Roper Technologies Q4 2022 Earnings Call Transcript

Presentation

[Operator]

Good morning, the Roper Technologies Conference Call will now begin. Today's call is being recorded, and all participants will be in listen-only mode. [Operator Instructions] I would now like to turn the call over to Zack Moxcey, Vice President, Investor Relations. Please go ahead.

[Zack Moxcey, Vice President-Investor Relations at Roper Technologies]

Good morning, and thank you all for joining us as we discuss the Fourth Quarter and Full Year Financial Results for Roper Technologies. Joining me on the call this morning are Neil Hunn, President and Chief Executive Officer; Jason Conley, incoming Executive Vice-President and Chief Financial Officer; Rob Crisci, Executive Vice-President and Chief Financial Officer; Brandon Cross, Incoming 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 prepared slides to accompany today's call, which are available through the webcast and are also available on our website.

Now if you'll please turn to page 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. Unless otherwise noted, we will discuss our results and guidance on an adjusted non-GAAP and continuing operations basis. For the fourth quarter, the difference between our GAAP results and adjusted results consists of the following items. Amortization of acquisition-related intangible assets, purchase accounting adjustments to commission expense, a legal charge related to the settlement of the Berall versus Verathon patent litigation matter. The case related to the sale of certain Verathon products from 2004 through 2016, there are no future financial obligations for Verathon related to this matter. Next, transaction-related expenses for completed acquisitions, and lastly, we have adjusted our cash-flow statement to exclude the cash taxes paid related to our divestiture activity. GAAP requires these payments to be classified as operating cash-flow items, even though they related to divestitures. Reconciliations can be found in our press release and in the appendix of this presentation on our website.

And now if you please turn to page 4, I'll hand the call over to Neil. After our prepared remarks, we will take questions from our telephone participants. Neil?

[Neil Hunn, President and Chief Executive Officer at Roper Technologies]

Thanks, Zack, and good morning, everyone. As we turn to page 4, we'll walk through our usual year end agenda, highlights for the most recent quarter and full year, followed by color commentary for each of our segments, and then the initiation of our 2023 guidance. Let's go and get started. Next slide please.

As we turn to page 5, the main takeaways for today's call are, first -- we delivered another great year of strategic, operational and financial progress. To this end, we concluded our multi-year divestiture program which was centered on improving the quality of remaining portfolio, namely emphasizing less cyclical, more asset-light and higher-growth businesses.

In addition, we successfully deployed for $4.3 billion towards market-leading and application-specific software businesses. More on this later, but we also continue to have substantial M&A firepower well north of $4 billion. Organically, we grew just shy of 10% for the year, while simultaneously improving the underlying quality of the enterprise.

During the course of the year, our businesses did a terrific job of innovating and capturing share, which leads us to our second main takeaway for today's call, that we're well-positioned for another solid year performance in 2023. Our higher-quality, less cyclical and more highly recurring nature of our portfolio will serve us well during 2023.

Now, as I hand the call over to our incoming CFO, Jason Conley, let me take a moment and thank Rob Crisci for all he has done for Roper and for me. Rob has been a significant contributor to our success and an important member of our executive team, with meaningful insights and contributions across a variety of topics, including our most recent portfolio repositioning.

We're excited to welcome Jason to his new role. Many of you know Jason, for those of you who do not, Jason has been with Roper for 16 years. He started in Corporate IR and FP&A, then the operating CFO at MHA, our one of our businesses, and most recently serving as Roper's Chief Accounting Officer. Since his return to corporate, he has been a member of our capital allocation team and has attended every Board meeting. The team and I are excited to partner with Jason for the next leg of our evolution.

So, with that, looking forward to the partnership, Jason, and thank you, Rob, for all that you have done to make Roper better than when you joined. Jason, let me turn the call over to you so you can walk through the fourth quarter and the full-year financial summary. Jason?

[Jason Conley, Executive Vice President and Chief Financial Officer at Roper Technologies]

Hey, thanks, Neil. I am very excited and incredibly grateful for the opportunity to work with you and the team in this new role. And of course, thanks Rob for your awesome partnership and mentorship over the years. It's been just a great experience working together.

So, first, I'd like to introduce Brandon Cross as our new Principal Accounting Officer. Brandon joined Roper about five years ago, progressing to our Assistant Controller, and more recently has led and transformed our audit services function. He has significant M&A and integration experience, so this is a natural and well-earned promotion for him. Brendan, I look forward to working together in your new role.

[Brandon Cross, Principal Accounting Officer. at Roper Technologies]

Thanks, Jason.

[Jason Conley, Executive Vice President and Chief Financial Officer at Roper Technologies]

If you'll indulge me, I'll rave on Roper for a few seconds. I've been blessed to help guide and execute our evolution from Roper Industries to Roper Technologies, which has been underpinned by our NorthStar belief that cash is the best measure of performance, and as we enter 2023, our best years are ahead of us.

We have a family of market-leading businesses with durable growth drivers and terrific free-cash flow margins. Further, the leadership teams and talent processes at our businesses are the best in the company's history. And finally, we have significant capacity to execute our proven and disciplined M&A strategies that I've been part of for many years.

I anticipate being quite active on the road this year, so for those on the call, I look forward to either meeting you or reconnecting in the coming months. All right, let's get into the financials.

Turning to slide 6, we'll do a quick review of our Q4 performance. We capped off a solid year of growth with revenue of over $1.4 billion, which was 14% higher over prior year. Organic growth was 7% with strength across the portfolio, which was enhanced by 10% software recurring revenue growth. Acquisitions added eight points of growth, led by our frontline business that closed in early October. And currency was a 2-point headwind.

EBITDA of $592 million was up 17% over the prior year. We experienced strong operating leverage across the enterprise and improving gross margins in our TAP [Phonetic] segment to finish off the year. DEPS came in at $3.92, which was 17% against the prior year and $0.18 above the midpoint of our guidance range.

Next, we'll look at free-cash flow. Free-cash flow of $457 million was down 8% over the prior year. Excluding the Section 174 impact, we were down 3%. And factoring out a $30 million Vertafore tax benefit in 2021 that doesn't repeat, we're up about 3% to 4% in the quarter. Taking a broader view, you can see we compound cash at 11% over a four-year period despite the section 174 headwind, and we're well-positioned for double-digit cash-flow compounding going forward.

Turning to slide 7. We will now do a quick overview of our Q4 segment results, as Neil unpacked more detail on the full year, a bit later. We had a nice finish to a great year across the three segments. For application software, revenue was up 22% to $740 million with organic growth of 7%.

EBITDA margin increased to 45.6% in the quarter. We had strong SaaS bookings growth and overall solid net retention throughout the year, which is just naturally rolling through recurring revenue in the quarter. Growth was broad-based across the segment, aside from some delayed decision-making and the large government contracting space within Deltek.

On margin, we had lower incentive-based SG&A and employee medical costs, so some favorability in the quarter. If you look at the full-year margin of 44%, that's about where we would expect to be over a longer horizon.

Our Network Software segment grew nicely in the quarter, with revenue up 9% to $350 million and EBITDA also at 9% to a $189 million or 54% of revenue. Growth was led by our freight matching businesses which continued driving higher ARPU from premium offerings to offset moderating carry activity as we expected.

Tech-enabled products revenue was $340 million and grew 5% organically in the quarter. Demand remains strong, and we had some orders that didn't get delivered towards the end of the quarter, which will benefit Q1.

EBITDA grew 7% to a $119 million, resulting in EBITDA margin of 34.9% or 100 basis-points over prior year, with strong operating leverage as the price-cost dynamic was neutralized in the quarter.

Turning to the full year 2022 performance on slide 8. Revenue was 11% higher than prior year to $5.4 billion with 9% organic growth. EBITDA was 12% better to nearly $2.2 billion, with EBITDA margin coming in at 40.4%.

DEPS of $14.28 was 15% over prior year and reflected strong P&L leverage against the 11% revenue growth.

Notably, compared to our 2018 pre-divestiture financial profile, our revenue is about $175 million higher, while EBITDA is nearly $365 million higher. So, through a combination of organic growth and capital deployment, we've grown despite divesting about 40% of our 2018 revenue. And most importantly, the composition of our portfolio today positions us for higher and more durable growth going-forward.

Free-cash flow came in at about $1.5 billion, so down 7% versus prior year. It's a bit of the same situation as our fourth quarter, with both the 2022 headwinds of Section 174 of nearly $100 million and the non-repeat of the 2021 Vertafore tax benefit of $117 million. If we normalize for those items, free-cash flow grew about 8%. We've had a bit of an inventory build within our tech segment as suppliers become more available. This is not a new normal, and we certainly expect that to improve in 2023. If we kind of take this up to a multiyear view, you can see we've compounded cash at 15% over a four-year period. And as we look-forward, the impact from Section 174 will be fairly neutral, and we expect to convert plus or minus 80% of EBITDA out of free-cash flow. So, we're clearly well-positioned for double-digit growth.

Turning to Slide 9. Let's take a look at our financial positions. We certainly had a lot going on in Q4. On November 22nd, we completed the majority sale of our industrial businesses, which are now operating under the name Indicor, and received $2.6 billion in upfront proceeds. Also in the quarter, we paid $270 million representing all taxes due related to the majority sale. So, this yielded us net proceeds of over $2.3 billion, a very good outcome here indeed. Related to our stake in Indicor, this is now appearing as an equity investment on our balance sheet. We will be updating the fair-value of the equity investment each quarter going forward.

To provide a clear picture of our continuing operations, we will provide a non-GAAP adjustment for this fair-value accounting and any tax expense related to this investment.

So just looking at our balance sheet, even after our $3.7 billion frontline acquisition which was completed in October, our net debt-to-EBITDA ratio stands at 2.7 times. So, our solid leverage profile coupled with strong free-cash flow generation and an undrawn revolver of $3.5 billion gives us $4 billion plus of M&A capacity. Clearly, we are very well positioned for disciplined capital deployment in 2023.

And with that, I will turn the call back over to Neil to go through our segment details. Neil?

[Neil Hunn, President and Chief Executive Officer at Roper Technologies]

Thanks, Jason, and well done. Let's turn to page 11 and walk through our 2022 highlights for our Application Software segment. Revenues here were $2.64 billion, up 7% on an organic basis, and EBITDA margins were 44.1%. Performance across the segment was just solid in 2022. Vertafore, our software business of tech-enabled property and casualty insurance agencies accelerated their growth led by continued strength in the enterprise-class segment. In addition, the two vertical bolt-on acquisitions are strategically on point, integrated and performing well.

As we've been discussing, SaaS migrations have been a key theme for us over the past few years, and 2022 was no different. Both Aderant and Deltek continued their SaaS migration momentum and both grew nicely based on solid customer ads and strong retention.

Deltek was particularly strong in the private sector end markets, but as Jason mentioned, Deltek did see some slower decision-making specific to new bookings in the enterprise segment for their GovCon solutions. At our upcoming March 21st Investor Day, you'll get an opportunity to hear directly from the leaders at Vertafore, Deltek and Aderant about how they're competing and consistently winning in the market.

As it relates to PowerPlan, we liked what we saw last year. PowerPlan was strong, given their refocused and narrowed strategy, combined with a highly aligned team. As a result, PowerPlan crossed a meaningful milestone, launching a SaaS solution for their flagship product -- tax fixed assets. Congrats to the team for a great 2022 and looking-forward to more great things in 2023.

2022 was a very good year for our application healthcare IT businesses as well. Strata's combination with EPSi has just been great. The integration is complete and the number of EPSi to strategize conversions and upsell cross-sell are both meaningfully ahead of our deal expectations.

CliniSys and Data Innovations continue to win in the marketplace. The internal combination of CliniSys and Sunquest has rejuvenated and energized their high-performance culture, which is enabling the business to more effectively compete and win in the marketplace.

Data Innovations continues to gain share and evolve to become the de-facto standard as it relates to lab Metaware.

Finally, Frontline, our cornerstone 2022 acquisition is off to a solid start. We look forward to sharing the strategic and financial success of this business in the quarters and years to come.

I'd like to reiterate with what we started with, performance here strategically, operationally and financially was just great in 2022. Very proud of the team and the performance. Congrats and thanks.

Looking to the outlook for 2023, we expect to see organic growth in the mid-single-digit area, based on our market positions and growth in recurring revenue.

Turning to page 12. Revenues in 2022 for our Network Software segment were $1.38 billion, up 13% on organic basis and EBITDA margins were strong at 53.3%.

As we dig in the business-specific performance, our U.S. and Canadian freight matching businesses were great in 2022. Their exceptional growth is based on many factors, certainly favorable market conditions but also continued product and network innovations as well as terrific product and package designs that drove increased value for network participants.

IPipeline and iTradeNetwork were stellar performers throughout 2022 and benefited from having strong renewal and expansion activity. iPipeline, like that of PowerPlan is benefiting from having a narrowed and more focused strategy, namely tech enabling the life insurance and annuity distribution network.

Moving the Foundry, which had another great year, as part of Roper. Foundry continues to be the market-leading software and post-production media entertainment. During 2022, Foundry's product innovations were impressive with several new features focused on ML based automation. Starting in 2023, Foundry's flagship product, Nuke will begin its subscription transition, so looking forward for solid progress on that front.

Growth in our businesses that focus on alternate site healthcare was led by SHP and SoftWriters, and importantly, retention rates across SHP, SoftWriters and MHA remain extremely high. Broadly, the performance across this segment was great. Congrats to the teams for this terrific year financial performance.

Turning to the outlook for 2023, we expect to see mid-single-digit organic growth for this segment based on broad and sustained growth across the Group, and a normalization of market conditions for freight and logistics applications.

As we turn to page 13, revenues in 2022 for our tech-enabled product segment were $1.35 billion, up 10% on an organic basis. EBITDA margins for this segment were 35.4% for the year. As expected, EBITDA margins expanded in the second-half of the year, as pricing and supply-chain improvements flowed through.

Let's start with Neptune, our water meter and technology product business. This past year was just terrific, with very strong growth based on strong market conditions, strong share gains and strong adoption of their static ultrasonic meter technology. In addition, Neptune launched their cellular connectivity solution and did a fantastic job, migrating a large chunk of their customer base to their newest data management solution. Spectacular job, Neptune, congrats Don to you and your team.

Northern Digital, which is our precision measurement tech company continue to see terrific demand for their optical and EM Solutions. NDI benefits from having a strategy that is laser-focused on healthcare applications and an R&D capability that is unmatched in the industry. NDI's CorTec is used in countless life-saving procedures on a daily basis across the globe.

Verathon turned in another solid year performance in 2022 as well. The growth is based on momentum across their video intubation and single-use bronchoscope product lines. As you saw in the press release, we did take the opportunity to clean-up a legacy patent dispute. Make no mistake, the innovation capability at Verathon is nothing short of exceptional, and we could not be more confident about their most recent product launches and the new concepts in development pipeline. As it relates to the single use bronc space, we hope to see Verathon capture the number one market position in North America in 2023.

Our outlook for the year in this segment is in the high-single-digit area and is based on continued strength and backlog at Neptune, as well as continued growth across our medical product businesses. Specific to the first quarter, we do have easier comps versus a year ago.

Now please turn to page 15, let's review our 2023 and Q1 guidance. For 2023, we're initiating our DEPS guidance to be in a range of 1590 and 1620. Underpinning this guidance is expected organic growth of 5% to 6% and the tax-rate in the 21% to 22% area. Specific to the first quarter we're establishing our DEPS guidance to be in the 380 to 384 range.

Now please turn with us to our final page, page 16. As we turn to this page, we want to leave you with the same key points with which we started. First -- 2022 was a year of great accomplishment for our teams and our enterprise. We grew revenue 11%, 9% on an organic basis, and we did this while continuing to increase the underlying quality of our revenue base. In fact, we delivered double-digit increases in our software organic recurring revenue during 2022. EBITDA grew 12%, our EBITDA margins expanded 20 basis-points to 40.4%. Also, we successfully concluded our multiyear divestiture program and deployed $4.3 billion against our longstanding capital deployment strategy headline by frontline education.

The second key takeaway is that we're well positioned for double-digit cash-flow compounding in 2023 based on our organic revenue growth outlook, contributions from our 2022 acquisition cohort, and having well north of $4 billion of M&A capacity. To this end, we continue to be very active in the M&A markets. But as you saw during 2022 and as always, we will remain super patient and highly disciplined to ensure optimal deployment of our available capital.

Finally, and perhaps the most important, the new higher-quality Roper portfolio is becoming increasingly more evident, and we've never been more excited about the future of enterprise.

As we open it up to your questions, we'd like to take this opportunity to remind everyone that we are hosting an Investor Day on Tuesday, March 21st in New York. We look forward to seeing many of you there.

So, with that, let's open it up to your questions.

Questions and Answers

[Operator]

Thank you. We will now go to the question-and-answer portion of the call. [Operator Instructions] Today's first question comes from Deane Dray at RBC Capital Markets. Please go ahead.

[Deane Dray, Analyst at RBC Capital Markets]

Thank you and good morning, everyone. Hey, just start with the best wishes to Rob. I remember when he was starting as a rookie Investor Relations professional, and just wish him all the best. So, thank you.

[Rob Crisci, Executive Vice President and Chief Financial Officer at Roper Technologies]

Thank you, Dan, appreciate it. It has been a quick decade.

[Deane Dray, Analyst at RBC Capital Markets]

Fabulous. And then Jason, yeah, I think you've been on every one of our call backs for the 16 years, so you're absolutely, we know exactly who you are and your experience, and so congrats on the new role.

[Rob Crisci, Executive Vice President and Chief Financial Officer at Roper Technologies]

Thank you, Dan, appreciate it.

[Deane Dray, Analyst at RBC Capital Markets]

All right. So, for a question, maybe we can start with a bit of a macroeconomic sensitivity because typically you don't see much of this within Roper, but you called out the Deltek delayed decision-making. Neil, is there any change in the pace of like-new customer adds or the migration, new logos, anything that you would point to that perhaps there is some economic sensitivity reading through and kind of the pace of business.

[Neil Hunn, President and Chief Executive Officer at Roper Technologies]

Yes, I think, if I take it at the highest level, we've been 8% to 10% organic. The last couple of years, obviously, are guiding a little bit below that for 2023, so I think you see it in our guidance model reading through as a general matter. If you take the software businesses, our retention rates will stay very high. We expect that to the intimacy and the criticality of our applications, so retention rates to be very high. But as our customers, I mean across all these end-markets, I mean, if there is, macroeconomic sort of headwinds or slow-down, then they are going to be affected to some degree, so we expect customer expansion activity maybe a little bit of net-new to be slowed a little bit. The software businesses will be great. They'll grow for sure, but a little bit slower.

From an end-market perspective, we're in a number of end-markets that are generally macro insensitive. There's a little bit -- obviously in our transportation business, the AT, that we called out on the call. That'll be a little bit slower, but there are some hedges inside the portfolio, Construct Connect should be good in the slower economic environment and also our medical product businesses as staffing levels and hospitals gets a little bit easier, patient volumes should come back and that should help those businesses.

And then from a product, Neptune has got a gigantic amount of backlog, which will carry them through much of this year, so we feel pretty well set up. It doesn't mean that we're completely insensitive to macro, but relatively insensitive.

[Deane Dray, Analyst at RBC Capital Markets]

That's really helpful. And then, let's just switch over to free-cash flow. And maybe, I'll be accused of quibbling. The 161 free-cash flow conversion is still elite, but it did lag your five-year average, and I know there's some dynamics here, and you touched on in the remarks the Section 174 and the comparison from the tax benefit last year. Anything that on the working capital side or maybe the Frontline contribution because there on a different school year. So, maybe more of a third quarter collection, but is there any change in the seasonal tilt on free-cash flow conversion?

[Jason Conley, Executive Vice President and Chief Financial Officer at Roper Technologies]

Eah Dean, good question. I think you're spot-on. So, we typically convert on from an EBITDA to free-cash flow will be in the 90s, typically in Section 174. If we adjust for that, we are in the 80s, and so you're right. Frontline has a very seasonal sort of cash collection cadence, so the third quarter is when all the renewals and upsells happen. So, most of their cash comes in the third quarter, so in the fourth, you won't see that converting to cash from EBITDA, so that's exactly what you saw.

So we're looking-forward to next year and especially in the third quarter, be a little bit more weighted than the normal.

[Deane Dray, Analyst at RBC Capital Markets]

That's great. That's exactly what we're looking for. Thanks.

[Jason Conley, Executive Vice President and Chief Financial Officer at Roper Technologies]

Thanks Dean.

[Operator]

And our next question today comes from Scott Davis of Melius Research. Please go ahead.

[Scott Davis, Analyst at Melius Research]

Hey, good morning, guys.

[Neil Hunn, President and Chief Executive Officer at Roper Technologies]

Good morning, Scott.

[Scott Davis, Analyst at Melius Research]

Congrats, Rob, and good luck Jason, etc. Wish you guys well, but. [Speech Overlap]. You get to work a few more years with Neil. Good luck. [Speech Overlap] I can say that, I guess, but anyways, I don't want to climate in a [Indecipherable] here, but, I know there is no one particular asset that moves the needle in a huge way. But can we walk back and talk a little bit about PowerPlan. I mean you mentioned the narrower product focus, I think I heard you say, which and really understand what that meant, and the cloud rollout again like, how relevant is that to the business, but maybe if we just go back and you can explain to us again what kind of drives PowerPlan, and I'll just leave it there.

[Neil Hunn, President and Chief Executive Officer at Roper Technologies]

I appreciate the opportunity to talk about any of our businesses. It has been a while since we have been able to do a double-click on PowerPlan. So just to remind you, if they do, right. So PowerPlan Software and Services live at the intersection of the Financial System and the Asset Tracking System for these large utilities, Investor and Public Utilities, and PowerPlan software has a perfectly curated view of what the assets look like inside our customer base. When you have that perfectly curated view as these assets are constantly being updated and changed, they are not static, right, and so that's why you have to live between these two systems, and we have this perfectly curated view of what the assets are. Then you get the most appropriate tax treatment you can, the most appropriate lease accounting, and a series of other financial benefits associated with that.

We bought the business, the business was doing that but then was also reaching outside its core customer base and the core products that I just described, looking for growth, sort of in all the wrong places if you will, and then what we did when we did our strategy work with them, going back probably a year to year and a half ago is the amount of opportunity inside the core of what they do was large enough to support the growth thesis for many years to come. So, it's just refocusing back on the core. That's a common theme we talked about that. I think you'll see that increasingly more inside of Roper as we do our strategy work, right, so I'm not getting too far away from the core and getting distracted. So that's what they've done.

The first impact of that as they now have this 100% SaaS solution for their principal product tax fixed assets, it just released in Q4, and we're excited by that because as you lift and shift your customer-base from an on-premise to a cloud solution, there is a tremendous value capture opportunity, and it will unlock some growth for the business.

[Scott Davis, Analyst at Melius Research]

And can you get pricing in the process or is this just more about retention?

[Neil Hunn, President and Chief Executive Officer at Roper Technologies]

No, that's the value unlock, right. So, we're doing more for our customers with the SaaS solution, right. So, we're not just hosting at there's more features, you're on the latest release, we're certainly -- we know how to operate our software ourselves better than third-parties, and so it's the efficiency and the uptime is higher, and as a result of all that, you do get price. We'll see -- we've talked about, there's roughly $900 million in legacy on-premise maintenance in our revenue base and as that is lifting and shifting to the cloud, over a long arc of time, that should lift and shift north of two times, right. So, there's a $1 billion of growth that's latent inside the portfolio as we lift and shift that on-premise maintenance to the cloud.

[Scott Davis, Analyst at Melius Research]

Okay. I look forward to the Analyst Day. I'm going to pass it on. Thanks guys and congrats on another good year, see you [Speech Overlap].

[Operator]

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

[Julian Mitchell, Analyst at Barclays]

Hi, good morning. Thank you, Rob, and look forward to working with you. Jason, so, maybe my first question just to try and home in a little bit more on the sort of macro framework in the guide. Maybe specifically, I think about 25% of your software revenue is reoccurring and non-recurring, so maybe more cyclical kind of talk. Maybe just remind us sort of what the organic growth of those two in aggregate was last year, and what you're dialling in for 2023 or any flavor of that? And then within network software, specifically transport and freight, it's almost a quarter of the revenue. And you mentioned you're dialling-in, I think normalization was your phrase, maybe just any final point on what that means exactly of growth this year versus last.

[Neil Hunn, President and Chief Executive Officer at Roper Technologies]

Yeah, so let me take, let's take those, Jason I take those in sequence. So, I'll set that up what the difference between the recurring and reoccurring revenue is in our base. I'll let then Jason talk about the relative growth rate, then we'll tackle the DAT freight question you are raising. So, just to level-set with everybody is, if we have a recurring revenue is subscription, contractual, recurring revenue. Reoccurring revenue is principally located at our MHA business, we take a percentage of the drug and food spend that goes to the network. And so, it's not technically recurring, it's highly reoccurring. So it's not -- that's probably one of most stable parts of our portfolio, long-term care, healthcare, residents and buildings, consuming food and pharmaceuticals, right. So, it's highly secure for lack of a better word, it's not transactional relative to the macroeconomic situation. So, I'll stop just in terms of framing recurring versus reoccurring, and let Jason take the relative growth rate question.

[Jason Conley, Executive Vice President and Chief Financial Officer at Roper Technologies]

Yeah, sure. Glad to. So MHA, as Neil mentioned, it's really about drug purchases from the pharmacies and they have very strong retention in those businesses from a customer standpoint. We always sort of think about the business being maybe at the bottom-end of the mid single-digits, maybe a little bit in the low singles. And that's sort of what we experienced this year and that's kind of what we're baking in for next year.

[Neil Hunn, President and Chief Executive Officer at Roper Technologies]

Great. Okay, now let's take to your freight and logistics around DAT specifically. So, to remind you there is this tension between the cyclical freight dynamic and a secular push or secular benefit that DAT and DAT's customers are experiencing relative to the spot market becoming a more efficient place to place freight, so that there is tension between those two. From a cyclical point of view, we expected and have seen the carrier side of the network reduce a little bit, and it is [Indecipherable] and we expect it to reduce over the course or shrink or get a little bit smaller over the course of this year. DAT grew through the 2019 freight recession. I think DAT has grown every year since 2010, so the business, we are talking about the rate of growth at DAT, nor does it expand or contract, it tends to be much more stickier than that. As an early read, January is actually a little bit better. I mean, the number of carriers in the network is sort of flattish through January and not declining. And the people and the industry that sort of call like freight, timing, and if there's going to be a freight recession, I actually think there is a queuing for a large spring shipping season, mostly around this triggered by produce. And we might start to be seeing a little bit of that bleed in, but we'll have to see how the next couple of quarters play out.

[Julian Mitchell, Analyst at Barclays]

That's very helpful, thank you for the color. And then just within TEP, understand the recurring piece is minimal there and it's 99% product related. Any flavor you could give us on sort of what you're seeing in medical versus Neptune for 2023, any major difference in kind of visibility, between the two or the growth rate expected.

[Neil Hunn, President and Chief Executive Officer at Roper Technologies]

So, we have the most visibility we've ever had at Neptune. The order volume continues to flow, the order duration, meaning the longer-dated orders continues to flow. And so, we feel quite comfortable and good how 2023 is shaping for Neptune. For medical products, there's actually, I think we've talked about a few quarters ago the reoccurring elements of Verathon became the largest part of the revenue stream. There's a lot of consumable pull-through on the capital equipment there in Northern Digital, has a decently high amount of consumables that are pull-through that CIVCO and so it is more procedure and patient-driven, and like I said a few minutes ago, we feel that we're decently well set up there, but it's not on our base case. Right. So, we saw 6% to 8% declines in patient volumes in the areas in which we service in 2022, all tied to hospital staffing levels, and we're cautiously optimistic that as the labor market solution and hospitals able to staff and be able the patient volumes pick back up to prior levels.

[Julian Mitchell, Analyst at Barclays]

Great, thank you.

[Neil Hunn, President and Chief Executive Officer at Roper Technologies]

Thank you.

[Operator]

And our next question today comes from Steve Tusa of J.P. Morgan. Please go ahead.

[Steve Tusa, Analyst at J.P. Morgan]

Hey guys, good morning.

[Neil Hunn, President and Chief Executive Officer at Roper Technologies]

Hey Steve, good morning.

[Steve Tusa, Analyst at J.P. Morgan]

Congrats to all, Rob and Jason, looking-forward to working with you. Just on the free-cash, you mentioned plus or minus 80% conversion to EBITDA. Obviously, the last couple of years have been a bit volatile around all these tax items. But in '21, I think you had a decent number of deferred revenue benefit on the cash-flow statement. Maybe just give us a little bit of color, looking into next year with concerns around the macro that can be a pretty big variable. I mean, are you going to be around that 80% in '23 or will you be kind of more in between what you did in '21 and '22, I think adjusted around 70%. Maybe just a bit of color on the free-cash, and then I have a follow-up on Frontline.

[Jason Conley, Executive Vice President and Chief Financial Officer at Roper Technologies]

Yeah, we are happy to. I think we're feeling very good about the 80%. Our deferred revenue, our renewals are really strong this quarter. And we felt good how it moved up sequentially, how was up year-over-year, and just what we're hearing from our businesses as we feel good about the renewals. And then we're going to have, we expect I think I said on the call that we'll get some improvement on our inventory ratios next year, we had a little bit of build at the end of this year. Frontline would certainly help with our negative working capital profile there at negative 40%. Like I said, most of that will hit in the third quarter when all the renewals take place. Of course if Section 174 gets repealed, this will be a home run here, but we're not banking on that for now.

[Steve Tusa, Analyst at J.P. Morgan]

So, like something in the $1.8 billion range for free-cash for next year?

[Jason Conley, Executive Vice President and Chief Financial Officer at Roper Technologies]

I'll let you come to your math on that.

[Steve Tusa, Analyst at J.P. Morgan]

Okay, we will. And then just Frontline, revenues roughly $95 million bucks this quarter, is that about right?

[Neil Hunn, President and Chief Executive Officer at Roper Technologies]

No, they were somewhere in the 80s, we had a few days knocked out at the beginning of the quarter because we closed on the fourth.

[Steve Tusa, Analyst at J.P. Morgan]

Okay, by the way, really appreciate all the discussion on the businesses and looking-forward to the Investor Day, learning more on this portfolio. So very helpful detail on the moving parts of all the different businesses. Thank you.

[Neil Hunn, President and Chief Executive Officer at Roper Technologies]

I appreciate. Looking forward to seeing you.

[Operator]

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

[Allison Poliniak, Analyst at Wells Fargo & Company]

Hey, good morning. Just wanted to circle back on DAT, you talked about it growing historically to recycles, but it's certainly been an unusual one. A lot of new entrants here, is there any risk to the retention rates? Should that spot rate not hold in terms of stabilization? Is some of those new entrants can survive, and I guess along with that premium offering in this type of uncertainty does that drive may be more increase our interest in that premium offering versus just to gain some visibility here in an uncertain market. Just any thoughts there.

[Neil Hunn, President and Chief Executive Officer at Roper Technologies]

Yeah, so in terms of the number, when you say new entrants, I assume you're referring to the number of new carriers that are in the network as opposed to a competitive entrant or the sorts, there really are no new competitive entrants. Relative to the carriers, yeah, I mean, it was, it's been just a tremendous last couple of years driven by the things we've talked about for a couple of years which is the fluidity and liquidity in the spot market, which is a secular tailwind and then obviously a huge boom on the cyclical piece.

We historically, when you've look at like [Indecipherable] carriers to trough carriers through cycle, it sort of goes down, the carriers declines by plus or minus 10%, we've assumed that it will decline by more than that in our guidance model because the build-up was unprecedented. So that's sort of, we think we have this conservatively planned in our outlook, but it's unprecedented ramp-up leading up to this.

We do take some early confidence in the carrier count in the first couple of weeks in January, right. So, the fact that we're flattish versus continuing to see some declines is certainly encouraging, but it's only a handful of data points we want to see taken together. In terms of the premium offering, I mean, DAT has just done a tremendous job creating product and package designs that have more value for all the network participants. It's helped drive some ARPU increases because there is more value that participants are getting.

[Jason Conley, Executive Vice President and Chief Financial Officer at Roper Technologies]

Like different packages, different features and functionality that they've upsold.

[Allison Poliniak, Analyst at Wells Fargo & Company]

Great. Now that's helpful. And then just in terms of the M&A pipeline, are you still under the new portfolio? PE primarily your source of opportunities here, have you expanded it, and if I guess if you have, are you looking at the NOCRI [Phonetic] geometric that is your foundation, but are you providing any other controls with maybe some new opportunities out there, just any thoughts there.

[Neil Hunn, President and Chief Executive Officer at Roper Technologies]

Yeah, you're right, we've obviously historically sourced all but, in my time here, I think one meaningful deal from private equity, one was from a small founder. And that has been sort of the pond in which we fish, but we're -- that's not exclusively, where we have business development activities going on. We've always looked in public markets, we just haven't found anything that's been compelling from a value point of view, yet. We'll continue to look there. You could see us get a little bit earlier in the cycle and try to compete a little bit more with private equity, sort of a half a flick earlier in the company's lifecycle. So, when we did the Vertafore transaction and the Frontline transaction, many of our investors said, why didn't you buy it when the person you bought it from are private equity firm you bought it, and so that's something that you could see us explore in the right situations. But still all that being said, the predominance of what we're going to do is what we've done for the last 20 years, which is sort of lower risk of highly recurring software application, software businesses from private equity.

[Allison Poliniak, Analyst at Wells Fargo & Company]

Great, thank you.

[Operator]

And our next question today comes from Brad Hewitt with Wolfe Research. Please go ahead.

[Brad Hewitt, Analyst at Wolfe Research]

Hi, thank you and good morning.

[Neil Hunn, President and Chief Executive Officer at Roper Technologies]

Good morning.

[Brad Hewitt, Analyst at Wolfe Research]

You noted that your adjusted EPS calculation will include the fair value accounting and tax impact of Indicor, but why would you not include the minority interest contribution as well. Just wondering what is the logical downside of not including that? Shouldn't it be a positive and growing contribution?

[Jason Conley, Executive Vice President and Chief Financial Officer at Roper Technologies]

Well, it's a calculation that's going to be based on many variables right, it's mainly an accounting exercise. We don't think that it's going to -- we'd rather see the outcome when we do the exit. We think that's the better reflection of what the economics are going to be. We feel really good about what that's going to look like. We've worked to CDNR on a strategy there. They typically look at several multiples of return on investment and that's what we're planning for upon exit.

[Brad Hewitt, Analyst at Wolfe Research]

Okay, great, that's helpful. And then in terms of price contribution in Q4, what did that look like. And then also how much pricing is embedded in your 2023 guidance?

[Neil Hunn, President and Chief Executive Officer at Roper Technologies]

So, price for us, I mean, it's an important lever to our growth algorithm, not just for '22 and '23, but all prior years and all forward years. Teasing out specifically, how much is price is a very, very difficult thing across our 27 companies and rolling it up to a number that is meaningful, and so we're not going to share a specific number in that regard. I'll tell you the pricing, the value capture that we have given what we do, the creative Cali [Phonetic] what we do, we've always had pricing power and pricing value capture, and there's nothing different with that. You want to add anything to that, Jason? Perhaps, we can go to the next question.

[Operator]

Absolutely. Our next question today comes from Brendan Luecke from Alliance Bernstein. Please go ahead.

[Brendan Luecke, Analyst at Alliance Bernstein]

Good morning

[Neil Hunn, President and Chief Executive Officer at Roper Technologies]

Good morning.

[Brendan Luecke, Analyst at Alliance Bernstein]

Just wanted to take a quick look at macro. One of the questions here. Is there anything to offer, any color on your exposure to construction end-markets and how that's playing into your growth expectations for FY '23, and I guess specifically I'd be curious about Deltek, Construct Connect and Neptune as well.

[Neil Hunn, President and Chief Executive Officer at Roper Technologies]

Yeah, so appreciate the opportunity there, so let's just take it by those three. So, Construct Connect, to remind you what it is, right, so we have a near-perfect database of all the construction, commercial construction projects that are in the planning phase across North America. As a result, it has a bit of counter-cyclical demand attached to it. So, when there is a tremendous amount of new projects and you're a subcontractor, general contracting, building product manufacturer and business is flowing from everywhere, then you don't have to look too hard for what we are going to do next. When there's fewer projects, than you subscribe to the subscription service of Construct, and then actually you can identify what projects are coming down the pipe that you want to try to bid for and win. And so, the Construct Connect has been a modestly good performer for us over the years, we expect that to actually have a good run here in '23 as a result.

Deltek does have, its been a strategic focus of Deltek. Deltek is 60% government contracting 40% private sector and private sector, the smallest lever is construction. And we sell software to large contractors, right. That's what we do. That business we -- in our prepared comments, we talked about how the private sector was very strong in Q4 for Deltek. We would expect and do anticipate some softening on the construction side for Deltek in 2023, and we think we have that fully covered in our guidance.

And then Neptune, we believe strongly Neptune is not a cyclical business. As you sell water meters of water meter technology to the municipalities, when they -- they tend to have a budget for meters. When there is a large new residential new construction, then a higher percentage of the budget goes to install new meters. When there's fewer new starts, the budget stays the same, but they take the meters and they do the retrofits and trade outs of the aging fleet and infrastructure. So that as a general across cycles sort of view of Neptune. But then we're further ' our confidence is further buoyed by the fact we have this is just unprecedented amount of backlog at Neptune for 2023, so we think that Neptune has performed well for us this year.

[Brendan Luecke, Analyst at Alliance Bernstein]

Very useful. Thank you

[Operator]

Our next question today comes from Rob Mason of Baird please go ahead.

[Rob Mason, Analyst at Robert W. Baird]

Yes, good morning and congrats as well to Jason and Rob. Maybe just stick on the technology-enabled products area. I think there was a mention of some products didn't ship in the quarter, maybe got pushed. To step back, maybe update us where you think you are around supply-chain just on the product side in your businesses. And then, I'm curious what kind of impact that those deferral shipments might have had in the fourth quarter?

[Neil Hunn, President and Chief Executive Officer at Roper Technologies]

Let me just set it up and I'll hand it over to Jason. So, we talk obviously about Neptune, we talk about medical problems. There's also a small cohort of RF product businesses [Indecipherable] and in RFID. The fourth quarter was particularly brutal supply to utilize all on those RF product businesses. And so, with that, I'll give it to Jason to sort of talk through anything you'd like to.

[Jason Conley, Executive Vice President and Chief Financial Officer at Roper Technologies]

Yeah. It wasn't significant, it was probably in the $5 million to $10 million range, and it was across a number of businesses, so I think we expect the first quarter for TAP to be up a little bit more than the rest of the year because of that and because of some of the easier comps. So, maybe low double-digits in the first quarter, but that's sort of the range. So, yeah, a lot of this is in the rear view. Of course, things do pop-up here and there, but we're not hearing as much sort of meaningful impact in the quarters.

[Neil Hunn, President and Chief Executive Officer at Roper Technologies]

Sure, sure. And as a general matter, we're not the only ones there, but supply-chain is generally, as Jason has said, improving and there's essentially the chip shortage and chip issues, there is more of a glut globally, yes, but you are not considering that from us. We do think this supply-chain issues abate over '23.

[Rob Mason, Analyst at Robert W. Baird]

Sure, sure. And Neil, you've made several references to Neptune through the call and in share gains and the strength in your backlog, and that tends to be a business where share doesn't move around that dramatically. I'm just -- could you expand a little bit just on what's going on there? What you've done, whether it relates to ultrasonic adoption or the introduction of cellular or if this is a broader effort at Neptune describing that.

[Neil Hunn, President and Chief Executive Officer at Roper Technologies]

Neptune has been a just a steady and consistent share gainer the whole time I've been here, right. I mean for a decade. And the reasons for that are many fold, but they have a product road, a product orientation that starts with they never want to strand their existing customers with technology. So, for instance, this goes back to the prior iteration of communication software, but the proprietary protocols between mobile and fixed point. Neptune has a solution where if you're a rule municipality and you have you can have one fixed points, roaming points and still have some manual reads, and the master data management software package in Neptune can ingest all that data, and you don't strand a customer having to pick one piece of technology for the totality of what they have to do. So, it comes from a product orientation that starts with flexibility.

The second thing is, the products are just particularly well thought out for the long arc of what the customer wants to do. For instance, on the large commercial meters for ultrasonic, you have to be able to read high flow and low flow equally accurate. Our products do that, so think about a big hotel application, a trickle that happened at three in the morning versus the high flow and thereby fix the showers in the morning, our ultrasonic meter will perfectly read the low flow and the high flow and the competitive products tend to be focused on one or the other for the precision, more so for that application when the ultrasonic, the battery that drives the ultrasonic technology needs to be replaced. In our case, it's essentially a drop-in battery, the competitors, you have to cut the meter out and replace the meter. So, it's small thing -- seemingly small things like that that help drive market share gains over a longer time.

Final thing, I would say, in 2022 it was particularly beneficial for us because we had product availability throughout the totality of the year. And so, our competitors were quoting year-plus lead times. I think our lead times went from like eight to 12 weeks. And so, just some accounts that we typically have not had any presence in, they need meters we can deliver meters, all of a sudden you have presence and the opportunity to compete in that account. So that's helped gain some market-share in the relative short term.

[Rob Mason, Analyst at Robert W. Baird]

Great. Great, that's very helpful. Thank you.

[Operator]

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

[Alex Blanton, Analyst at Clear Harbor Asset Management]

Hi, thank you. Good morning.

[Neil Hunn, President and Chief Executive Officer at Roper Technologies]

Good morning.

[Alex Blanton, Analyst at Clear Harbor Asset Management]

First, I just want to say that I think your format for the slide presentation this time is probably the best ever. And I think you should stick with it. It's really a great presentation.

[Neil Hunn, President and Chief Executive Officer at Roper Technologies]

Noted.

[Alex Blanton, Analyst at Clear Harbor Asset Management]

Now the most of my questions been answered, but something came up from one of the other participants. Regarding the business that accumulates commercial construction plans, and Barry Sternlicht, who is the CEO of Starwood was on CNBC yesterday, saying that in his business and across the board, really in commercial construction, as interest rates have gone up, people will complete the projects they have but hold-off on starting new ones. And so, that's why he is looking for a big drop in commercial construction in the second-half of this year, because new projects are sliding. Do you see that in your statistics?

[Neil Hunn, President and Chief Executive Officer at Roper Technologies]

So, it's interesting. So, I can ask Zack the Construct Connect publishes. I'm looking at that quarterly, the macro of what they're seeing from a construction planning point of view, and I can have Zack forward that to you. I have not read the -- more personally, I've not read the most recent report yet, so I don't want to comment on its content, so we can send that to you.

[Alex Blanton, Analyst at Clear Harbor Asset Management]

Okay, thank you, because it would seem that if new construction projects are not being put into implementation, it would show up in those numbers, wouldn't it?

[Neil Hunn, President and Chief Executive Officer at Roper Technologies]

So here's the counter-cyclical nature of that. And so, if you have several hundred thousand construction workers, construction small sub-contracting firms. Construct Connect has tens of thousands of customers. So as those hundreds of thousands are looking for work, it only takes a small percentage of that cohort to become a customer of ours to exhibit counter-cyclical growth behavior which is what's happened in every prior slowdown in the history that we've been able to observe with Construct Connect.

[Alex Blanton, Analyst at Clear Harbor Asset Management]

Okay, so you're really talking about your business and market share, rather than the overall trend of that market.

[Neil Hunn, President and Chief Executive Officer at Roper Technologies]

Correct.

[Alex Blanton, Analyst at Clear Harbor Asset Management]

Yeah, okay, thank you.

[Neil Hunn, President and Chief Executive Officer at Roper Technologies]

Yeah, thank you.

[Operator]

Well, ladies and gentlemen, this concludes our question-and-answer session. We will now return back to Zack Moxcey for any closing remarks.

[Zack Moxcey, Vice President-Investor Relations at Roper Technologies]

Thank you everyone for joining us today, and we hope to see you all at our Investor Day on March the 21st in New York. Thank you.

[Operator]

[Operator Closing Remarks]

Participants

Corporate Executives

• Zack Moxcey, Vice President-Investor Relations
• Neil Hunn, President and Chief Executive Officer
• Jason Conley, Executive Vice President and Chief Financial Officer
• Brandon Cross, Principal Accounting Officer.
• Rob Crisci, Executive Vice President and Chief Financial Officer

Analysts

• Deane Dray, RBC Capital Markets
• Scott Davis, Melius Research
• Julian Mitchell, Barclays PLC
• Steve Tusa, J.P. Morgan
• Allison Poliniak, Wells Fargo & Company
• Brad Hewitt, Wolfe Research
• Brendan Luecke, Alliance Bernstein
• Rob Mason, Robert W. Baird
• Alex Blanton, Clear Harbor Asset Management