ROPER TECHNOLOGIES INC Q3 2025 earnings call

Good morning, and thank you all for joining us as we discuss the third 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. Now, if you 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. Now, if you please turn to page three. Today, we will discuss our results primarily on an adjusted, non-GAAP, and continuing operations basis. For the third 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 our minority investment in Indicor. Reconciliations can be found in our press release and in the appendix of this presentation on our website.

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

Thank you, Zach, and thanks to everyone for joining us. I'm excited to be with you this morning. As we turn to page four, you'll see the topics we plan to cover today. We'll start with our third quarter highlights and financial results. Next, we'll review our segment performance, our AI progress and momentum, and our most recent set of bolt-on acquisitions. I'll get into our guidance details and, of course, wrap up with your questions. With that, let's go ahead and get started. Next slide, please. Turning to page five, let me run through the four key takeaways for today's call. First, we had a strong third quarter. Total revenue grew 14%, organic revenue grew 6%, software bookings grew in the high singles area. We continued to deliver impressive free cash flow, with free cash flow growing 17%.

Of note, free cash flow margins posted at 32% for the TTM period. Really impressive financial results. Second, we're super encouraged by the progress and momentum we're seeing across all of our businesses as it relates to our AI enablement and our product stacks and our internal operations, and more on this in a moment. Third, we're announcing today our first share repurchase authorization, $3 billion in total. Lastly, we continue to execute on our M&A strategy of acquiring faster growth platforms and bolt-on or tuck-in acquisitions at a high fidelity rate. In the quarter, we deployed $1.3 billion, $800 million for Subsplash, which we detailed this time last quarter, and $500 million on a series of tuck-in acquisitions. Also, more on this later, but worth highlighting here, we are very encouraged by this recent capital deployment execution and the future growth potential that's being layered into our enterprise.

Importantly, we remain very well positioned for the continued execution of our M&A strategy and continue to have north of $5 billion of capital deployment capacity available over the next 12 months or so. As I turn the call over to Jason, reflecting on the quarter, I'm quite bullish on most of what we're seeing. A very strong 3Q, real demonstrable AI progress, which is a long-term growth driver for us, excellent execution of our higher growth, higher returning capital deployment strategy, and the announcement of our first ever buyback authorization. This all bodes very well for the future. That said, we'd like to see some of our markets start to cooperate a bit better, namely the government contracting and trade markets, and we have some delays at Neptune. Much more on this as we walk through today's call.

With that, let me turn the call over to Jason to talk through our P&L and our balance sheet.

Thanks, Neil. Good morning, everyone, and thanks for joining us today. I'm pleased to take you through our third quarter results and strong financial position. Turning to page six, Q3 and TTM results reflect the long-term financial profile of Roper, which is to compound cash flow in the mid-teens area. We'll start with revenue, which was 14% over prior year and surpassed the $2 billion mark. Acquisitions contributed 8%, led by the final quarter of Transact before it turns organic, and CentralReach, which we acquired in April of this year. Of note, these businesses are tracking very well against our acquisition expectations. We printed 6% organic growth, both for the consolidated enterprise and across each of our three segments. Our application and network software segments were in line with expectations, while TEP was a bit below given near-term timing at Neptune, which Neil will discuss further.

EBITDA of $810 million was 13% over prior year, with EBITDA margin of 40.2%. Core margins expanded 10 basis points, and segment core margins expanded 30 basis points, led by our software segments. DEPS of $5.14 was 11% over prior year and $0.02 above the high end of our guidance range, despite absorbing $0.05 of dilution from Q3 acquisitions that were not reflected in previous guidance. Free cash flow was outstanding at $842 million, up 17% over prior year and representing 32% of revenue on a TTM basis. Our software businesses captured strong renewals, and we drove great working capital performance across the board. Broadening out a bit, TTM cash flow of over $2.4 billion is a 17% CAGR over a three-year period. For those looking at per share metrics, you'll note that our share count has compounded at about 0.5% over that same time period.

At Roper, we have been and will continue to be relentlessly focused on cash flow and shareholder value creation. Now, let's turn to slide seven and discuss our very strong financial position. Our net debt to EBITDA stands at three times, which is up only modestly from Q2 at 2.9 times, despite deploying $1.3 billion towards acquisitions. This places us in a great position with over $5 billion in next 12-month capacity for capital deployment. Regarding M&A: you can see that we've been quite active this year in acquiring high-quality growth businesses and several strategic bolt-ons. This is against the backdrop of a muted PE deal environment. The pipeline of high-quality acquisitions continues to build as assets mature in PE portfolios, and a return of capital to LPs becomes paramount. Additionally, as Neil mentioned, we're pleased to announce another capital appointment lever that was previously unavailable.

Our board has authorized a $3 billion share repurchase program with an open-ended time period to execute. While M&A will continue to be the majority of our capital deployment allocation, our share repurchase program will allow us to opportunistically complement our M&A program. Over the last year or two, we have talked about the great business building taking place across the Roper portfolio, from strategy to talent to execution, all now greatly turbocharged by AI. Our repurchase program reflects both confidence in our strategy and our commitment to delivering long-term shareholder value. I'll turn it back over to Neil to talk about our segment performance. Neil.

Thanks, Jason. Turning to page eight, and before we get into our segment details, we want to discuss why AI is a powerful and durable growth driver for Roper. To start, AI represents a meaningful expansion of our TAM across the portfolio. We can now deliver transformational software solutions that automate labor-intensive work adjacent to our existing platforms. This creates substantial new value streams for our customers and correspondingly facilitates long-term growth for Roper and our businesses. Importantly, our businesses are uniquely positioned to win in AI, in fact, having a very high right to win in the AI world. Our software solutions are deeply embedded system-of-record applications with workflow-oriented domain-specific architectures. The decades of cumulative workflow knowledge built into our platforms, combined with the proprietary vertical market data, provide the precise context needed to develop agentic AI solutions.

Because of this, our businesses have an exceptionally high right to win as we deploy these capabilities across our VMS and markets. Internally, we're becoming AI-native across all functions to drive productivity gains. We're excited to reinvest these gains to further accelerate our product development and go-to-market initiatives. It's important to note we've always had more great ideas than resources needed to execute, and AI has the potential to attack this challenge. Finally, we have tangible proof points, though it's still early. Aderant has claimed a technology leadership position in legal tech, accelerating their bookings growth. CentralReach now has roughly 75% of their bookings attributed to AI-enabled products, which have automated $100 million reimbursement rule evaluations, over 3.5 million learner appointments, and over 1 million clinical summaries being generated. Great real-world examples of the power of AI.

Deltek has released over 40 AI features into their cloud offerings, driving increased cloud conversion activity. DAT has industry-leading AI/ML-enabled freight matching capabilities, which I'll detail shortly. These are but a few examples from across the portfolio. Very exciting times for sure. With that, let's now turn to our segment reviews, starting with page 10 and our application software segment. Revenue for the quarter grew by 18% in total, and organic revenue grew by 6%. EBITDA margins were 43.4%, and core margins improved 40 basis points in the quarter. Starting with Deltek, Deltek delivered solid performance in the quarter, with particularly strong results in their private sector end markets. Construction, architecture, and engineering remain robust throughout. The GovCom business experienced softness in September as agencies paused activity ahead of the pending government shutdown. This timing is unfortunate.

Pipeline activity and commercial momentum had been building nicely following the passage of the One Big Beautiful Bill in July, and we were seeing increased engagement across our customer base heading into the new fiscal year. The fundamentals remain strong. The OB3 authorized significant increases in defense and infrastructure spending that will flow through to our customers once appropriations are finalized. This is simply a timing issue, not a demand issue. Finally, retention levels across the entire Deltek franchise remain very high. Aderant continues to be incredibly strong and continues to post impressive bookings and recurring revenue growth. The booking strength is broad-based, fueled by their AI-enabled solutions, especially as it relates to AI-enabled compliant time capture and billing, and as a combination of market share gains, cloud migration, and SaaS growth. Vertafore continues once again to be steady and solid for us.

We continue to see consistent ARR growth and strong customer retention and 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. PowerPlan's performance has been terrific. Their success is the result of several years of business building in the product stack, the go-to-market capabilities, their service delivery, really across all functions. In addition, to remind everyone, they serve power generation customers, which are adding capacity as quickly as possible to handle the AI workloads. The setup here should be quite good for a long time. Also, in the quarter, we completed the acquisition of Orchard, a tuck-in acquisition for our Clinisys business. Orchard brings additional clinical laboratory capability to Clinisys, with particular strength in reference, physician offerings, and public health labs. Finally, the balance of our application software portfolio continues to execute very well.

CentralReach was awesome again in the quarter, driving accelerating adoption of their AI tools and capturing ABA therapy capacity additions. Procare made a great installment of progress, with new bookings continuing to be strong, posting low double-digit growth in payments with improved gross margins, though still work to do, in particular with faster implementation timeframes and share wallet expansion. Meaningful progress for sure. Finally, Strata and Transact were steady and solid in the quarter. As we look to the final quarter of the year, we expect to deliver mid-single-digit organic revenue growth. This outlook reflects high single-digit growth in our recurring revenue base, offset by declines in non-recurring revenue, primarily due to anticipated softness in our Deltek business stemming from the ongoing government shutdown.

Given the uncertainty surrounding the duration and impact of the shutdown, we see potential outcomes across the full range of our MSD outlook, from the lower to the higher end. Our businesses in this segment continue to compete and execute exceptionally well. The primary variable remains a higher level of market uncertainty than we typically experience for a Deltek business. Please turn with us to page 11. Total revenue in our network segment grew 13% and organic revenue 6% in the quarter. EBITDA margins remain strong at 53.7%, with core margins improving 60 basis points. As we dig into the individual businesses, we'll start with DAT. DAT was solid in the quarter and had strong RFP improvements. DAT continues to execute exceptionally well on their core strategy of driving enhanced network value for both brokers and carriers.

This dual-sided approach positions DAT to better monetize their entire network ecosystem, and more on this when we turn to the next page. ConstructConnect was solid again for us in the quarter. Their growth was fueled by strong customer bookings activity and improved customer net retention. Of note, this business continues to make good progress with their emerging AI-enabled takeoff and estimating solution. Foundry is turning the corner on growth, posting continued sequential improvements in ARR, and we expect their Q4 exit ARR to grow year over year in the HSD area. Really happy for the team there as they've had to work through some tough market conditions. Next, our network healthcare businesses, MHA, SHP, and SoftWriters were very good in the quarter.

Of particular note, SoftWriters is executing at an exceptional level, winning a few very large pharmacy customers and making substantial progress on a high-impact AI solution, which is being beta tested in the market currently. Congrats to Scott and his entire team for their success. Finally, Subsplash, our most recent acquisition that closed on July 25, is off to a great start, delivering financial results in line with our deal model expectations. Of note, they saw very good market traction with their AI-driven sermon content offering, Pulpit AI, as they deepened its integration with their core engagement platform, driving strong product-led growth. Exciting stuff. As we turn to the outlook for the final quarter of the year, we expect to see organic revenue growth at the higher end of the mid-singles area.

As we turn to page 12, we'd like to spend a few minutes describing the strategic evolution of our DAT business and why we're so excited about its future growth prospects. To start, our legacy DAT platform is the largest freight matching network across the U.S. and Canada. The scale is remarkable. Over 1.2 million loads posted and 15 million rate views every single day. DAT is the clear market leader, delivering tremendous value to both freight brokers and carriers, both of whom pay to participate in this powerful network. As strong as the legacy business is, we're even more bullish about where DAT is headed. To bring this vision to life, DAT is building capabilities across the entire freight automation workflow, from carrier vetting to broker-carrier matching to AI-driven rate negotiation, load management tracking, and finally payment and settlement.

Through deep customer partnering with the brokerage community, DAT is working to fully automate the freight matching process. As this happens, DAT will generate $100 to $200 per load in savings for brokers, while giving carriers greater predictability and faster payments on their invoices. What sets DAT apart is this end-to-end product capability and its role as a neutral, trusted partner, a Switzerland-like player that equally serves the entire freight brokerage market. This is a truly unique position in the market. This evolution also highlights the Roper-DAT partnership at its best. We work closely with the DAT team to craft this strategy, then we execute a focused M&A program to strengthen it through three strategic tuck-ins, Trucker Tools, Outgo, and Convoy. With the deals complete, DAT is now fully focused on delivering against this strategic opportunity.

Important to note, Convoy is an unusual transaction for us as it currently is not profitable, but we expect the financial returns over the next several years to be extremely attractive. The key to success is scaling efficiently, leveraging DAT's advantaged customer unit economics for both brokers and carriers to drive sustained growth and profitability. We are confident in this strategy, market position, and DAT's ability to execute. I know this was a bit of a deep dive, but we wanted to share with you why we're so excited about the growth opportunity that sits in front of DAT, true AI-based freight automation. Now let's turn to page 13 and review our TEP segment's quarterly results. Total revenue here grew 7%, and organic revenue grew 6%. EBITDA margins came in at 35.2%. Let's start with Neptune.