Roper Technologies Inc (ROP) 2016 Q3 法說會逐字稿

The Roper Technologies' third quarter 2016 financial results conference call will now begin. Today's conference is being recorded. I will now turn the call over to Rob Crisci, Vice President, Investor Relations. Please go ahead.

Thank you, Audra. And thank you all for joining us this morning as we discuss the third quarter financial results for Roper Technologies. Joining me on the call this morning are Brian Jellison, Chairman, President and Chief Executive Officer; John Humphrey, Executive Vice President and Chief Financial Officer; and Paul Soni, our Vice President and Controller.

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 or also available on our website.

Now, if you'll please turn to Slide Two. We begin with our safe harbor statement. During the course of today's call, we will be making forward-looking statements, which are subject to risks and uncertainties, as described on this page and as further detailed 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 be discussing our results for the quarter, primarily on an adjusted non-GAAP basis. A full reconciliation between GAAP and adjusted measures is in our press release this morning and also included as a part of this presentation on our website.

For the third quarter, the difference between our GAAP results and adjusted results consist of two items. First a $2.2 million purchase accounting adjustment to acquire deferred revenue relating to software acquisitions. This represents revenue that those companies would have recognized if not for our acquisition.

Second, a $0.9 million debt extinguishment charge related to the replacement of our former credit facility with a new $2.5 billion facility that closed in the quarter. And now, if you'll please turn to Slide 4, I will turn the call over to Brian Jellison, Chairman, President and Chief Executive Officer. After his prepared remarks, we will take questions from our telephone participants. Brian?

Thank you, Rob, and good morning, everybody. We'll start here with the Q3 enterprise results so next slide. We had a record for just about everything again in the third quarter. Our orders were an all-time record at $929 million and by the way, if we had booked the MTA order a couple of days earlier but it wasn't quite ready to go, we would have been -- we would have had our first $1 billion record quarter in our history.

Revenue was strong. Net earnings were, of course, a record EBITDA cash flow. Revenue was up 7% to $947 million, which gave us 2 points of organic growth despite the headwinds in oil and gas. FX cost us a 1 point and then acquisitions and divestitures netted out plus 6%, because this was still the last quarter growth without all the divestment in. \

Growth was led by both the Medical and RF Technologies/Software businesses and certainly, Neptune had an outstanding quarter, you will see in a minute. Declines in oil and gas were basically about what we thought. We thought they would be sort of down 20% or so and they were.

Gross margins were up 60 basis points to 61.3% and EBITDA was up 8% to 328 million. Our net earnings reached $169 million, which gave us a DEPS earnings-per-share of $1.65, ahead of our guidance. Free cash flow was up 40%, really an astonishing quarter where free cash flow is up 11% year to date, but up 40% in the third quarter.

And then our ConstructConnect acquisition, which we are announcing today and which we will close this week, is another terrific business for us. It's a SaaS network business for the pre-construction industry and we will detail that later in the call this morning and it should close yet this week. So we have very strange -- very strong cash quarter. We had record results and then we had this pre-acquisition.

So the next slide. Here, if you look at the income statement, you can see orders were up 4%. The book-to-bill was 0.98, which is okay because of sort of lumpy activity. It's in the wheelhouse but had we been able to book the MTA order, our book-to-bill would have been 1.05, which gives you some idea about how strong, really, the core orders were.

The only thing in the quarter that was odd is the normal fourth-quarter delivery schedule stuff was not very strong. Revenue was up 7%; our gross profit was up 8%. You can see we were up 60 basis points in gross profit. The operating income margin because of the acquisition and amortization in these things, you can see it going to 28.5%, which is still spectacular but down 20 basis points.

The reality is on the next slide, you will see the EBITDA margin actually went up 30 basis points, which is the right way to look at a cash-oriented business like ours. And then net earnings were up 4%, actually about what we thought

Next slide. If you compare the operating and the EBITDA margins, we certainly have not reported leading first with those kinds of numbers but our EBITDA margins, you can see in 2014's third quarter were 32.5%; last year at 33.4% and this year, 33.7%, so our margins on the operating cash side are up 120 basis points in just two years.

Our gross margins continue up as well. If focusing on the operating profit margin where you get a lot of non-cash amortization charges, which lead people to the wrong conclusion and so the wrong way to think about a cash business like ours, even though the results are outstanding. So we're really focused on continuing to improve our EBITDA margins, which were up 30 basis points.

Next slide. We continue to comp out cash flow at a quite strong clip and we don't see that slowing down anytime soon. We really have a terrific operating cash flow in the quarter, $317 million, both operating and free cash flow were up 40%. And you can see the comparison to last year at $660 million year-to-date operating cash flow.

And now we're at $731 million, up 11%, despite less than robust end markets in our Industrial and Energy businesses. Conversion was pretty spectacular. You can see our year-to-date conversion on operating cash flow is 146% so excellent cash performance.

Next slide. Our asset-light business model which, five years ago, people told me, you couldn't make it any better than it was, continues to improve at really phenomenal rates. Here you can see inventory is down 80 basis points from two years ago ; receivables are down 150 basis points ; and payables and accruals are actually up 160 basis point.

So two years ago, we had 5.8% net working capital to revenue in the way we measure it. Today, we closed the quarter at 1.9%. That's a 67% reduction as a function of revenue in just two years, 390 basis point. So the quality of the asset-light acquisitions that we've been doing the last couple of years, in addition to our own governance process around improving everything we own, is really having just astonishing impact on our ability to compound cash and deploy future capital.

Next slide. If you look here at the financial position of the Company, you get some sense of the balance sheet. Just as a quick note, this is absolutely the biggest balance sheet that we have ever had to capture capital deployment opportunities. We now have an undrawn revolver of $2.5 billion and we have $882 million of cash, so nearly $3.4 billion of powder and even after paying for the ConstructConnect business, our acquisition powder is right around $2.8 billion.

We begin -- we've deployed capital since January 1 of 2015 at a rate of $2.7 billion during that 21-month period so our compounding of the cash and the strength of the balance sheet and the flexibility that our new credit facility gives us is all great because we're going to be able to put that to good use, with the incredible acquisition pipeline that we continue to see.

And you can see our net debt to EBITDA number is only 1.7; after the acquisition, it is still just around 2 so we've got a lot of ramp space here to be able to continue to make transactions that are accretive to the Company.

Next slide. We will look at the segment detail of each of the four segments the way we report it and then talk about the detail of the business here after that.

So and next slide. Here, if we look at the Q3 segment performance of Energy, you can see its EBITDA margin was 29%; Industrial tech, 32%. The first point about thinking around these businesses is how remarkable their margin performance is in these challenging markets. The nimble execution that we have inside the presidents to run this business is really amazing.

In 2003, those businesses, the Energy and Industrial businesses taken together, had about $377 million in revenue, and this year, taken together, they had $303 million, and yet the EBITDA margin in 2014 was 32% of, those combined businesses and here this year, it's 31%. So despite a significant fall-off in revenue, the margins have been able to be maintained.

The second point of the slide is that, of course, our future and the nature of the enterprise, you can see, continues compound towards the RF, Application software, the Medical software, and the Medical products businesses, which now make up nearly 75% of the EBITDA of Roper's entire entity. And they also have done remarkably well. Two years ago, those businesses had about 39% EBITDA; today, those businesses have about 41% EBITDA.

Next slide. We look at the first, in our Controls and Energy Systems now is down to barely 10% of the Company. And its organic growth was down 13%, generally the way we thought it would be. The segment, while down as expected, really did modestly better than it did in the second quarter, and is likely to do modestly better again in the fourth quarter.

Terrific profitability. The OP margins in this segment were 25.4% and the EBITDA margins were 29.2%. When we look at the fourth quarter, we think oil and gas will be down about another 20% in this particular segment, same as it was in the third quarter but we don't think we're going to get much growth in terms of fourth-quarter seasonality.

We didn't get much last year but generally, it's been quite substantial. So we're sort of assuming that we won't get that this year. Margins will improve, again, in the fourth quarter. We started the year out in Energy with 20.4% OP; second-quarter went to 22.5%; the third quarter is already up to 25.4% ; and the fourth quarter will be substantially materially above that. So these businesses still, in our view, represent free shot on goal for us and they only represent 10% or less of revenue.

Next slide. On the Industrial Technology side, you can see that this is the fortunately, the last quarter we'll talk about this divestiture of ABEL. If you adjust for the divestiture, the segment was actually flat despite the upstream oil and gas piece that's in Industrial Technology being down 35%. So how did that happen?

Well, it happened from double-digit growth at Neptune, who continues to gain market share. And very strong demand for the R900 Automatic Meter Reading and AMI technology, with lots of migrating upgrades. We had significant number of wins last quarter, over 10, and really, the $50 million that we put into R&D in the last three years of Neptune has gotten us into a very outstanding position that people will begin to appreciate just how much we've done and how far advanced we are going to be over the next couple of years in this space.

We did get some sequential improvement at Roper Pump and we expect to have a little bit better results, again, in the fourth quarter despite basically that two other businesses in here that are really purely related upstream and have been severely hampered. The rest of our businesses in here are -- it's kind of test businesses. They are all doing relatively well; some of them, actually, have record quarters.

And on balance, we don't see any deterioration in those businesses. In the fourth quarter, we think we'll have sort of a similar revenue and margin performance to what we had in the third quarter and while upstream markets are sequentially flat, there is a tiny bit of improvement that we're seeing.

Next slide. Here, we'll look at the RF Technology and Software segment. It's really increasingly right to think about three legs of this segment with the RF product side of activity; then you have the tolling side of activity, then you have all of this application software business and of course, now in addition to that with ConstructConnect.

So here are the businesses, revenue was up 20% in the quarter; the operating profit was up 26%. The OP margin is 31.7% but the EBITDA margin was 38%, up 230 basis points. We had organic growth of 7% in this segment, and had about 1 point of foreign exchange headwinds, and acquisitions helped by 14%. Very strong growth at toll and traffic on project activity in Florida and Texas and Pennsylvania. Sounds like swing states in the election.

Continued high single-digit growth in software led by freight matching and seaboard. We did some really exciting things that freight matching. We moved to a more modern software-friendly location in the Portland, Oregon area and we put together the freight matching network so DAT in the US and get loaded into a new software development of process that's going to expand our customer base.

We had double-digit growth in the RF products business. A lot of that's driven by senior living; there are several of our businesses that touch senior living. And in toll and traffic, had -- would have had spectacular orders, of course, if we would have been able to book the Bridge and Toll Project -- Toll and Tunnel project which we hoped would happen a little bit earlier in the year.

We had a five-year extension of our toll mandate in Dubai and the Saudi project sort of back on track. We wound up with about 30 installations here in the fourth quarter, we think, which will get us to about 70 of the 350 so we feel much better about the progress in Riyadh.

In the fourth quarter, TransCore was awarded $70 million-plus MTA project to convert nine bridges and tunnels around the five boroughs. That, all of you who go back and forth in there are well aware what that's like. There's like 800,000 people a day going through that process and conversion with our Infinity-Lane Technology will allow people to not have tollbooths and hand out the fines, of course, based on video tolling but if you have your normal toll tag, you will be able to get through.

The growth in toll and traffic, we think, will continue to manifest itself in the fourth quarter, certainly into 2017. This software businesses universally remains strong. We had kind of mid-single-digit organic growth in the whole segment, which gives really strong momentum going into 2017, certainly the best position we've had in this segment in a long time. And now we've acquired ConstructConnect, which we'll talk about here in a second for $632 million. It's got about $150 million in revenue and sort of Roper-type expected EBITDA margins, which will get better as it gets inside the Roper governance process.

Next slide. So talking about ConstructConnect for a minute, we issued a separate press release on this. I think today is an interesting day in addition to being a record quarter, it's a record number of press releases for Roper. This is really an amazing business.

When our teams made the trips in the diligence process and working with Dave Conway's staff and you get to work in their training center, and you can watch the network live, it's really a -- it's just like watching the floor of the Exchange with all of this activity going. You realize just how many people are interacting with this thing.

They have $55 million of bids -- $55 billions of bid activity. It's just remarkable. It's like our freight matching network for something is up for maybe 1 or 1.2 seconds before it's grabbed by somebody else in the network and here you're seeing all of this usage around the data, which is just unprecedented that is inside the network that's accessible to everybody. So it's all cloud-based technology.

The network allows people to see what projects are coming up. They can see what contractors that form their own opinions about who might be competing for it, what the call-off is for everyone's specifications. There are also going to be benefited, by the way, because they will work together with our On Center business that was just for drywall construction only.

And there are other niche things that are going to be able to fold into ConstructConnect Point going forward. Those 800,000 users were laughing about this preparation of the call -- that basically there's 800,000 people that use the bridge and tunnels in New York every day so we've decided that perhaps every person going through the tunnel represents a ConstructConnect user.

This business is headquartered in Cincinnati. Its revenue for next year should be something, hopefully, above $150 million. It's going to generate something in the $50-plus million of EBITDA to us, and remember, lots of non-cash amortization in this things. So terrific cash business. It will meet all of our acquisition requirements.

It's got a great management team. Dave's been running this business through its acquisition phase and through its evolutionary shaping of the pre-construction industry. So he really is the domain expert. Very high recurring revenue.

The subscription business so you have all of these great -- cash characteristics. It has deferred revenues so you have very few assets of any kind and it really has multiple growth opportunities. That's another reason why we found it to be a very attractive acquisition. I think a great home for ConstructConnect, who can now focus, really, on continuing to shape the evolution of the pre-construction industry.

Next slide. The Medical and Scientific Imaging business. You can see year, we were up 12%; 8% on acquisitions, 4% on organic, a little less than 1 point of negative FX but around the down as opposed to up. The Medical businesses are 85% of the segment and they grew organically at 5% and interestingly, throughout the year, the Medical businesses have grown organically at 5%.

Each one of the separate businesses are sort of hospital software or alternate site solutions business and the Medical products; all three groups grew. Sunquest, the way we look at order intake, is sort of different than bookings against the entire business because there's so much recurring revenue that doesn't really change from a booking space.

It's on an ordering take basis, they had a record in the third quarter was up by the most it's ever been. Scientific Imaging, which is about 15% of the second, did okay in the third quarter. It's -- it had modest growth but actually, it's a bifurcated situation where the life science portion, because of cryo-EM market opportunities grew over 100% in the quarter, while the physical science business continued to be pretty weak and was down about 20%.

So, these -- the opportunity in front of these businesses is the best it's ever been. In the fourth quarter, we think we'll have continued mid-single digit growth for the Medical businesses, led really by the alternate site solutions business. Scientific Imaging, we think will be terrific on demand and bookings for new products but most of those probably will have early 2017 deliveries, which was another reason that maybe gets on here in the fourth quarter, we will just have to see, but we're going to the assume that mostly that's going to be a first-half next year benefit.

Okay, the next slide is the guidance update. Turn the page and here are the specifics on the guidance. We're going to go in, for the fourth quarter at $1.77 to $1.89. It's a broad range, probably not really a broad range, given how much money we make and how few shares we have, so seasonality in the Industrial and Energy business is not something that we think will help this year.

We could be wrong about that and if we get normal seasonality, then we would be towards the higher end of the range. The New York City MTA ramp is very important in the fourth quarter. There was a commitment to get the first three projects completed by January 1, and how that project ramps will have a direct effect on whether we're towards the low or the higher end of the guidance.

And then customer preferences around delivery. We felt the third-quarter orders were satisfactory but a lot of that not hearing immediate delivery kind of results. So I think there's some hesitancy in the Industrial and Energy markets about exactly when they want things that they're booked and committed to. The full-year guidance, given the fourth quarter ASH addition to our year-to-date results would give us somewhere around $6.48 to $6.60. Most of our internal projections and external projections are right around $6.55 to $6.60.

Full-year cash flow conversion will still be spectacular, 140% or so. And that will allow us despite terrific oil and gas headwinds this year to have 5% to 6% of revenue and EBITDA growth for the year.

Next slide. If we look at the summary of how we did in the third quarter, it's kind of a long list of good things. We got record orders, revenue, net earnings, EBITDA, and cash flow. Four stand-out businesses there. Medical, Software, Tolling and Neptune were really quite good because remember, we got 20%-plus negative on the Energy side of the business.

EBITDA got up to 34.6% of revenue and our free cash flow was phenomenal. The New York City MTA Bridge and Tunnel All-Electronic Tolling project, we really expected to win this for some time, but the news about it -- the commitment around it didn't come until last Friday. So we had been planning for a Q4 kick-off and we will do what we said we would do for them, which is to get the first three projects done.

But almost, the vast majority of this work is going to come in 2017 and not in the fourth quarter. We acquired a great SaaS network business in ConstructConnect and it, all along with the things we can do with On Center in a cooperative way, will be very beneficial for us in 2017.

The cash performance that we have year to date, along with a brand-new balance sheet with a much better credit facility, supports our continued ability to deploy capital. It's the most powder we've ever had and the opportunities that we see are excellent. So we had outstanding results in the third quarter and we are very well-positioned for 2017 and ready to take your questions.

(Operator Instructions)

Deane Dray, RBC Capital Markets.

This is Andrew Krill on for Deane. I want to start off on ConstructConnect. It's the second meaningful deals you guys have done recently and software-as-a-service after Aderant. So I just wondered if you could talk about market share within construction, and if there are any unique barriers to entry versus peers for the business?

Well, this is John Humphrey. So as far as barriers, I mean, the barrier, of course, for a networks business is the strength and size of the network, and the ability for all of the different users to be able to trend back business and grow their own business by utilizing the ConstructConnect Network and Software solutions.

And I think it goes to the size of the network. When Brian talked about 800,000 users and 55 million invitations to bid every year, encompassing almost 400,000 different commercial construction projects. I mean the size of the network and the combination that ConstructConnect has been able to put together between their different brands of iSqFt, and Bidclerk, and Construct Data, it really turned that into a single integrated platform, that's really unique inside the industry.

So from a competitive position, I think for most of those customers, the way that variable to grow their business and to bid on more projects and to win more, is through connection to the ConstructConnect network. And so that's really the strength of that in the competitive position. There are a couple of competitors out there, that also provide, participate on the construction data side but on the network and the integrated data, I really don't think there's anyone of size there.

Okay, great. That's very helpful. Just as a quick follow-up, do you have any sense of potential accretion and then where you guys think the EBITDA margin could eventually go versus the 33% or so you were expecting next year? Thank you.

We still have a lot of work to do and we're going to close on the transaction but as we're thinking about, it's probably somewhere in the $0.10 to $0.15 accretive for next year. We will be able to update you on that, of course, as we finalize the purchase accounting. And the margin profile here is also very good, right?

We're talking about something that's already in the mid-30% EBITDA margin. And so as it continues to grow, it will grow with high incremental margins. And so that's how we see the margin progression over time as this network continues to get bigger.

All right. Thank you.

Just want to add to the understanding that these acquisitions have a lot of non-cash amortization. So, on a GAAP DEPS basis, people are looking at expensing that amortization and depressing what otherwise looks like earnings per share. Reality is, it will be very cash accretive but on a GAAP DPS basis, it may only had $0.10 to $0.15. I think you get paid as a shareholder for monitoring what's happening to the quality of the cash earnings. The cash earnings at ConstructConnect will be great.

Got it. Next time. Thank you guys.

Robert McCarthy, Stifel.

I guess first, just talking about and again, congratulations on a very strong cash generation quarter. This questions will relate obviously to DEPS, but in terms of the Medical cadence for the fourth quarter, and Energy, could you just expand on your comments about what kind of brought the guide down for the fourth quarter?

Well, I think two things in terms of the DEPS is just -- our view in that is we're not going to get much in the way of seasonality. When we look at the orders that came in the third quarter, we get a lot of footprints and we call them booked so they are booked in the quarter, and shipped within the next quarter and we didn't see any uptick that would give us a reason to think we'd have normalized Q4 seasonality but we could be wrong about that. That would be upside that could happen to us. So I think it's that, more than any one item and then we've been ready to go on a couple of projects that we expect -- we're ready to (multiple speakers) --

Energy is not surprising but the Medical cadence. Could you just expand upon that because I think your expectations was kind of high single-digit growth as kind of an exit rate for fourth quarter.

Rob, I think you're right about that. And once again, it goes back to what Brian was talking about. When we look at the product orders, so -- and I'm talking specifically around Medical products, where we expected that kind of last time we talked, that's the exit that's closer to 10% growth rate. That is exiting closer to the 5% growth rate by -- and that combined with the timing of imaging orders and deliveries.

So all the right science things that Brian talked about earlier, those are actually very sophisticated instruments and cameras and filters. That aren't as kind of the -- it's not just like machining and creating a pump. So the process in order to be able to turn that from order to delivery, can easily be a 60, 90, 120 days depending on yield and throughput, particularly from suppliers around some of the sensors.

And so as we look at the deliveries and the delivery schedule, particularly on the imaging product side and also on the Medical products side, that 's where we see a slight difference from what would have thought before. But we still see this segment exiting at the mid-single-digit rate, very consistent with where it has been over the past two-and-a-half years.

Okay, so you see no underlying deterioration in the core organic growth rate of that segment?

No, we do not.

Okay, and then in terms of the M&A pipeline, obviously, you've transacted on a very interesting deal this quarter. But what's the state of play in terms of how you look over the next 12 to 18 months in terms of capacity of these deals and the environment to get deals done because it has been in the main kind of a difficult environment to get deals done.

Yes, if you go back to January 2015, in that 21-month period, we've deployed $2.7 billion in capital. In the next 21-month period, or much sooner, I would think that, that kind of run rate is very possible. We've got not hundreds of millions, but billions of dollars of capital to be able to put to work and getting the new $2.5 billion revolver, which was (inaudible) done was a big deal because it has given us some flexibility around we -- how much could get deployed at any one point in time and that's very helpful.

So there are a number of small deals that we're engaged with at the moment and a couple of larger transactions, which would be even bigger than ConstructConnect that we are involved with, but we think are very attractive so you never know in terms of your work cadence, how that will happen. But I'd be very, very surprised if we didn't deploy quite the capital in the next 12 months.

So a final question is just around you've heard this many times, but would you consider doing something akin to what some of your competitors or -- ostensibly, not competitors but public comps in terms of perhaps just shifting to a EPS excluding amortization?

Well, there's a lot of smiling in the room because that's a proper way to measure us. I guess we're not interested in stepping on the SEC. Those people that are doing that, they can continue to do it for a longer period of time and if the SEC doesn't say anything about it, that's a smart thing to date because is the proper way to measure the business. It's just not the way GAAP measures the earnings. So we -- (multiple speakers) $50 million of amortization in the third quarter and what do we have? 101 million or 102 million of shares; you can do the math. Apparently, I'm not allowed to say what that math generates. EBITDA (multiple speakers) earnings-per-share for the Company will be and are spectacular.

Brian, you been banging my head against the wall for that for about 15 years and I'm a slow learner. So I'll leave it there.

Okay.

Joe Giordano, Cowen and Company.

Do you get the sense that given where rates are and when you're looking at deals, are you having to stretch a little bit more in terms of multiple because competitors who are looking at the same assets are able to kind of do some funny math with the rates being here in terms of returns?

Well, I wish it were funny math but it isn't funny math. The difference is, we don't like to go above 4 times debt-to-EBITDA and those guys are willing to take debt staples that bank put on things and non-bank entities put on things at 8 times EBITDA, right? So, they don't deploy much more equity in a transaction that we do.

We just don't want to have 7 or 8 times debt to EBITDA. We're going to remain an investment grade, and to do that, you want to be around 4 times debt to EBITDA coming back to 3.5 or something. So we're very disciplined about wanting to and guaranteeing ourselves to maintain investment-grade status. The prices that people are paying for things are really bifurcated.

Oddly enough, the Industrial assets are trading at, really, more than they're worth in a normalized interest environment in the M&A world. Because they don't have a EBITDA even though they will require a lot of capital spending to maintain that EBITDA. So their multiples are interestingly high. Then the asset-life businesses trade at a premium to that but the arbitrage for us on the asset-life businesses is more favorable than those people that are buying the more capital intensive businesses.

So something like ConstructConnect, it's -- will be a long-term compounder of investment for us, which is a great thing as opposed to the guys that are buying the capital intensive businesses, thinking that, it looks like I'm paying a lot but the (inaudible) of their cyclical activity and when they are this higher number, this will happen. We'll leave that field to everybody else. It is not where we're going.

Thank you. I just wanted to touch on Neptune as well. The results quarter, obviously, were very, very strong. There's this story out there that's been out there for a while there or not about a lack of investment. You talk about $50 million of M&A. Can you talk about your positioning there on the highest technology-type products like on the AMI development and how you're capitalizing on your install base? The numbers speak for themselves but this is kind of been out there for a while and maybe give you guys a chance to address that?

Yes, I think -- I'm not -- $50 million was what we had done in R&D, not M&A.

I'm sorry if I misspoke.

In the last three years, we put $50 million to work there. We're also opening a new Software Development Center for Neptune that will really help us in a lot of things we're doing. So we're not going to provide a lot of information about what we're doing, but I can suggest to you that we have the reading technology that's available. It has the highest integrity results.

We have an enormous install base and maybe people forget the way our R900 product works, we can upgrade that. The AMI status and there's a lot of ways to collect the technology. But if you've got the right core unit that can use multiple ways of gathering the data, you will be a little bit ahead of the game.

So we are able to do upgrades for people in the AMI arena that they always -- if they ever were migrated to it, they'd do that and we won a lot of those -- over $30 million of that just in the third quarter. You saw other things. You'd see -- mobile activity, you see Verizon picking us as the person that they are working with development on mobile technology.

So there's a lot of different things going on and we're not going to provide more information than we have around that but we're -- this -- Neptune will have record performance in 2016 so if anybody thought it didn't have some kind of long-term reason for performing well, explain to me why they are growing so much.

Fair enough. And last, if I could, John, you talked last quarter about when you were talking about Sunquest, some small hospitals you were taking on, maybe [Epicon] and that makes sense for that size of a customer and your core being large hospitals. Can you just talk about how that went through for 3Q? Is that kind of stabilized and the customer base that you focused on, you remain to be the capture rate there is being consistent?

Yes, it has been consistent. And you are absolutely right. As Brian talked about the order intake, right, so remember that fully two-thirds, if not more, of Sunquest revenue is recurring revenue in terms of maintenance on installed software that has already been out there.

And so when we look at the order intake, it's a much smaller piece of their revenue buy, but when they look at their order intake, which is about the new Lab 8.0. It's about the new blood bank solution. It's the new outreach solution so the nurses can start the testing process right at the bedside and be able to start that data flow and workflow to the lab right from the bedside.

So all of those upgrades are driving that order intake to be a record level for the third quarter. It is true that on the lower end, the smaller hospitals and integrated solution can make economic sense for them but the competitive environment and the solution that Sunquest delivers is -- it continues to be very good. And our competitive position can easily be very strong, particularly in those larger hospitals.

Good. Thanks, guys.

Brian Gesuale, Raymond James.

Wondering if you could expand a little bit on Sunquest. You talked about record orders, maybe just the richness of this product upgrade cycle that we've seen and maybe give us a little bit of a preface as what we might expect in 2017?

I think it's early to talk about 2017. We actually have a review coming up with Sunquest in about a month. We will be talking about that 2017 but importantly 2018 and 2019. And the plans they have around the investments there. So one is that I was kind of just mentioning in terms of the continued on the upgrade side around Lab 8.0 and the new blood bank solution but also I wouldn't ignore the investments that we've made around genetic testing and the workflows associated with that.

So you really have the blood side which is the core lab high-volume testing environment that every hospital has to have. And then you have the other side, which is the anatomic pathology and the emerging genetic workflows around genetic testing. That is where we've made the important investments with the acquisition of GeneInsight and continued our deed around being able to make that workflow as efficient and as quick, with getting the information back to the doctor as timely as happens today on the blood side.

And so far all of those reasons, I think the Sunquest and our entire platform of Hospital Software solutions which, of course, includes data innovations and Clinisys and GeneInsight and a variety of other things. All of those businesses really deliver those software solutions to hospitals and I think their future looks very bright as a result of the investment that we continue to make there.

Great. That's helpful. Maybe just a follow-up on the M&A pipeline. It sounds robust. You certainly have a lot of dry powder. Can you maybe talk about the quality of those deals? Some of the -- this ConstructConnect looks very asset light, negative working capital. It appears that the quality is actually increasing as the pipeline is. COuld you maybe discuss that?

Yes, you can really see that when you look at that, that networking capital chart where you're down at 5.8%. People think you can never get lower and now we're at 1.9%. Certainly, a lot of that as you get deferred revenue and you get paid in advance for work you do and most of the things that we look at these days have those qualities.

So we -- I don't know if we'd get to zero or ultimately negative at some point, but I don't see us going up. The amount of small niche businesses that work in kind of oligopolies where customer intimacy is critical and then those that have the ability to have a network effect, there are more of those things out there than you might imagine because when you're focused on product businesses, you don't necessarily see some of these kinds of things.

All of the people that are involved in transactions in the banking businesses and private equity businesses know what we favor and what would look like and so the funnel that we have of incoming opportunities is really amazing. And it's just incumbent on us to sort through that funnel, find the best management teams, and the best end market opportunities, that are in favorably competitive environments. And believe me, there is more high quality things available that our balance sheet could tolerate. Fortunately, we've got a big enough balance sheet to capture some of them.

Great. Thanks a lot guys.

Richard Eastman, Robert W. Baird.

Brian, could you just talk for a minute or two about the New York MTA contract? I think you had mentioned three sites should be performed in the fourth quarter kind of accelerated. Given the size of that contract, are we talking about maybe $20 million, to $25 million of revenue in the fourth quarter and then the balance of the sites, the others six sites, does that all fall into the first half of 2017?

No, no, no our account practice is pretty specific in terms of what they've been willing to release. And will -- it will become by November 2017 is what we're told. There was really even one -- remember you've got the light ramp, right? So we've been doing some engineering work with to assure that the overhead kiosk and everything that are being built-in are going to be okay so it will start slow.

I don't know -- maybe we could get $10 million in the fourth quarter of revenue. That we have with the rest being -- whatever it is, it's about $72 million for the entire period and it will be really up to them at the pace they want us to do the installation and release this technology.

Okay. Understood and just a last question. Just around MHA, there is a lot of noise around drug pricing, both generic as well as branded. And then also I noticed in this slide that you had -- that there was a suggestion that the Alternative Site Solutions business would be a leader here in the fourth quarter.

Can you just pull all that together? Has the noise around drug pricing impacted just the revenue stream in the pass-through there at MHA? And then also is the Alternate Site Solution business been the fourth quarter leader, is there timing there or is there contract renewals? What would drive that in the fourth quarter?

Yes. Sure. In terms of its contribution on the gross side, it was up in the 3% or 4% in the third quarter and we expect that to be modestly better in the fourth quarter. From a drug pricing standpoint, you are right. That is something that we look at. A lot of the headlines that you see around drug pricing aren't really targeted for our being sold to the senior population.

Remember, MHA is around alternate site healthcare and the largest portion of their revenue is coming from skilled nursing homes, long-term care facilities. It's not really the headline prices around EpiPen or whatever else that you might read in the Wall Street Journal. Is really for kind of the longer chronic illnesses that they are being sold through the MHA contracting vehicles.

So, we do look at drug pricing. It's been lower than what we would have seen in years past which is still positive in 2016. We're not counting on an awful lot of drug pricing lift as we think about the future for MHA. They continue to expand in their solutions and non-drug supply chains, including food and other things around long-term care facilities and other nursing homes.

So they continue to expand that and they also expanded software solutions around data analytics. You've seen us make a couple acquisitions that also serve the alternate site healthcare which are not GPO but are really around software solutions that allow those members and customers to run their businesses more efficiently.

That's where we look for, for growth. We don't really count on underlying drug price increases as something that is going to drive our performance, although it does have an impact on our revenue.

I understand. Okay. Thank you.

Alex Blanton, Clear Harbor Asset Management.

Hello?

Alex, are you there?

Hello? Can you hear me?

We can hear you. Hello?

Mr. Blanton, your line is open.

Audra, we'll have to follow-up with Alex, I think.

That will end our question-and-answer session for this call. We now return back to management for any closing remarks.

Well, thank you very much for us and we look forward to speaking to you again in about three months.

That does conclude today's conference. Again, thank you for your participation.