The Roper Technologies Third Quarter 2019 Financial Results Conference Call will now begin. [Operator Instructions]. As a reminder, this call is being recorded. And now I would like to turn the call over to Zack Moxcey. Please go ahead.

Good morning. And thank you all for joining us as we discuss the third quarter financial results for Roper Technologies. Joining me on the call this morning are Neil Hunn, President and Chief Executive Officer; Rob Crisci, Executive Vice President and Chief Financial Officer; Jason Conley, Vice President and Controller; and Shannon O'Callaghan, Vice President of Finance. Earlier this morning, we issued a press release announcing our financial results. The press release also includes replay information for today's call. We have prepared slides to accompany today's call which are available through the webcast and are also available on our website. Now if you'll please turn the Slide 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 Slide 3. Today, we will discuss our results for the quarter primarily on an adjusted non-GAAP basis. Reconciliations between GAAP and adjusted measures can be found in our press release and in the appendix of this presentation on our website. For the third 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 acquire deferred revenue; transaction related expenses for our completed acquisitions and the announced divestiture of Gatan; and lastly, tax expense adjustments related to our divestitures. And now if you please turn to Slide 4, I will hand the call over to Neil. After our prepared remarks, we will take questions from our telephone participants. Neil?

Thanks, Zack, and good morning, everyone. As usual, we'll start with our third quarter highlights. I'll then turn the call over to Rob to discuss our financial results. Then I'll walk us through the segment details and outlook, followed by our Q4 and remaining 2019 guidance. I'll then wrap up our prepared comments with a summary of our third quarter activities and share some of our early thoughts for 2020, then we'll open it up for Q&A. Next slide please. We had another really strong quarter here at Roper. Revenue grew to $1.36 billion, margin execution was tremendous, really fantastic, and free cash flow came in at $387 million or 29% of revenue in the quarter. Gross margins expanded 80 basis points in the quarter broadly across the enterprise. And we always like to see the leverage down the P&L with organic revenue plus 2%, EBITDA up 5% and DEPS growing 6%. We saw broad-based growth across our software businesses in both our Application and Network segments. Our medical product franchises remains very strong as well as RF product businesses. Neptune had a nice quarter coming off strong double-digit comp from a year ago. But we did experience some short-term supply chain capacity constraints, which we will double-click into later in this call. Our Process Technologies segment continue to do a really impressive job of executing through the expected decline in oil and gas markets with tremendous margin improvements in the quarter. Also, we announced and closed two acquisitions, iPipeline and ComputerEase for a total of approximately $1.8 billion. Our capital deployment capability continues to operate at a high level. We'll talk much more about these acquisitions later in the call. Further, we successfully executed a $1.2 billion very attractive bond offering in the quarter and we also agreed to the divest Gatan to AMETEK for $925 million, which is a great outcome for Roper and our shareholders. Finally, as we look towards 2020 we are encouraged by many factors, not the least of which is TransCore's recent contract award to deploy and maintain New York City's congestion pricing tolling initiative. At the end of the call we will further unpack some of our views for 2020. With that, I'll now turn the call over to our CFO to walk you through our consolidated quarterly results. Rob?

Thanks Neil, good morning, everyone. Turning to the next slide on the Q3 income statement metrics, go over some of the numbers for the quarter. Revenue was $1.358 billion, which was a 3% increase over prior year, organic plus 2%. That organic growth was led by our two segments that are primarily software -- our Application Software segment at plus 5% organic and our Network Software & Systems at plus 4% organic growth. Margins, as Neil mentioned, were really spectacular, great execution by our business leadership teams across the enterprise. We had gross margin up 80 basis points to 64.6%, EBITDA margin up 90 basis points to 36.7%, the EBITDA for the quarter of $498 million, which was 5% growth. We benefited a little bit in the quarter as we looked down to the DEPS line from some favorable timing of perpetual license wins where we recognized I would say a few cents of earning in the quarter in Q3 that we had expected originally in Q4 around timing of those wins, primarily at Aderant and Deltek. And that gave us at the bottom-line DEPS of $3.29, which was well above our guidance range of $3.16 to $3.20. Next slide. Next slide our asset light business model, always one of our favorite slides. As many of you know, the big part of the Roper governance model is our focus on the balance sheet, working capital efficiency. As part of our annual review process we will be meeting with every business over the next couple of months as we look forward to the next three years. Of course, the number one focus on that is going to be around our long-term growth opportunities and strategic deployment for all the businesses and we will also spend some time focusing on do we…

Thanks Rob. Let's turn to our Application Software segment. Revenue came in at $405 million, which represented increase of 5% on an organic basis. EBITDA was $168 million, an increase of 7% versus prior year and EBITDA margins were 41.4%. At Deltek we saw the continuation of a few trends that we discussed over the past several quarters. Specifically Deltek grew high single-digits in the quarter following the difficult 2Q comp. In addition, we continue to see a good balance of perpetual software transactions and a continued acceleration in recurring revenues as a result of an increased mix of business towards Deltek SaaS offerings. Also the business continued to see a nice bounce of activity across their two macro end markets, professional services and government contracting. Deltek’s team continues to execute exceptionally well. Also in the quarter, we acquired ComputerEase for a $185 million. ComputerEase is a leading enterprise software solution provider for construction firms with particular emphasis on the smaller end of the market. They have over 6,000 customers in North America and deliver the software on -- either on on-premise basis or in the cloud. This solution is very specific to the needs of building contractors including job costing, construction accounting, project management, asset management as well as payroll. This business fits nicely with Deltek's leadership position and the architecture and engineering vertical. This is a great addition to Delkek's AEC platform. Aderant experienced yet again double-digit growth as a result of continued share gains within the large law vertical and the adoption of their newer SaaS solutions targeting smaller law firms and cross-selling new products to the larger firms. As you may know, we have highlighted Aderant’s competitive strength for several past quarters and are proud of the long-term market share gains by the Aderant team. Strata…

Thank you. We will now go to the question-and-answer portion of the call. [Operator Instructions]. We will begin with Deane Dray, RBC Capital Markets.

Hey maybe you can just start with some clarification on the perpetual license revenues that came in for Deltek and Aderant. Just give us some context here. Is this the customer deciding when these will be executed and are they one-time? And I think Rob said that it pulled maybe $0.02 out of what would have been in the fourth quarter and the third quarter, is that right?

Yes, it was probably closer to $0.03, maybe $0.04. It's just timing those things come in at really 100% margin. And so what, go ahead, you can talk about the customers.

Yes, I mean, the situation for both Aderant and Deltek, these were larger -- on the larger side of transactions. They were pretty late stage in the pipeline as we're preparing our guidance for this coming quarter, but you never know on the timing of these larger deals. And so we'll tend to take a more conservative posture on the timing and they just came in a little bit earlier than we thought.

Got it. And then on the congestion tolling win. So, congratulations on that, everyone has been watching this as the contract and where the first major city in the U.S. will take on this technology. So you already have Stockholm, you already have London. Are there other U.S. cities that you are in negotiations with and do you have the capacity to roll out more of these systems?

I think there is -- if you Google congestion pricing you see almost every large U.S. city sort of thinking about it or talking about it or in some stage or in the legislation to begin. But that said, all eyes are watching this implementation, not just how TransCore does, but how the initiative works for the city. How the funding works? How it goes? So I think the funding here is going to underlie our support of $15 billion bond offerings which is part of a $50 billion capital plan for MTA. And so the whole picture is being watched, but we're certainly encouraged this could be a very long-term opportunity to do other cities for us.

Got it. And then just last one from me. Just can you clarify on Neptune and this high quality problem of demand on your ultrasonic smart meters? Are you losing any business or any customers getting turned away because you can't supply them over the near-term or is this going into backlog?

It's 100% going into backlog. In fact the majority of these wins came from competitive displacements of ultrasonic technology that was not working as well as our product does. And so it's in backlog, it was -- this is not a sort of a customer surprise per se. It was just a little bit of push out in terms of capacity on our side. But it's not -- it's all positive from our point of view.

And Robert McCarthy with Stephens has the next question.

Good morning, everyone, and congratulations on a great quarter. A lot of really good things to talk about. But I think rather than talk about the good things I'll be more of the fox and hedgehog. The Gatan divestiture, I think you guys were in print about a year ago when you announced the sale to Thermo about $150 million in sales. And then I think the most recent press release suggested $180 million, but now I think you cited for the full year expectation of some disappointment there. So, what is the updated expectation for 2019 revenues for Gatan in the context of what you've already disclosed?

Right. So, yes, the full year numbers are the numbers that were disclosed I think when the announcement was made. So, I mean, there is no update at all to that.

Okay, alright. Fair enough. I guess I'll take care of that offline. In a more positive light, obviously longer tune on Neptune, I would say the following. In attending some industry conferences recently around the smart grid in general and grid automation in general across a variety, whether it would be electricity, water et cetera, with the utilities. There seems to be kind of a rising wave that the canopy of the Internet of things and data is really going to be a nice secular growth story here. And it could be the bleeding edge of IoT over the near term. Are you seeing from what you're seeing in Neptune's markets and the software opportunities there even from a capital deployment perspective? Are you seeing a sea change in that market? Is that becoming more attractive to you than perhaps history would suggest? Any color there in terms of what the secular organic dynamics are with respect to that general vertical?

Yes. So, our experience with in this water industry, I don't think -- there's no sea change. It's sort of tectonically changing. It's slow and paced and conservative. That said, for many years. At least three or four that I can think going through the Neptune strategic plans. They have focused a number of resources on what they call network-as-a-service and then also the data that comes out of the water meter to be able to do more leak detection and more reporting to the customers on sort of their utilization patterns et cetera. So, it is certainly attractive. Neptune opened an R&D center and a software development center in the Atlanta market, the sort of how some of these resources. That said, it is a small part of Neptune today. I mean Neptune is the leader and will continue to be the leader both on the mechanical meters and emerging on the sort of static ultrasonic meters. And as you know, the technology that we place on top of the meter has been a long-term differentiated advantage for us as you don't have to touch the meter as the reading technology changes from sort of mobile to fixed. So, that's our views on there and happy to spend more time on that, if you like.

Now we'll take a question from Christopher Glynn with Oppenheimer.

Curious with the -- on the heels of the efficient reprocessing of the Gatan transaction, just wondering how you're viewing the market overall for strategic buyers of manufacturing assets and your kind of view of that whole dynamic around your portfolio mix?

I don't know if that's a trick question, but we -- the businesses that we have that are on the product side are great businesses. They've been in the portfolio for a long-time. They're amazing cast producers that enable sort of our -- meaningfully enable our capital deployment strategy. We talked in this quarter how the cost structures are positioned to be on a variable basis to best sort of let us sort of right up and down as the macro market rides them. And so they are in the portfolio. We like them in the portfolio and expect them to stay in the portfolio.

And I don't know if this is a hedgehog question or not, but I didn't hear anything on PowerPlan, just wondering how that's tracking financially and culturally. I think you've had it for about a year now?

Yes culturally it's great. Joe, who is the leader of that business has done a great job with the culture and sort of getting on the right growth sort of drivers and footing. We talked about a couple of times in the past. Well around the time we acquired the business, we were just on the back end of a sort of an industry-wide adoption of lease accounting software to which PowerPlan was one of many benefactors of. On the back side of that we had to -- had in our currently finishing retooling the go-to-market capability to go back to the old school way of identifying leads or working leads and closing leads. So, we saw a great momentum in that last quarter in terms of adds to the pipeline. We saw that continue this quarter, but more importantly the pipeline adds or added last quarter matured and got closer in the later stages of the sales funnel. So, they've done a really nice job retooling the go-to market. We feel good about the business as we head into next year.

Next question will come from Julian Mitchell with Barclays.

This is [Joe] on for Julian. Just starting with kind of a broader question on your SaaS businesses. As they become a larger part of the portfolio, how are you guys thinking about the longer -- medium term trends of your kind of average revenue per user. You mentioned that Aderant was benefiting this quarter from cross-selling and then things like that. Do you think that's something that's going to be able to have in other SaaS businesses? And then I guess just as a part two there. Are you offering any incentives to your customers to switch over into the SaaS products, I guess at Deltek in particular? And then does that kind of imply a tailwind can come in when those incentives go away a little further down the line?

Alright. Hey, there's a lot in there. So, I'll try to sort of take it one by one. So, it's hard for us to make out a comprehensive or broad-based sort of statement across the many SaaS businesses that we have or businesses that are selling their products on a subscription basis around the cross-selling up-selling, but it is -- that said for each one, it is a very meaningful part of their strategy, right, where just take the most recent one iPipeline. They've got gross retention in the high 90s and net retention like 110. So, a big part of their strategy is cross-selling and up-selling additional products to the existing customer base. As I'm sure you're aware, I mean the heaviest cost in a SaaS business is the cost to acquire a customer. And so then we want to see the solution sort of stack on top of that over a long period of time. So, we're certainly -- that is certainly the strategy of each one of our businesses. But if that's a generalized statement, it’s hard to give you a specific one because each business -- its deployment against that is unique to that business. Relative to your question on incentives, certainly not from a financial point of view, I mean there is a very compelling value proposition for a customer to migrate their implementation from on-premise to the cloud, not the least of which is the headaches of managing the technology, infrastructure moves to us, to the users of the software. Perhaps the largest benefit of the value proposition is, they get the benefit of all the new releases when the new releases are released, which oftentimes and almost most cases is not the case when it's hosted by the customer and the list goes on, but they are not financial incentives to sort of migrate to the cloud. And again maybe the final thing I would say is, this is -- there is no push from us to mandate X percent of revenue gets into the cloud by Y date. This is very much company by company and that company is being pulled by their customers to go into the cloud. And as a result, the businesses are at various stages of maturity.

Got it. Thank you. And then just a follow-up. How are you guys seeing kind of the commercial construction market right now and how that will impact Deltek and other offerings?

Yes. So, it’s -- the company we have most index -- commercial construction in the U.S. is our construct connect business. The principal business they are in is, is they have virtually every commercial development project in the U.S. They have visibility to that project in the planning phase from many years out when they were just doing the permittings to right before shovel goes in the ground. And so that set of leads if you will or projects becomes more and more valuable to the contractors as the economy gets weaker and weaker. And so it somewhat has a sort of a counter-cyclical sort of demand associated with that. So, feel pretty good on the Deltek side with our recent acquisition, ComputerEase on the small end of the contractor side and sort of automating their businesses. Same thing when times get a little bit more tough than the customers look for more efficiencies in the software that we just bought sort of enables that.

Moving to a question from Steve Tusa with JPMorgan.

So, you guys didn't give a total company organic revenue update for the year, for guidance. I think it was 4% the last quarter. What's that going to be now?

Yes. So, we gave each of the segments. I think if you add up all the segments for the fourth quarter, it's going to be pretty close to the Q3 organic, so in the 2% range. So, I think if you add that up for the full year, we're somewhere just north of 3%.

And then with regards to Gatan, I think they said something like $70 million in EBITDA, I'm not sure how much D&A goes with that. But what is the kind of dilution for next year from that deal?

Yes. So, our best estimate would be $45 million to $50 million of EBITDA would go away. That was in '19 obviously, wouldn't have in 2020. As Neil mentioned, it really is very consistent that their last quarter is their biggest quarter as I'm sure you know from covering us for a long period of time and actually November, December is 35% to 40% of our annual EBITDA typically. So, that's our best guess is sort of what numbers we'll get that we won't get next year.

Do you know what the difference is between the $70 million and the $50 million that they're talking about $70 million? What's the difference between that and your $50 million?

November and December.

Okay, got it. So, it's the calendar issue. Got it.

Right. We are assuming it gets sold this month.

Okay. And then one last one, I mean, acknowledging the pipeline looks good at PowerPlan. What is actually -- what was actually the growth of that business in the quarter?

PowerPlan, the quarter was down a little bit over past -- over last year.

Steve which is we expected given we are rebuilding the pipeline there.

Yes. And what is it year-to-date?

Year-to-date, it's down slightly year-to-date.

We'll now move to a question from Joe Ritchie with Goldman Sachs. And Joe you may be muted please unmute. There's no response from that line. We'll move to the next question. And that will come from Joe Giordano with Cowen.

Hey, good morning. This is Robert in for Joe this morning. I just have a follow-up to Deane's question on the New York City order in TransCore. Can you give us a little bit of color on what the margin profile is there and how that changes throughout the contract?

Yes, it's just pretty simple, right. So, it's a little north of $500 million contract. About half of that is the design and implementation. The remaining half is six years worth of maintenance operations. It's consistent with TransCore's margin structure, which is a little bit below that of Roper on a consolidated basis.

Okay, thank you.

And project profile -- sorry the margin profile is pretty consistent across the totality of the period.

Okay, perfect. That helps. And then just another one without giving any names, are there any businesses within your portfolio that you're looking at or that makes sense to divest in the next year or so?

Certainly, if there were, we couldn't talk about it. So, we can't talk about it.

Now we'll take a question from Alex Blanton with Clear Harbor Asset Management.

Just wanted to clarify what you said about the margins in the New York City business, you say was slightly below the average for the company?

Yes.

I wanted to go to, what you said about CCC and the bridge there, project opportunities going forward. Could you repeat that?

Sure. There are -- the exact number I don't have on my fingertip. A dozen or so larger LNG projects that are in the feed sort of in the planning phase, late stage of planning phase across the globe and were specified and I think 11 of the 12 and still have an opportunity in the 12th. And so we're -- the long-term sort of projects positioning you see what you've commented on that for several quarters is quite good.

But what kind of revenue growth that we're talking about there, these compared with let's say the recent past?

As you know these projects take many years to unfold. And so we're talking about just the very long-term, the next several years of CCC based on these projects, very long lead time projects appears to be quite robust, don't want to get into the comments of specific growth rates of specific companies many years down the road.

When CCC was first acquired in 1992 they were doing almost entirely retrofits of existing projects because the compressor companies that were selling compressors to these projects were not using CCC software in the compressors that they were delivering initially to those projects. So, CCC would come along and just retrofit because the operators of those projects found that their search control and all of the rest were superior to what was being provided by the OEMs. It sounds as if that has completely changed. Is that correct? Now it's been adopted?

I wouldn't say it's been completely changed. I mean the balance -- the business is balanced between new projects and retrofits. One of the strategies of the business -- in fact it probably tilted more towards new and a little bit lesser towards the retrofits in the past several years and the leadership team there has worked really hard to position CCC with the various customer opportunities across the globe to do more of getting larger percentage of market share of the retrofit opportunities to get more back in balance. And so we can fully endorse the strategy and look forward to execution against it.

And finally is your principal competition in that business still the OEMs as it was?

Sure. Yes.

And that will end our question-and-answer session for the call. We will now go back to your host for closing remarks.

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

And with that, ladies and gentlemen, this does conclude your conference for today. Thank you for your participation. You may now disconnect.