ROPER TECHNOLOGIES INC Q2 2025 earnings call

Good morning, and thank you all for joining us as we discuss the second quarter 2025 financial results for Roper Technologies. Joining me on the call this morning are Neil Hunn, President and Chief Executive Officer; Jason Conley, Executive Vice President and Chief Financial Officer; Brandon Cross, Vice President and Principal Accounting Officer; and Shannon O'Callaghan, Senior 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. If you'll please turn to page two. 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. Please turn to page three. Today, we will discuss our results primarily on an adjusted, non-GAAP, and continuing operations basis. For the second quarter, the difference between our GAAP results and adjusted results consists of the following items: amortization of acquisition-related intangible assets, transaction-related expenses associated with completed acquisitions, and lastly, financial impacts associated with minority investments, including cash taxes paid resulting from the sale of our minority interest in Certinia. Reconciliations can be found in our press release and in the appendix of this presentation on our website. If you please turn to page four, I'll hand the call over to Neil. After our prepared remarks, we'll take questions from our telephone participants. Neil?

Thank you, Zack, and thanks to everyone for joining us this morning. As we turn to page four, you'll see the topics we plan to cover today. We'll start with our second quarter highlights, including reviewing the platform acquisition we announced earlier today, Subsplash. Then we'll go through our segment results and our improved outlook for the full year, and then get to your questions. Let's go ahead and get started. Next slide, please. As we turn to page five, let me highlight the four key takeaways for today's call. First, we posted another solid quarter of financial results. Total revenue grew 13%. Organic revenue grew 7%. Software bookings grew in the high teens area, and we continued to deliver impressive cash flow with free cash flow margins coming in at 31% for the TTM period.

Second, we announced earlier today the acquisition of another great vertical market software provider, Subsplash, which I'll get to in a bit. Then given the strong first half performance and the anticipated completion of the Subsplash acquisition, we're raising our full year total revenue guidance and our full year debt outlook. Finally, we continue to be very well positioned for capital deployment and continue to have more than $5 billion of available firepower over the course of the next 12 months. Please turn to page six where we'll discuss Subsplash. Subsplash is a cloud-native and AI-enabled software provider serving faith-based organizations. As a leading provider of digital engagement, church management, and integrated giving solutions, their purpose-built platform enables customers to serve congregations while engaging with members more effectively.

Subsplash partners with 20,000 faith-based organizations to help them become digitally native by deepening member engagement, reducing manual administrative burden through automation, streamlining content distribution, and integrating digital giving solutions, all supporting their customers' core mission. Simply put, Subsplash enables these organizations to allocate more time and resources to what matters most. Ministering to and engaging with their congregation in a digitally native way, whether it be online or on an in-person basis. Importantly, this customer value proposition strengthens further as the company's AI-native capabilities are further deployed across the product stack. In terms of investment highlights, the purchase price is $800 million. We expect Subsplash to deliver $115 million of revenue and $36 million of EBITDA for the 12 months ending Q3 of 2026.

This business meets all of our longstanding acquisition criteria: leader in a niche, competes on the basis of customer intimacy, has strong gross margins, and converts high levels of cash flow. Subsplash reflects the maturing leader acquisition profile of being a higher organic growth business, in this case in the high teens area, and competes in a $2.5 billion US TAM with about half being currently served and potential to meaningfully expand internationally. In addition, Subsplash is well positioned to materially improve their gross and EBITDA margins over the next three or five years, and we expect to deliver this by executing a handful of the available levers. As a result, we expect to see Subsplash's organic revenue growth convert to high 20% EBITDA growth over the next three to five years. We will finance this transaction with a revolver and report the results in our network software segment.

Subsplash represents another powerhouse addition, delivering critical solutions to a customer base with deep ongoing needs for these capabilities. To the Subsplash team, we're so excited for you to join Roper. Thank you for all of the super important work you do for your customer community and for trusting Roper to become your permanent partner. With that, let me turn the call over to Jason to walk through our P&L and balance sheet. Jason?

Thanks, Neil, and good morning, everyone. I'll now take you through our Q2 financial highlights on slide seven. The second quarter was another solid installment in what we believe will be a good year for Roper. Revenue of $1.94 billion was up 13% over prior year and well balanced, with 7% organic growth and a 6% increase from acquisitions, with CentralReach results contributing since the April 23rd close date. Organic growth was strong across the portfolio, demonstrating resilient demand for our mission-critical solutions. Importantly, and as expected, network software year-over-year growth notably improved from Q1, given more normal comps at MHA, increased freight match unit economics, and recovery at Foundry. EBITDA of $775 million was up 12% and generated EBITDA margin of 39.9%. Core enterprise operating margin was flat to the prior year, with core segment margin up 40 basis points.

This follows a similar pattern to Q1, bringing our year-to-date core segment margin expansion to 70 basis points. For the diluted EPS, we delivered $4.87 versus our guidance range of $4.80-$4.84 on strong revenue growth and excellent core operating leverage. Finally, free cash flow of $400 million was up 10% versus prior year, which drives TTM free cash flow to over $2.3 billion. The recent passage of the Big Beautiful Bill Act provided a permanent repeal of Section 174 capitalization of R&D expenditures. We are therefore reducing our cash tax payments for 2025 by around $150 million to reflect the cumulative reversal of capitalization, of which about $60 million benefited our second quarter. We will also see a benefit of $120 million carrying to next year due to deduction limitations in 2025. Adjusting out the Section 174 impact, our three-year TTM free cash flow CAGR would be about 14%.

Overall, good news in offsetting some near-term yield dilution and fueling our growth equation. Now let's turn to slide eight to discuss our strong financial position. We finished the quarter with a healthy balance sheet and substantial capacity for continued capital deployment. We exited at 2.9x net debt to EBITDA, and pro forma for Subsplash, this would be around 3.1x. Additionally, our cash balance was $242 million, and our revolver had $1.4 billion drawn against our $3.5 billion credit facility. Even with Subsplash closing this month, as Neil outlined, this gives us over $5 billion in M&A firepower. This substantial capacity positions us very well to executing on our disciplined capital deployment strategy.

To that end, while the sponsor-to-sponsor market is still somewhat muted, we are active on a number of both platform and bolt-on transactions that reflect the characteristics of higher growth and increasing long-term value capture, with Subsplash being a case in point. With that, I'll turn it back over to Neil for our segment highlights and guidance update. Neil?

Thanks, Jason. As we turn to page 10, let's review our application software segment. Revenue for the quarter grew by 17% in total, and organic revenue grew by 6%. EBITDA margins were 42.9%, and core margins improved 70 basis points in the quarter. As we turn to the businesses, we'll start with Deltek. Deltek grew in the mid-single digits range in the quarter, both recurring and total revenues. As highlighted on the slide, Deltek continues to have strong migration to their cloud offerings while the business continues to innovate at a rapid pace and is benefited by very strong gross and net retention. As it relates to the federal government contracting outlook, we believe The Big Beautiful Bill spending priorities and sheer volume will be a catalyst for market growth, which has been tepid for the last 24 months or so.

The timing of market re-acceleration is still to be determined, but we believe it will occur over the course of the next few quarters. Importantly, during the quarter, Deltek made substantial progress in regard to their AI-based product capability and recently announced their new flagship GovCon product, Costpoint, fully embeds their AI assistant, Della, to help deploy intelligent, task-oriented agents to streamline repetitive processes and help users make faster, better, informed decisions. Exciting stuff here and lots more to come for sure. Aderant continues to be incredibly strong and posted their best bookings quarter in the company's history. The booking strength is broad-based, fueled by their AI-enabled solutions, and is a combination of market share gains, cloud migration, and SaaS growth. Congrats and thanks to Chris and the entire team at Aderant. Keep up the amazing work. Vertafore continues once again to be steady and solid for us.

We continue to see consistent ARR growth and strong customer retention here with strength across their agency, MGA, and carrier solutions. This growth is enabled by their strong go-to-market capabilities and their long-term commitment to product strength. We look forward to talking about this and their AI-enabled solutions in subsequent calls. PowerPlan continues to be outstanding. As we mentioned last quarter, the team has done a great job at making the revenue stream more recurring in nature. In addition, they continue to get amazing feedback with their innovative cloud offerings, which are driving strong SaaS migration activity. As a result, PowerPlan just continues to win in the market with their new SaaS solution and near 100% gross retention.

ProCare and Transact CBORD continue to perform very well in their respective markets, while we also saw very good results from the healthcare IT portion of this segment, Strata, Data Innovations, and Clinisys. Finally, CentralReach is awesome in the early days, has exceptional momentum, record expansion activity, and a 70% enterprise new client win rate all in the quarter. As it relates to the outlook for the second half of the year, we continue to expect organic revenue growth to be in the mid-single digit plus area. Please turn with us to page 11. Total revenue in our network segment grew 6%, and organic revenue 5% in the quarter. EBITDA margins remained strong at 54.6%, and core margins improved 20 basis points. As we dig into the individual businesses, we'll start with DAT. DAT was solid in the quarter and had strong RPU improvements.

The market continues to be stable, albeit bouncing along the bottom. Also, in the quarter, we integrated LoadLink, our Canadian freight match business with DAT. We expect the integration to deliver, over time, a more unified and efficiently deployed North American freight match network. DAT continues executing exceptionally well on their core strategy of driving enhanced network value for both brokers and carriers. This dual-sided approach positions us to better monetize our entire network ecosystem. Supporting this strategy, DAT made significant progress integrating Trucker Tools, our Q4 bolt-on acquisition, and completing the acquisition of Algo, an AI-native factoring technology solution. Combined with the DAT network foundation, these integrated products and assets now deliver substantially more value to both carriers and brokers. Looking forward, DAT will maintain their aggressive execution of this network value enhancement strategy, positioning the business for continued growth and improved monetization across all.

ConstructConnect was solid for us in the quarter. Their growth was fueled by strong customer bookings activity and improved customer retention. Of note, this business continues to make good progress with their emerging AI-enabled takeoff and estimating solution. Foundry declined in the quarter as expected, but we continue to see market recovery signs as they grew their sequential ARR for the first time since the Actors and Writers' Strikes. Good to see recovery start here. Also in the quarter, Foundry's new product, Nuke Stage, started gaining traction in the market, specifically with a very large studio and several smaller customers. Nuke Stage enables the power of post-production compositing to occur in the production phase of the pipeline, an exciting new capability that will help drive cost savings for the industry. Finally, our network healthcare businesses, MHA, SHP, and SoftWriters were very good in the quarter.

As we turn to the outlook for the second half of the year, we expect to see revenue growth in the mid-single digit plus range. Now, please turn to page 12, and let's review our TEP segment's quarterly results. Revenue here grew 10%, and organic revenue grew 9%. EBITDA margins came in at 36.7%. We'll start with Neptune, which was once again just solid for us. Neptune continues to do a great job with their ultrasonic meter go-to-market execution and continue to see strength in their data and software offerings. Verathon continues to execute at a high level as well. In particular, in the quarter, Verathon saw continued strength in their single-use reoccurring solutions, both BFlex and GlideScope. NDI was really good in the quarter.

As discussed in prior quarters, NDI delivers proprietary and world-class precision measurement technologies to a wide variety of healthcare OEMs, which in turn enables the OEMs to deliver guidance-enabled solutions across many healthcare markets such as orthopedic surgery, interventional radiology, and cardiac ablation. Finally, there was strong execution, which led to growth across CIFCO, FMI, Inovonix, IPA, and rf IDEas. Turning to the outlook for this segment, we expect to see high single-digit organic growth for the second half of the year, with a stronger third quarter and a more difficult fourth quarter comp. Before turning to our guidance outlook, I'd like to reflect on our AI perspective, its transformational potential for customers and our enterprise, and the steps we're taking to build lasting advantage. Our strategy is focused and practical, applying AI to address high-impact customer-specific challenges.

We're confident that AI-based innovation substantially expands our business's TAMs, where we have a high right to win, and will be a core catalyst for our next chapter of growth. The true unlock, the magic, if you will, of AI emerges at the intersection of the specialized mission-critical workflows our customers rely on daily and our deep vertical market expertise. Our AI initiatives span all our businesses, and we're seeing early traction from compliance solutions to AI-enhanced products to AI assistants and intelligent agents that streamline tasks. We're building solutions that deliver tangible, high-value outcomes. Today, we have approximately 25 AI-enabled products either in market or in development. Importantly, our AI innovations create a positive halo effect across many of our businesses, driving booking activity for our broader product stacks.

This is an exceptionally fun moment to be at the forefront of innovation, redefining and automating workflows across our vertical markets while unlocking new growth and building durable competitive advantages. Exciting stuff for sure. So with that please turn with us to page 14. Let's turn to our Q3 and increased full year 2025 guidance. Given our strong Q2 performance and anticipated closing of the Subsplash acquisition, we're increasing our total revenue growth guide to be in the 13% range. Our organic growth rate of 6-7% for the full year remains unchanged. Finally, we're increasing our full year DEPS outlook to be $19.90-$20.05, which includes about a nickel of Subsplash dilution. Our guide continues to assume a full year effective tax rate in the 21-22% area. For the third quarter, we expect adjusted DEPS to be between $5.08-$5.12 while absorbing $0.03 of Subsplash dilution in the quarter.

Now, please turn with us to page 15, and then we'll open it up for your questions. We'll conclude with the same key takeaways with which we started. First, our second quarter financial results were quite good. Second, we announced the acquisition of another market-leading vertical market software business, Subsplash. Third, given our solid start to the year, we're raising our full year guidance. Finally, we remain well-positioned for further capital deployment. Relative to our financial results, we grew total revenue 13% and organic revenue 7% in the quarter and delivered 31% free cash flow margins in the TTM period. We're delighted with our acquisition of Subsplash. As discussed, this vertical market leader is mission-critical to the delivery of digital engagement, church management, and payments to 20,000 faith-based organizations and has several embedded growth drivers that will support its high teens revenue growth and expanding margin profile.

Next, we're raising our full year outlook. Finally, we continue to be very well-positioned with more than $5 billion of available M&A firepower to deploy capital towards leading vertical market software businesses. Our M&A pipeline continues to be very active, and our teams are engaged on several opportunities. As usual, we're excited to pursue these opportunities with our unbiased and disciplined approach. Prior to turning to your questions, and if you could flip to the final slide, our strategic compounding flywheel, we'd like to remind everyone that what we do at Roper is simple. We compound cash flow over a long arc of time by executing a low-risk strategy and running our dual-threat offense. First, we have a proven, powerful business model that begins with operating a portfolio of market-leading, application-specific, and vertically oriented businesses.