Roper Technologies Inc (ROP) 2019 Q2 法說會逐字稿

Good day, everyone, and welcome to the Roper Technologies Second Quarter 2019 Financial Results Call.

A reminder that today's call is being recorded.

And now I'd like to turn the conference over to Zack Moxcey.

Good morning, and thank you all for joining us as we discuss the second 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 throughout the webcast and are also available on our website.

Now if you'll please turn to 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 second 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 the Foundry acquisition; and lastly, an adjustment to the income tax expense related to the gain on sale of our Scientific Imaging businesses.

And now if you'll 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 second quarter highlights.

I'll then turn our call over to Rob to discuss our financial results.

I'll then walk us through the segment details and outlook, followed by our Q3 and 2019 guidance, then we'll open it up for Q&A.

Next slide.

We had another very strong quarter here at Roper.

Revenue grew as expected, margin execution was strong and operating cash flow increased 13%.

It was nice to see gross margins expand 90 basis points in the quarter, increasing in both of our product segments.

And we always like to see leverage down the P&L with EBITDA growing faster than revenue and cash flow outpacing that of EBITDA.

Our software segments continued their strong momentum led by 6% organic growth.

In our network systems and software segment, we saw broad-based growth highlighted by DAT, iTrade, MHA and SoftWriters.

Application Software grew 2% despite a difficult comp against Deltek's significant perpetual wins a year ago.

Deltek continues to win in the marketplace with bookings up double digits and SaaS adoption accelerating in the quarter.

Growth in our Measurement & Analytical Solutions segment was led by high single-digit growth in our medical product businesses as new products gained traction following recent investments.

And Neptune's strategic effects continued with another solid quarter of growth.

However, this was partially offset by expected declines at Gatan and a short cycle pause late in the quarter for our industrial businesses, which represents approximately 8% of our annual revenues.

We will discuss this later in the call, but we're maintaining a cautious stand and not assuming industrial improvement in the second half of the year.

Process Technologies continues to do an impressive job executing through expected declines in oil and gas markets.

As many of you know, we closed the Foundry transaction in the quarter and onboarded the company into our operating and governance model.

While very early, things are off to a good start.

And finally, our acquisition pipeline is quite active, and our balance sheet positions us exceptionally well to deploy capital on the second half.

I'll now turn the call over to our CFO to walk you through our consolidated quarter results.

Rob?

Thanks, Neil.

Good morning, everybody.

Turning to Page 6, I'd like to recap some of the numbers behind our strong second quarter financial performance.

Starting with revenue.

Revenue was $1.332 billion in the quarter, an increase of 3% and an organic increase of 2%.

This was right on line, as Neil mentioned, with our internal guidance model coming into the quarter.

We had organic growth in 3 of the 4 segments.

The one segment that was down was our Process Technologies segment as expected against the very difficult plus 20% comp last year.

Margin expansion was very strong, so gross margin increased 90 basis points to 64%.

EBITDA increased 5%.

EBITDA margin up 70 basis points.

So really good margin expansion for the quarter, probably a little bit better than we had anticipated coming in.

So that all adds up to DEPS for the quarter of $3.07, which was a 6% increase over last year and a little bit better than our guidance coming in of $3 to $3.04.

Next slide.

Turning to our asset-light business model slide.

We'll look here at the net working capital as a percent of the Q2 annualized revenue.

So a slightly different view this quarter, looking back over the past 6 years of the trend to give a little bit of a perspective in what's been going on with working capital here for Roper over a long period of time.

So if you look back and compare June 2013 quarter to the June 2019 quarter, you'll see our inventory is down 200 basis points to 4.3% of revenue.

Receivables are down 240 basis points to 17.3% of revenue.

Payables down a little bit to 10.5%, but deferred revenue up 680 basis points to 13.5%.

If you add all of that together, you see this consistent negative working capital we talked about at Roper at minus 2.4% for the quarter, and that's over 1,000 basis point improvement versus the same period in 2013.

So we really believe that negative net working capital accelerates our cash flow compounding.

Next slide.

Speaking of cash flow compounding, excellent cash results in the quarter on Page 8. Q2 operating cash flow of $301 million, that was a 13% increase versus prior year.

The free cash flow was $286 million, which represent a 14% increase versus prior year.

So if you look now at the trailing 12 months, $1.51 billion, certainly a record, plus 23% over prior year 12-month period and representing, importantly, 28% of revenue.

If we look at the first half of the year, we were up 15% on cash flow, so we're certainly on pace for continued double-digit compounding at Roper.

Next slide.

So importantly, due to the strong cash flow performance, we really see exceptional deleveraging over the past year.

So in between acquisitions, we generate a lot of cash.

We paid on our debt very, very quickly, so we're always well positioned to make the next acquisition and deploy capital.

So if you look at the past year, gross debt down $900 million, from $5.6 billion down to $4.7 billion.

Net debt is down $800 million, from $5.2 billion to $4.4 billion.

The TTM EBITDA is up $191 million.

And you can see here our gross debt-to-EBITDA is now down to 2.5x.

Net debt-to-EBITDA is down to 2.3x.

We recently were upgraded at Moody's, which we're very happy to see.

We also have a BBB+ rating at S&P.

So we really are exceptionally well positioned as we sit here today to continue our disciplined capital deployment and really take advantage of the very high-quality pipeline of acquisition opportunities that we have in front of us.

So with that, I'll turn it back over to Neil.

Thanks, Rob.

Let's go and turn to our Application Software segment.

In the quarter, this segment represented 29% of our revenue, and revenues came in at $391 million, which was plus 2% organic.

EBITDA was $155 million, which represented a 39.7% margin.

Starting with Deltek.

We saw the continuation of a few trends that we've discussed over the past several quarters.

First, we saw an acceleration of bookings and recurring revenues as a result of an increased mix of business towards Deltek's SaaS offerings.

In fact, in the quarter, Deltek signed their largest VantagePoint SaaS contract.

As a reminder, VantagePoint is Deltek's new enterprise software offering targeting professional service firms.

Also the business continued to see a nice balance of activity across their 2 macro end markets: professional services and government contract.

To remind you, Deltek had a very difficult comp given a very large volume of perpetual deals signed a year ago.

Adjusting for this, Deltek grew their bookings double digits in the quarter.

Deltek team continues to execute exceptionally well.

Aderant experienced double-digit growth as a result of continued share gains in the adoption of their newer SaaS solutions targeting law firms.

As you may note, we've highlighted Aderant's competitive strength over the last several quarters.

Over that period of time and since 2015, Aderant has added approximately 40,000 timekeepers to their core platform, roughly 30,000 of which have been competitively won from their largest competitor.

Deane and her team at Aderant have done and continue to do a great job.

At PowerPlan, we saw nice increases in recurring revenues based on continued strong retention rates and an expanding customer base.

Importantly, the PowerPlan team is working aggressively and systematically to increase the volume of new pipeline adds in their sales comp.

This is particularly important following the regulatory-driven increase and license and implementation revenues following the new lease accounting standards.

Also we saw nice increases again at CBORD with excellent cash performance.

And as a reminder, CBORD is our software business that delivers integrated security and payment solutions to higher education and health care campuses.

Finally, Strata logged another great quarter based on very strong renewal activity, the adoption of their new products and continued market share gains for their cost accounting and decision support staff products for hospital markets.

As we turn to the outlook for the second half, we continue to expect 4% to 6% organic increases for the segment.

The comps for Deltek will normalize in the second half, and we expect the segment's organic growth to be slightly better in Q4 versus that of Q3.

Next slide and turning to our Network System -- Software & Systems segment.

This segment in the quarter, revenue represented 28% of Roper's revenue, and revenue was $368 million, which was plus 6% on an organic basis.

EBITDA was $159 million, which represented a margin of 43.2%.

The quarter was highlighted by continued growth at both of our Freight Match businesses, the U.S. and Canadian markets.

In particular, we saw strength in demand for our rates data offering.

MHA's performance in the quarter was highlighted by several strong trends.

To remind everyone, MHA is the largest group purchasing network for the nonhospital market with leadership position in long-term care pharmacy, long-term care facilities and home infusion marketplaces.

The team continues to win the market share gain relative to onboarding new and start-up pharmacies, so nothing new here and a good job by the go-to-market teams.

Importantly in the quarter, MHA started to see the benefits of increased customer purchasing volumes due to several new pharmaceutical products being on contract.

Also pricing appears to have stabilized, and the business's food and nutrition portfolio grew nicely in the quarter in the mid-single-digit range.

Additionally, our pharmacy automation workflow software business, SoftWriters, had a very nice quarter continuing a trend.

This is an example of a wonderful software business with network effects and network financial benefit.

This is a business that develops and deploys the core pharmacy automation workflow software that closed door for non-retail pharmacies use in their day-to-day operations.

The economics of this business and for our customers are unlocked as they cross-sell the recurring revenue transactional products, specifically electronic claims submission and e-prescription.

So as this business adds more and more pharmacies to the customer accounts, their economic model expands at a more rapid pace as the recurring revenues accelerate.

Nice job by the team in Pittsburgh.

iTrade grew high single digits in the quarter based on strong renewal activity and an increase in trading partner growth.

Over the last couple of years, the team at iTrade has worked to structure their business model and customer contracts where iTrade benefits from volume increases from their trading partners, and we saw the benefits of this in the most recent quarter.

Again, we saw strength at RF IDeas, in fact, a record quarter for the business.

The strength is based on continued adoption of RF IDeas' core reader technology in the secure print and secure sign-on marketplaces.

At TransCore, the quarter was marked by an exciting new product release.

TransCore's proprietary integrated toll technology in partnership with Gentex was released in rearview mirrors in Audi's new electric SUV.

Currently, other OEMs are evaluating the technology and considering timetables for a potential adoption.

While very early, this is another example of great innovation by a Roper business.

And before we turn to the outlook for the segment, we wanted to briefly discuss our most recent acquisition, Foundry.

We closed the transaction during the second quarter.

Soon after, we had the opportunity to onboard the team and do our normal introduction to our governance model and CRI framework.

Also we're excited to announce that Jody Madden, previously Foundry's Head of Product, was named as their CEO.

Jody is perfectly suited for this role given her long history in the visual effects industry as well as her specific history with Foundry.

So far, it's been a very easy transition.

Importantly, Jody was able to successfully close a couple very large planned transactions with customer prospects in the early days of her new leadership role.

Congrats to Jody, and welcome to the entire Foundry team.

Now turning to our outlook.

For the second half, we continue to see 4% to 6% organic growth for the segment.

Relative to TransCore, the new project pipeline remains robust, although it's difficult as usual to forecast the timing of new project wins and implementation timetables.

Next slide.

Our Measurement & Analytical systems segment in the quarter represented 31% of Roper's revenue.

Revenue for the segment was $408 million, which was plus 2% on an organic basis.

And EBITDA came in at $140 million, which represented a 34.3% margin.

Neptune had another record quarter.

Neptune's strategy is rooted in customer intimacy, and product innovation continues to help Neptune systematically gain market share in the North American market.

NDI had another great quarter.

This quarter's strength was rooted in NDI's electromagnetic and optical measurement systems used by several OEMs in surgical applications.

Dave and his team in Waterloo continue to do a terrific job.

Verathon's growth was led by increases in our GlideScope consumables recurring revenue and demand for their next-generation BladderScan system.

The Roper Board of Directors is looking forward to a site visit at Verathon during an upcoming September Board meeting and seeing all the progress the company has made over the past couple years.

Our CIVCO MMI or multimodality imaging business located in Iowa City had a very nice quarter that was highlighted by strong execution in their ultrasound guidance and infection control markets.

CIVCO's ultrasound guidance products have extremely high levels of intellectual property and meaningfully aid doctors in ultrasound-assisted procedures.

Of particular interest is CIVCO's most recent innovation regarding infection control.

For many years, CIVCO has been a market leader in providing covers for ultrasound-assisted surgical procedures, namely image guided biopsies.

One of the risk factors of these procedures is the risk of cross-contamination of the gel that is used for ultrasound conductivity.

Well, the smart team at CIVCO appears to have solved this problem.

They created the first ever and IP-protected solution that does not require gel in ultrasound-guided procedures.

The team is just launching the product in North America and Europe.

And congrats to the team on its innovation, and we look forward to working with the team to make this become the standard of care.

Our industrial businesses, which are about 25% of this segment's revenues, were impacted by a short cycle pause late in the quarter and down mid-single digits.

Struers, really all of our industrial businesses, saw a slowdown in the second half of the quarter due to project pushouts and consumable destocking.

As such, bookings for this group were down high single digits in the quarter.

Importantly, this group did a very nice job managing margins and cash flow in the quarter.

Gatan declined in the quarter as we expected.

And as we have announced, the agreement to sell to Thermo has been terminated over regulatory concerns.

As we turn to the guidance for the second half, we see organic revenues increasing 1% to 3% for the segment.

Our medical products and Neptune businesses, which are roughly 70% of the segment's revenues, are expected to increase mid-single-digit plus for the balance of the year.

For our shorter-cycle industrial businesses, again, 25% of the segment's revenues, we expect these businesses to be down high single digits for the second half of the year.

This assumes the late second quarter industrial slowdown continues for the balance of the year.

And for Gatan and given the Gatan sale to Thermo was terminated in the quarter, we have now included Gatan in our full year and second half guidance.

Specifically, we've added approximately $0.20 of DEPS to the second half.

Also we expect to see modest organic decline for Gatan given the record 2018 comps.

Finally, we have reengaged the sale process for Gatan.

While early in the relaunch process, we have received strong interest from many parties.

Gatan is a very good business with an exceptional management team.

We're committed to completing the sale process with Gatan.

But if we do not receive compelling economic and contractual offers, we look forward to owning Gatan over the long term, engaging with Sander and his team and investing for its long-term success.

Next page.

As we turn to our Process Technologies segment in the quarter, this segment represented 12% of Roper's revenue.

Revenue was $164 million, which was down 5% on an organic basis.

EBITDA was $60 million, which represented an amazing 36.6% margin.

Our upstream oil and gas business has declined as expected against a very challenging comp, which was plus 20% from a year ago.

That said, the business has executed very nimbly in the quarter and drove outstanding margins across the segment.

EBITDA margins were up 200 basis points in the quarter.

Relative to CCC, we continue to see strength in their LNG project pipeline.

Finally, Metrix delivered a record quarter based on strong demand for their vibration monitoring systems and controls across multiple end markets.

Turning to the outlook.

We see minus 1% to 3% organic growth for this segment for the balance of the year and do see easing comps in Q4 versus Q3.

As we have discussed, the potential for upside may exist based on expanded takeaway capacity and/or higher oil prices, but we have not assumed this is going to happen in our outlook for the second half.

Now let's turn to our guidance update.

We're updating our DEPS guidance to a range of $12.94 to $13.06 compared to our prior guidance of $12.70 to $13.

This increase to our guidance range primarily relates to the inclusion of Gatan, which we expect to add approximately $0.20 to second half DEPS.

Given the dynamics around the divestiture process, we do expect there could be greater-than-normal variability in Gatan's second half results.

Our DEPS and organic growth guidance assume that the short-cycle industrial pause that we saw late in the second quarter continues for the remainder of the year.

While recent trends may just be a soft patch, we do not have visibility into a second half recovery for our industrial businesses and more importantly, we did not want our business leaders to assume about that curse.

Accordingly, we're lowering our revenue assumptions for those businesses and expect our industrial business leaders to focus on continuing to deliver high margin and strong cash flow.

Should industrial trends improve, our guidance for those businesses could prove conservative.

As it should be clear from the content of our remarks on this call, the vast majority, approximately 80% of our enterprise continues to have strong momentum, growing roughly 5% on organic basis.

Relative to our tax rate, we assume the rate for the second half will be approximately 21%.

And finally, we're establishing our Q3 adjusted DEPS guidance to be in the range of $3.16 to $3.20.

Now let's turn to the Q2 summary.

We saw great execution and cash performance across the enterprise.

EBITDA increased 5%, margins expanded and free cash flow grew 14% in the quarter.

Importantly, our CRI disciplined improvement business model continue to provide a scalable platform for long-term to systematic growth.

Now turning to capital deployment.

First, and as the primary source for our capital deployment funding, our excellent cash performance will continue.

With leverage approaching 2x trailing EBITDA, our balance sheet is very well positioned to be offensive.

To the extent we're able to successfully complete the sale of Gatan, we will be even better positioned to accelerate our cash flow compound.

Also it was nice to see the Moody's upgrade to Baa2 and to sustain the S&P BBB+ ratings for our bonds.

Relative to the outlook for acquisitions and our pipeline commentary, we continue to see a very large number of very high-quality assets.

We will always remain patient, but we are very active in maturing a number of opportunities in the pipeline.

Importantly, it's always good to remind everyone that our CRI orientation and M&A processes help us identify and execute on the very best acquisition ideas.

Now as we turn to questions, I want to remind everyone that what we do is very simple: we compound cash flow by running a portfolio of operating businesses that have market-leading positions and niche industry.

We provide the business leaders with Socratic coaching about what great looks like relative to strategy, operation, innovation and talent development.

We incent our management teams based on growth.

We have a culture of mutual trust and transparency.

And finally, we take our excess free cash flow and deploy it to buy businesses that have better cash returns than our existing company.

These simple ideas deliver powerful results.

Now let's go ahead and turn it over to the questions.

(Operator Instructions) And moving first to Deane Dray at RBC Capital Markets.

I don't normally have the opportunity or the responsibility of asking you about short-cycle industrial softness in the quarter.

It's just -- it's not typically something that we're talking about, but it's presenting itself here.

So can you provide some more color on kind of the cadence in the quarter, the pushouts, some of the destocking?

And what visibility do you have?

And if you can get it by business, that might give us some context, and start there please.

Deane, I appreciate the question.

I'll give you some thoughts and ask Rob if he has any additional.

So just firstly, we've got to note that we're -- it's 8% of our business, it's 6 or 7 businesses over 45 that we're talking about and were maybe not the best read across other things, but I'll tell you what we saw.

So April was just fine, really no issues there.

May saw a little bit of weakness, and June saw a lot of weakness.

Interestingly, it was across really all of the industrial businesses that we have.

It was across geographies.

Europe might have been a little bit weaker than North America, but nothing discernible and really across different various end markets.

It wasn't isolated to one end market.

What we think what we saw also was projects push and then a bit of consumable or spare sort of destocking, right?

So it's really across both the capital piece and the recurring piece.

Interestingly, the first 3 weeks or so in July, we saw a pretty meaningful recovery.

But we don't yet know enough if that's just a bounce back from June or if it's -- or what the real root cause was for why we saw the declination across the quarter, if it was lender addressing for the quarter or if it was something around trade tensions or something -- some folks waiting for low interest rates.

We don't yet know the root cause.

And so it's just a little too early for us to call a specific direction, so we chose to be what we think is relatively conservative here.

So we saw down mid-singles in the second quarter.

Assumption is down high singles for the balance of the year.

And we're managing the businesses assuming that, that occurs, right?

We don't want our leaders in these businesses to get sort of caught assuming a recovery and then it doesn't happen, then you have a margin problem.

So that's a bit of the color.

I don't know, Rob, if you want to add any additional?

Yes, sure.

So just to clearly size it, as Neil mentioned, it's 8% of the company's revenue, about 25% of that segment.

So this does not include Neptune.

Neptune continues to grow at exactly the same sort of mid-single-digit plus.

It's just the businesses that Neil mentioned.

So the bookings were down sort of high single digits.

And therefore, we're assuming the second half of the year is high single-digit declines where we used to have flat as that's about $25 million of revenue that comes out of the second half.

That's really the only sort of change in the entire company and what we're seeing at this point versus 3 months ago.

That's helpful.

And if I'm looking to calibrate how the slowing on the organic side ripples through into your guidance, just to make sure I've got the right pieces here, Gatan adding back $0.20.

It looks like the tax rate, a bit lower, is adding $0.08 versus our estimate.

So then when I look at the midpoint raise, it does look like there's a second half lower operating guidance.

It's something in the high-teens sense if that's right and maybe pricing context there.

Yes.

So the tax rate is slightly lower.

That's offset by higher share count, a little bit higher interest.

We are losing some proceeds from Gatan that impacts the interest.

So those other things, where they cancel each other out, is really around this $0.10 on industrial is the big change.

That's helpful.

And just last one from me.

On Gatan, was there any loss of momentum in the sales process?

You mentioned some slowing, but it sounded like those were tough comps.

But is there any momentum loss in the business as it's brought back into Roper?

So the team at Gatan really should be applauded for how well they executed and performed over what has been a really long, drawn out 18 months, 12- to 18-month process here.

The business performed amazingly well last year with sort of the new product cycle.

And as expected, we'll continue to sort of drive up a new product cycle, and you moderate for a little bit and you drive up on another product cycle.

So we're just in that moderation phase.

But the team has just -- I mean, A+ across the board with the distraction of sales process, which was immense given the sort of the CMA sort of process here in the last 6 months.

So great, great remarks to the team there, and we'll certainly add momentum to try to remarket the process -- the business now and have a better outcome.

And I would just add, I'd say they performed very well in the second quarter, so good performance.

And moving next to Robert McCarthy at Stephens.

I guess the first question is building on Deane's excellent questions.

In terms of the short cycle, you're not planning for any kind of contemplated balancing guidance here.

You can tell your business has to kind of focus on cash and margin, which is sensible.

You said, I think, 6 or 7 of your segments are really -- or your companies, within the broader [EBIT], are kind of affected.

I mean have you highlighted in the past exactly which one of these companies -- which one of these segments or subsegments these are?

And could you just kind of highlight what you're seeing with that kind of level of granularity?

Yes.

So it's -- the thing I should have mentioned earlier to Deane's question is this is Struers, Vaalputs, Denisco, it's Hardy, I mean there's 4 or 5 other that are much smaller.

But the trends that I just talked about are consistent across all of those.

They're not isolated to one.

It was very consistent read across our 7 or 8 companies here on the trends that we said, yes.

But it's the industrial complex, that 8% of revenue that we have.

Yes.

And then with respect to Gatan, I was under the impression that there were not that many natural buyers or potentially, I guess, private equity.

But could you talk about the fact that you think you've got a lot of interest?

Because that doesn't square with what I've heard in the marketplace.

Maybe I'm just an idiot, but I'll leave it there.

Well, hey, we know what Gatan is, right?

It's a clear market leader.

It has very great -- it has great growth prospects over a long arc of time.

It's got a great team and amazing cash flow.

And so as a result, there's a lot of people that are interested in a business like that, strategics and sponsors alike.

Okay.

And then the final question is I was going to ask about obviously the Foundry acquisition.

It sounds like you answered the question.

It sounds that this elevation of, is it of Jody Madden, that you've kind of taken the key man risk or the key creative sole risk out of the equation.

Because obviously, you think about companies with this nexus of technology and entertainment, you think about Steve Jobs or Jim Henson or whoever the case may be, you don't want that person walking out the door.

I mean would you say she rises to that level?

Are there other people within the company or the organization that you've made a real strong push to just retain?

Because obviously, at the end of the day, this is probably much more of a human capital business than some of the others.

Well, at first, I would say Foundry, really like all of our software businesses, is just a really boring software business, right?

The great software that enables creators to then do amazing work, right?

We're not the creative part of the ecosystem or supply chain in digital effects.

We're the enabling toolkit that allows that to happen.

And sort of maybe the first statement that's highly consistent characteristics with really every Roper business, not just the product software businesses, but the product businesses.

The team, I think, we mentioned last quarter that the totality of the Foundry team that we met in the diligence process and confirmed here in the first little bit of ownership, the breadth of that team, the depth of that team is quite strong.

And when we sat down and did the onboarding and started to engage with the team about our long-term orientation, multiyear product strategy, multiyear go-to-market strategies, it just became very clear to the incumbent CEO, Jody, ourselves, that the most natural fit for the long-term success inside of our framework was Jody.

And she's fantastic.

She, for the last 4 or 5 years, has been the face of the company relative to the products.

And we're expecting her to do great things with the business.

And we'll go next to Christopher Glynn at Oppenheimer.

I had a question about some of the pipeline dynamics that seem to come up a lot where you have a kind of a surfeit of actionable deals, but opportunity cost dynamics are always at play.

I'm wondering how that works as a partial gate to timing of deal flow.

And as a curiosity, when was the last time you had kind of an air pocket in actionable pipeline dynamics?

It's been -- I've been at Roper for 8 years, and I could not recall a real air pocket in terms of the pipeline.

I mean it's always a steady drumbeat, multiple deals presented at near final stages to our Board 5 times a year.

I mean so air pockets are -- I can't recall.

I'm looking at Rob, he's agreeing with me.

Relative to -- we're always -- to your first question about opportunity cost, I mean this is -- it's a debate we have on every transaction, right?

You're coming across one that looks really good, right?

It has all the characteristics we look for, niche, leadership, great team, accretive CRI, accretive organic growth rate, you know the list.

And they're like -- and the price might be X and the like, that really looks good, but is there something better that's just right around the corner.

So we're always having the opportunity cost discussion.

And it's one of those things that we sort of honed over the years, and we do the best we can relative to that decision.

It's obviously an opportunity cost, decisions won, where you don't have perfect information about what's around the corner.

And then we're always steep -- what gives us real confidence in ultimately everything we do is we're just steeped in the cash return methodology.

There's always that buffer built in day 1 when we buy a company relative to the values created for the shareholders.

And so that's at least how we think about it.

Rob, do you want to add any color to that?

No -- yes, there's always an opportunity, and it's just a matter of finding the best deals at the right price and getting them done.

Okay.

And then follow-up is on TransCore, the product implementing with Audi.

That seems pretty groundbreaking for TransCore.

Maybe I'm wrong, but could you elaborate on that thought?

Well, hey, it's very early.

We got a great partner in Gentex, right?

They're the clear market leader in the smart mirror technology.

And so it's been a nice collaboration with them.

But yes, I do believe it has the potential to be groundbreaking.

It's -- think about cars 10 years ago or 5 years ago, you didn't have auto-sensing, lane departure systems and whatnot.

Now they're almost standard.

So I don't know if this technology becomes standard like that, but it's certainly our hope that it would.

And it's great to have Audi as the first partner.

There's a lot of work that had to be done, not just in the technology that goes in the car, but also how you deal with intra-tolling agency and customer relationships and how you do with the billing.

And that's all been figured out by the partnership between TransCore and Gentex.

So it's super early, but we certainly thought it was exciting and wanted to highlight for everybody today.

And we'll go next to Barclays and Julian Mitchell.

This is Jason Makishi on for Julian.

Maybe just a question on the Gatan add-back guidance.

It was sort of our impression that the annualized Gatan divestment impact would be closer to $0.60 of EPS.

Adding back $0.20, just kind of wanting to reconcile the difference there, just sort of the half year basis seems like you'd be closer to $0.30.

Is this sort of seasonality of earnings?

Or is there other dynamics at play, such as lowered organic sales growth outlook, even just as we're modeling for 2020, et cetera?

Yes, no, I think you have too high of a number for what Gatan -- full year Gatan would be.

So this is consistent with sort of what we saw for the year all along.

There's certainly a lot of variability in the potential for their performance in the second half, as Neil mentioned.

But no, I don't -- I think their fourth quarters are generally their highest quarter of the year.

There's some seasonality there, so they should have a better fourth quarter than the third quarter.

Understood.

And then maybe moving a little bit away from the short-cycle businesses to Deltek.

I know it's been mentioned for a couple of quarters that there's a bolt-on M&A sort of going on there.

Is that still the plan for Deltek moving forward?

It seems like the bookings growth is doing quite well.

Just wondering if that was still a strategic focus of the business.

Sure.

I mean it is and has been and for a long time, it even predates our ownership.

Deltek sort of did 1-ish bolt-on a year before we owned it for several years.

We're probably at that pace or maybe just a touch higher in our ownership.

And we would expect that to be the case going forward.

Understood.

And it seems like the -- and moving on to CCC.

Just in the new construction business, seems like you had the expected strength that you sort of called out in previous calls.

Just kind of wondering where that you view that strength of the LNG pipeline in terms of -- is it still extremely early innings?

Or 4 to 6 quarters seems like a reasonable baseline time line for that?

Yes.

So what's characterized is some of these projects that are in development are actually smaller and quicker to come online than what we may or might have seen 5 and 8 years ago.

So in the past, there would have been multiple years, so I think your 4 to 6 quarters is probably more in line with the expectations.

They might drag out a little bit longer as you know these projects do, but these are not 5- to 10-year projects or 3- to 7-year projects.

They tend to be smaller and quicker to turn on.

And we'll go next to Steve Tusa at JPMorgan.

Appreciate the use of the Thermo Socratic coaching.

I was a political science major.

I'm not quite sure what that means, but I kind of get it.

On the software businesses, I guess the Application Software business, I mean I read all these other companies' transcripts, and I don't quite know what I'm reading, but they use the term bookings a lot.

How was the booking, like the organic bookings growth as you guys define it for, I guess, that segment?

Oh, Steve, so let me socratically walk you through this...

I need some -- I clearly need some coaching as well, so I'd just appreciate a little color there.

Yes.

But -- so for the segment now, we got to go company by company around bookings, right?

So I mean that's a harder question to answer because it's -- we don't roll anything up at the segment level...

Maybe, sorry, I just mean bookings and GAAP sort of bookings.

New.

Yes.

So -- sure.

So bookings in this case is -- or another term you might hear us use is order intake.

So it's what is -- what businesses actually contracted in a period of time.

And you have to deal with fair amount of sort of equivalency between the perpetual deal and a SaaS deal.

And so -- and then -- and obviously, when you book something, you got to have double-digit bookings.

And then if it's all SaaS, then it's going to take 4 quarters for that to get into the run rate.

So your GAAP revenue will lag -- sort of lag that a little bit.

And then on perpetual, you might book something in the second quarter and you might not be able to recognize the revenue because of some delivery in the software that might be pushed out a quarter or 2 as things are being implemented.

So bookings is just a little bit more order intake.

It's a little bit more of an early read of the business activity that's ongoing in the company.

So in Deltek's case, which we highlighted, we had the hard comp against the wonderful second quarter of last year.

Which, by the way, is a great problem to have because we won so much business on a perpetual basis a year ago.

And when you sort of normalize for the outsized perpetual growth a year ago at Deltek, bookings were up double digits this quarter.

So the activity inside that business we view as healthy.

Got it.

Okay.

And so that's up.

And inside that business, that was up like, I don't know, those bookings are up like double digit or like high singles?

Is that kind of what gives you confidence for the second half and in the next year, if you will?

That's right.

It's a combination of the bookings, and then you're also looking out several quarters of pipeline coverage and pipeline sort of conversion rates and things.

But the combination between that and the near-term bookings is what gives us the confidence.

Okay.

Was there any -- were there any businesses in that Application Software side that were down on revenue?

Well, in that, we know your favorite topic of Sunquest is in the segment, and it was down mid-singles as we expect.

They actually did modestly better here in the quarter and the first half than we thought.

But other than that, everything was up pretty much.

Okay.

That's great.

And then one last one, acquisition pipeline.

Standard question.

Anything -- are you bullish about -- any more bullish about the second half relative to a couple of months ago?

Anything loosening up?

Or does the kind of macro environment delay some of the activity you may have thought you would have seen?

I would say we feel the same today as we felt last quarter and the quarter before.

I mean the market and the activity is there, it's robust, there's lots of work.

We're looking at lots of things as we always do.

And you just never know until the very last minute in a deal if it's going to sort of one that we actually want to execute and one that we could actually win from a value and contractual terms perspective.

But it's steady as she goes on the M&A front.

Yes.

There's nothing in the macro environment that impacts these deal processes at all.

They're humping and ...

And we'll go next to Joe Giordano at Cowen and Company.

So now that we're getting into a little bit of an industrial cycle, I guess the question that you guys typically get asked will get asked a lot more, like how does this make you think about some of your industrial businesses from a long-term basis?

Has it become somewhat of a nuisance when 8% of your company become something that gets talked about more than 8% of the time as we enter these types of things?

And how do you think about the positioning of those businesses within the context of Roper long term?

Yes.

So it's -- first, these businesses are amazing.

I would just draw you to the profitability of both the industrial businesses and the process segments, right?

They're amazing businesses, they're clear leaders and they're niche.

They're just -- they're fantastic.

Yes, they have a little bit of cyclicality associated with them, but we've worked over the last decade to meaningfully reduce the cyclicality.

We're roughly 50% tied to these businesses, these more cyclical businesses a decade ago, and now we're about 20%.

And so that trend will continue as we deploy the capital going forward.

We're generally deploying things that don't have a large cyclical component, so continue to deemphasize sort of the cyclical aspects.

But they're great businesses and it's -- and we like them in the portfolio.

And they're designed to be incredibly profitable at all points of the cycle, right?

They're -- as you know, we're always looking at the breakeven analysis, what's the fixed cost, what's the variable cost.

Our business leaders are very, very proactive, so they're always going to generate a lot of cash in all environments and they're positioned to succeed over the long term.

So we believe we're a great owner for those businesses.

Okay.

Yes, you guys have been very consistent with that answer over time, so appreciate that.

Are there any specific cost actions that you're looking at as we enter this period over them?

Like is there any unique cost-out opportunity that you now you can execute as things kind of slow for them?

I wouldn't say unique, but what maybe is unique about the Roper model, and this is just building on what Rob said, is these businesses structurally are highly variable in their nature, thereby structural, right?

So any sort of cost actions can happen pretty quickly and without lots of sort of risk or cost to get the cost out, if you will.

And so the companies also naturally start feeling and pulsing their way when they feel softness and take the actions out any sort of direction from us, right?

And so we're certainly talking with them and understanding what they're doing and making sure their assumptions are aligned with our assumptions about what the future looks like, and then they go about doing what they do in managing their businesses.

Okay.

And maybe last from me.

Just curious about your -- the outlook.

Maybe from your customer standpoint about some of the commercial building sectors that you're exposed to, and I know there's some nuance with some of your businesses, whereas if some construction volumes go down a little bit, it actually is good for like a business like ConstructConnect as they meant you to help in finding the work.

But just generally, like what are your -- are your customers kind of getting raised antennas about the health of the -- or directionality of their businesses over the near term off very robust levels?

Yes.

Hard to get a read across that.

Like you said, in our ConstructConnect business, which is in the preconstruction part of commercial real estate development, we actually root for a modest -- a neutral to slightly positive, slightly bearish market because that increases the value of what we deliver to our customers.

But it's -- I don't have, as we sit here today, a great read across or readthrough from ConstructConnect on broader construction themes.

So (inaudible) and I wouldn't help you there.

And that does conclude our question-and-answer session for today's call.

And at this time, it's my pleasure to turn the conference back over to Zack Moxcey.

Thank you, everyone, for joining us today, and we look forward to speaking with you during our next earnings call.

And once again, ladies and gentlemen, that does conclude today's conference.

And again, I'd like to thank everyone for joining us today.