow growth as the best measure of performance.

Second, based on the strong start to the year, the higher recurring nature of our revenue stream and the importance of our solutions to our customers, we are increasing our full year organic revenue growth outlook to be between 6% and 7% and increasing our full year DEPS to be between $16.10 an $16.30.

Finally, we continue to be active with our capital deployment activities as we have north of $4 billion of available M&A firepower.

As we discussed during our Investor Day last month, we have a very large universe and pipeline of opportunities, though, as always, we remain super patient and highly disciplined to ensure optimal deployment of our available capital.

Now as we turn to your questions and if you could flip to the final slide, our strategic flywheel, we want to thank those of you who joined us in New York or online last month for our first ever Investor Day.

During that long-form overview of Roper, we were excited to share with you our long-term strategy, the high-quality nature of our portfolio of businesses, our operating ability to improve our businesses, our process-driven capital deployment approach and are compelling long-term business model that compounds cash flow in the mid-teens area.

So, thank you for your continued interest in Roper. And with that, let's open it up to your questions..

[Operator Instructions] The first question comes from the line of Deane Dray with RBC Capital Markets..

It was great to see everyone in New York last month. Just maybe we can start off and it's a bit of a follow-up from last quarter with Deltek on some of the slowing in decision-making. This is kind of what everyone is watching, might there be any kind of fallout from bank turmoil or read through in the construction markets and so forth.

But the idea of slower customer decision making, maybe just give us an update on how that played out, time to sign contracts, any new logos. Just any color there would be helpful..

Yes. Sure, Deane. Happy to talk about it. it's something that we spent a tremendous amount of time talking to our leadership teams, our group executives about, trying to understand the signal.

To set the obvious context, we spent the last several years trying to really work out the cyclicality of the portfolio and we're also in these very small niche markets where the customers tend to be not that cyclical. So the signal for us is faint. It's not nonexistent but it's faint.

Last quarter, we certainly talked about Deltek and them having some slower customer demand, as we said in the prepared comments, that largely, it's not fully rectified itself this most recent quarter. Two or three quarters ago, we talked about the same thing going on a PowerPlan, that rectified itself the subsequent quarter as well.

Some of the other macro things that we listen to, the amount of property casualty insurance written as a sign of sort of business formation or business growth continued to grow, life insurance applications that got steady. DAT, the number of carriers we expected and certainly have seen for a couple of quarters, carrier declines at touch.

But that meaningfully moderated in Q1. So we continue to listen for it but -- and we certainly have planned for the second half of the year, concern outlook relative to a slowdown. But the signal's faint at the moment.

Jason, anything you want to add to that?.

Yes I would just say our software bookings were up high single digits year-over-year in the quarter. So that just put some math behind what he was saying..

Great. That's really helpful and appreciate kind of that walk through the portfolio there on sensitivity. And then just second question, it was nice to see the boost in organic revenue guide for the back of the year in tech-enabled products up low double digits.

And just with the expectation, look, Neptune continues to do really well and we see that in the industry. That tends to be a bit steady.

So how is it that you're seeing this acceleration and must be also on the medical side, too?.

Yes. There's 3 parts to this -- macro parts to this segment. There's Neptune, medical products and then a couple of small RF product businesses, all 3, they have and -- we, at corporate, sort of increased the outlook for the balance of the year.

Neptune has just continued incredible order growth and then terrific performance out of the factory at Neptune which gives us confidence that they can chew into a little bit more of the backlog than we maybe originally thought coming into the year.

At the medical product businesses, as we all know, last year, medical procedure volumes were down in the 7% to 8% range. We plan for that to continue this year. It's actually been a little bit better than that and that flowed through at Verathon, CIVCO directly and less directly through NDI.

And then the Inovonics and RF Ideas, the RF product businesses, have been riddled with supply chain challenges and coming into the year. We assume those would continue and they meaningfully improved in Q1. So it's a little bit uplift across the board that gives us the confidence to take the guide up in that segment..

The next question is from the line of Scott Davis with Melius Research..

I know it's not -- there isn't any particular business that's game changing for you in any particular quarter. But when you think about freight matching and I know the truckers have had some tough time this quarter. Some of the guidance has been a little cautious, tough comps, et cetera.

How linked is your freight matching business to kind of the miles driven and the B2C kind of truck market? Is there a direct link there? I would assume there is but I'm just -- it doesn't seem like you had really any major problems in DAT this quarter..

Yes. DAT grew in the quarter. Year-over-year, it grew sequentially. So -- but there is a link. It's an indirect link. We're not paid per mile driven, we're not paid on any utilization metric. It's a fixed subscription on both the broker side and the carrier side.

The reason DAT historically tends to be less cyclical than the market in which it operates, a couple of things. One is you have this tension between the cyclical nature and the secular growth driver, where the spot market is just winning more market share of the total freight volumes.

So you have more volume generally coming into the spot market over the long arc of time. And the simple version for why that is, is because the spot market is becoming more liquid or easier to transact in as it tech enables itself, of which DAT is a participant and enabler of that.

The second thing is understanding the dynamic between what the role the spot market plays in a booming versus a waning market, where in the -- and it's about the pricing dynamic between contract pricing and spot pricing. Spot pricing changes daily, contract pricing changes on a rolling year basis.

And so when the market is very hot, you obviously have more demand for carriers and there is supply, rates up in the spot market. It invites capacity addition. And that's what's driven DAT's growth for the last couple of 3 years as you have more carriers coming into the market.

When the freight market slows, you actually have spot pricing below that of contract and you actually, at that moment, start seeing some of the contract freight come into the spot market so the shippers can save money. So it provides you a floor for the demand of carriers.

And so historically, DAT grows very nicely in upmarket and grow slower in the downmarket for those couple of reasons..

That's interesting. Hate to [indiscernible] here but I'm just going to do it anyways.

What's the -- how does this business change over time? Like does AI become a big enabler and a predictor and help kind of drive that liquidity that you talked about, Neil? How does technology, I guess, change the game and help you guys gain share over time, I think is a better question..

Yes. I mean -- there's a lot of tech currents and cross currents in this space. At the core of it, today, I still think on average, there's between 8 and 10 phone calls that go between a broker and a carrier to actually broker a load. Obviously, what we're all trying to do is take that to 0.

DAT is a big part of their product road map is to tech enable that. So there's AI in the match, there's AI in the routing, there's AI in future trucks going from Cincinnati, Chicago, it's going to be there on Tuesday at 3. How does it have a pickup in Chicago back to where it wants to go 4 hours later or whatever the time frame is.

There's a lot of AI that can go into that. But the principle, the true unlock for the industry is to take the -- make the match more efficient and that's where most of the technology investment is going today..

Okay, that's helpful..

The next question comes from the line of Terry Tillman with Truist..

Congrats on the quarter. So the first question, I guess, is on the Frontline because that was the last major platform acquisition. I think you all talked about $370 million of revenue, expected contribution and $170 million EBITDA. And I think also you said it was a stub period, it was in the 80s and 4Q.

What I'm curious about is how is it tracking to those targets. And I did notice they just announced a new HCM suite, there's a new CRO there. So it seems like there's some dynamic things going on. Just maybe double-clicking on Frontline and then I had a follow-up for Jason..

You do the -- you take the first one..

I take the first one. Yes. So they're tracking on their forecast. As you know, they're a business that has large renewals in the third and fourth quarter. And so we'll expect the business to pick up sequentially in the second half but there are definitely on track for their revenue and EBITDA numbers of $370 million, $175 million..

Yes. And as it relates to the new products and a couple of new leaders, we're certainly excited to have Bill a new CFO, Scott, our new COO; and Curtis, the new Chief Client Operations Officer joined. It's often case times the case. There's a few leadership changes that happen in the first year or so of ownership.

And so that was expected, we're excited to have this team. It's an incredible group that's joined us. The thing that we -- that I'm particularly excited about and proud of in the first couple of quarters of ownership of Frontline is the strategic choice they've made.

As a pattern we see from a lot of companies that come out of private equity is very limited choice that's made, so they try to do too many things and not do them well.

And so very quickly, Frontline doubled down on client experience and R&D productivity and actually made a choice to take a little bit of resource out of go-to-market which makes complete sense when you have 85% or 90% coverage of the customers. And the entire strategy or the principal here strategy is to focus on cross-selling, up-selling.

You need to deliver a tremendous experience, hence, to focus on client experience and need to be able to innovate and sell them more products, hence the deployment to R&D. So we love the choice that's been made there and excited for what that yields in the future..

That's great color. I guess just a follow-up for Jason is you were able to call out the adjustment from the settlement. So it was up 14% in terms of the free cash flow at low 30s on a free cash flow margin.

Should we think about that for the remainder of the year in terms of kind of that mid-teens growth and maintaining a low 30s free cash flow margin?.

Yes, that's right. We're on track to deliver north of 30% free cash flow. As I mentioned, the second half is going to be better than the first half with the renewals at Frontline. But yes, we're still on track there..

The next question comes from the line of Steve Tusa with JPMorgan..

A couple of the businesses that you guys didn't mention but I think to Deane's question around what's going on out there. ConstructConnect, what are you seeing there? And then perhaps Clinisys, another one of your kind of big ones..

Sure. So ConstructConnect, as we talked about in the past, tends to be a countercyclical business. For those that are less familiar, ConstructConnect for simplicity has a near perfect database of every commercial construction project that's in the planning phase.

And so if you're a general contractor, a trade contractor, a building product manufacturer, you're generally quite interested in understanding for planning purposes, for bidding a project purposes what's in the stage of development planning. When the construction market is quite hot, general contractors and subs have more work that they can do.

There's less utility and value in paying a subscription fee for future projects that are in the queue. When the amount of work starts to slow down, there is increased utility in that. So when I look back and back test ConstructConnect over a couple of cycles, it has a clear countercyclical demand behavior attached to it.

So the market, we think, will be coming to it. As a general matter, ConstructConnect has maybe modestly underperformed our hopes. It's been more of a low single-digit growth business. Our expectation is that it should be mid. And we're quite confident with the current strategy that will climb to there and get to there.

We have a great leader that came out from Deltek a couple of years ago, Matt Straza, the operational discipline, the strategy, the go-to-market sort of prowess is just at the next level. And so we're quite confident that we're going to be able to reach our expectations of mid there. CliniSys has been nothing short of great.

Simpson, who's been -- who has integrated the U.S. Sunquest business with the European business, has just done that almost without error. It's been terrific. The business grew. The combined business grew in the quarter. We haven't been able to say that for quite some time given the drag of the U.S. business.

We continue to be just tremendously strong in the U.K. As you know, we're 1 of 3 or 4 strategic IT vendors to the NHS as we run something like 80% or 85% of the laboratory network in the U.K. The pan-European strength continues. For instance, we run the largest health system in France, in APP, the Paris system.

And in the U.S., some of the strength comes from the fact that we now have a product offering that is for laboratories outside of that of health care. So think environmental, toxicology, water, et cetera which is showing some early signs of promise.

And so a lot of congratulations to Simpson and Andy, the CFO and we're excited to see what happens at Clinisys..

Great. And then just one last one on free cash flow. It's a very pretty strong quarter, upside surprise, at least versus what we were expecting. A little bit bigger of a drag from deferred but maybe a bit lower cash taxes or something.

Just talk about the moving parts there and how you expect that to trend sequentially over the next couple of quarters on free cash..

federal tax payments in the second quarter and then one in the third and one in the fourth. So we will expect Q2 to be down sequentially but up year-over-year. And then just overall, for the full year, as I mentioned earlier, just north of 30% free cash flow margin, so on track there..

Yes, great. And then sorry, just one last quick one. The high single-digit bookings number, was that an organic number for software? ..

Yes..

The next question comes from the line of Julian Mitchell with Barclays..

Just a question on tech-enabled products first. So you're seeing a lot of sort of hardware manufacturers in our group with a big kind of flush of revenue right now as component shortages ease and then there's obviously a lot less visibility on the forward look once that flows through. So just wanted to tap -- very strong revenue performance in Q1.

You're very confident in the sort of the next 3 quarters' outlook. Maybe just drill down a little bit more into sort of orders and backlog trends there, just kind of the confidence that the strength right now is sustainable through year-end and not just to kind of flush as supply chain eases..

Yes. So it's something that we -- a couple of things we've been really quizzing and with our companies is 2 things, this very thing and then also the stability of the backlog has there been any order fall out of the backlog, right? So there's been none, by the way -- virtually none on backlog order fallout. The orders are quite strong.

Book-to-bill was greater than 1 in the quarter. So it gives us, I think, a good indication that it's not just a flush backlog.

In terms of the balance of the year though, I mean, we're waiting for the time when -- a lot of what's happened across the whole complex, not just us, is order duration is extended, right, as customers that want to be in the queue to make sure they have supply.

At some point and at that point, I don't know -- I don't think any of us know what is going to happen, we're going to get back into a more normal order sort of duration timing. So there'll be a period of time when orders, because of timing, compress. It's -- we don't know when that's going to happen but we're fully expecting it.

And candidly, aren't going to be that worried about it because it's sort of a natural reaction to where we are. We also -- so that's a commentary for Neptune in the whole segment. For medical products, quite the opposite. There isn't really -- we don't work out of a huge backlog out of that -- those businesses.

And so that dynamic that you're addressing or question doesn't exist. And then for -- we really solved the supply chain challenges at the RF product businesses. They were bespoke and unique to the 2 businesses there. And so now we will be able to start clearing some backlog but that's more of a second half thing than what it was in the quarter..

That's very helpful. And then just circling back on one of the more potentially cyclical pieces within software and it's already been touched on once or twice. But to try and put a finer point on the sort of DAT and Loadlinked businesses at Network Software.

Within that sort of mid-single-digit growth outlook for the segment for the balance of the year, how -- what are you dialing in for sort of DAT or Loadlink? Not -- you don't have to give me the percentage number. Just curious sort of versus the segment growth of mid-single digit, for example..

Yes. So it's the same -- I'll give you a color to it. I think we'll stop short of giving you like specifics at a company level. But as we mentioned last quarter, there is a difference of opinion between the DAT leadership and Sarasota about what the outlook of this business is for the year.

DAT is much more bullish on what the year -- the balance of the year is going to look like than what we are here in Sarasota. We continue to have a very conservative posture relative to what DAT looks like, especially uniquely on the carrier count for the balance of the year.

We want to see -- while we had a nice proof point in Q1 that the carrier decline started to basically flatten, we have not assumed they continue from that level and improve. We continue -- we assume they actually get a little bit worse..

The next question comes from the line of Joe Giordano with Cowen..

So just kind of talk about this on the medical product side but we had another company talking about like big inventory levels of component parts in medical, like -- kind of like unexpectedly so. So like their customers just have some of their -- more of their products than anticipated.

I'm guessing that's not really relevant to you guys but I just wanted to ask the question..

It's not particularly relevant. There's one business, Northern Digital, correct me on this I think it's just -- principally one that sells through, as I mentioned in the prepared remarks, the medical product OEMs were a critical component, a necessary component to scores of these medical product OEMs.

They cannot ship their product without our product, obviously. So there was -- we're worried there might have been a fair amount of inventory in the channel as buffer. The commentary from the Northern Digital team this quarter is they feel most if not all of that is through the system.

It's hard to know exactly for sure but that's where -- that's really the only place where it happens. Otherwise, it's us directly to a customer -- and in consumer customer..

Yes, that's what I figured. Okay. And then just a question on like the landscape for M&A. Like I'm just curious, from -- for your competitors on the PE side who are looking at stuff, is like the -- I know rates are kind of all over.

Is the volatility of rates and like the uncertainty around rates directionally like a problem for them? And like the ability to lock in debt or the desire to lock in rates, like is that having an impact on the market at all?.

Yes. I mean, it's been slow. The number of deals printed in the last couple of quarters has been very low for this reason that you mentioned for the reason that there's just a bid-ask spread between buyers and sellers. -- that continues to exist. And then also just uncertainty on what the exit values are going to be.

If you're doing a IRR analysis, the most sensitive variable and the whole thing is your exit value, your exit multiple. And so all in uncertainty, there just hasn't been a lot of deals or recaps. Private equity -- in private equity, there's been a handful of strategic deals that have happened.

I'll tell you though, in this our pattern recognition history would say, in times of volatility, it creates opportunity. We saw that coming out of COVID. And very quickly, I mean, it was what, August-ish and 2020 when we did Vertafore, it was an opportunity for us.

And so it's our commitment to investment-grade debt, our leverage levels that we could be nimble and flexible and quite opportunistic because this -- moments like this is where opportunities exist for a variety of reasons. So we're cautiously optimistic over the course of this year that those will present themselves..

The next question comes from the line of Allison Poliniak with Wells Fargo..

Just along the lines of that M&A, I know you mentioned you have certainly have a pipeline platform versus bolt-ons.

I guess just even what you're seeing today and sort of the comments that you just made, is there any confidence sort of you'd probably lean towards more bolt-ons in the next few months? Or are there some opportunities that you're seeing on the platform side that could execute?.

Yes. I think it's -- we characterize the current near-term level of activity in the M&A pipeline as having a bit more on the add-on or bolt-on side than what we might have seen historically. I wouldn't read too much into that. It sometimes -- it's just the way it falls sometimes. There's certainly a handful of platforms that we are currently evaluating.

There always is a handful that we're in pretty late stages or detailed work evaluating. But on balance, there's a bit more on the bolt-on side. Those tend to be our very best deals because they are additive to strategically to one of our existing companies.

There's normally some synergies that come with those -- and as we talked about in the Investor Day, strategically, we'd like to see more of our capital deployed against the bolt-on strategy. But we're not going to force it but it would be nice to be able to see it..

Got it. That's helpful. And then Application Software, the capacity ramp in acute care. I know you mentioned, obviously, it's impacting Q2. How should we think about that, the balance of the year? When does that slowly get running, that ramp? ..

Yes, that's right. I mean, we thought EBITDA margins were in line with expectations in the first quarter and we did have those implementations. Also, CBORD had some large integrated security pull-ins, they finally got some parts for some of those projects.

But for the second quarter, we're expecting it to be about the same and then it will pick back up in the second half. So you can expect EBITDA margins to be about flat year-over-year..

The next question comes from the line of Joe Vruwink with Baird..

Hope you're well. One observation I just kind of what we're hearing in the broader environment. It does seem like the system of record companies for the industries you serve, they're holding up pretty well.

And then I think there's some particular industry examples like K-12 education would be one where the spend is actually consolidating a bit around these companies, so share of wallet is going up right now.

Do you think you're generally seeing this so far? And any examples that come to mind where you kind of look at your growth relative to underlying IT spend and this wallet share dynamic is maybe playing out?.

Yes. I mean, I would say -- I mean, I have to -- we can take this off-line and sort of go company by company in some level of detail to the extent it would be interesting.

But at the highest level, we would say yes, right? So we're -- we say in the Investor Day, we say in all of our communication that we're mission-critical software system of record sort of software.

On the application side, if you think about like Deltek or Vertafore I mean, Frontline -- Aderant is a great example where we've gone from number 2 to number 1. We've doubled the size of the company over ownership period.

The net retention has gone from like low 1-0, whatever, 102,103 so low 110s, 110, 112, I think which just gives you a sense that all these software companies work for a long time to create a customer base that then they can spend the rest of their life cross-selling into.

And so most of our -- all of our companies, 50% to 75% or more of their new bookings come from cross-selling, upselling.

And the best example of that is the one you called out which is Frontline which I think it's like 80% plus, where it's -- they've done all the work over their history of basically capturing the customers and now it's about how do you get more share of wallet.

And in Frontline's case, in particular, it's a more fragmented state-by-state based on the regulatory environment, competitive environment. And you're right, today, 50% of K-12 health systems -- or excuse me, education systems want to buy from a consolidated vendor, where 5 years ago, that number was 25% or 30%.

So the market is coming towards -- in the education space towards companies like Frontline..

Okay, that's great. And then, I guess, a quick one on Frontline. In terms of the sequencing of free cash flow, so 50% cash flow margin business, do they typically kind of burn cash 1Q, 2Q, 3Q, 4Q? And so 3Q, we can think of more than 50% of that business's full year generation is probably hitting in that time frame..

Yes, I think that's the right way to think about it, Joe. A little bit more of a burn in Q2 -- or Q1, a little less in Q2 and then a big cash inflow in Q3 and a little bit of cash in Q4..

The next question comes from the line of Alex Blanton with Clear Harbor Asset Management..

Most of my questions on your operations have been answered but I wanted to ask about the -- how you benefit from the sale of compressor controls. Like Clayton Doble and Rice [ph], they sold it to Honeywell, they just announced this week for $670 million.

Are they selling your piece? And do you get any cash from that?.

Alex, I appreciate the opportunity to talk about this. So we are certainly involved with it. We're 49% owners of Indicor. We have quarterly Board meetings.

From the very first conversation we had with [indiscernible] about what the value creation plan is for Indicor, part of it was to do some portfolio work with this being the principal piece to make Indicor less oily and more industrial. And so this was a strategic -- this was an asset that was highly strategic to a number of folks in the industry.

It was a very competitive process and we're delighted to be able to sell the business for 19 x this year's EBITDA. I think Honeywell is a great home for this business. That mattered a lot to us.

The benefit of Indicor is we now get to take this capital as a company and a 49% owner of the company and then redeploy it to industrial and industrial tech type businesses build the M&A flywheel and hopefully create the next great industrial compounder that will become a public company in 3 to 5 years.

And that's when we'll monetize through the whole value creation plan..

Okay.

Do you get any cash from this deal?.

The only cash we get, Alex, is we'll have a distribution to us for the tax liability of the sale. But most of the cash is going to stay in the business. So we'll get that cash whenever it closes, sometime in the second half..

[Operator Instructions] This concludes our question-and-answer session. We will now return back to Zack Moxcey for any closing remarks..

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

That conference has now concluded. Thank you for attending today's presentation. You may now disconnect..