Roper Technologies - Q2 2023
July 21, 2023
Transcript
Operator (participant)
Good morning. The Roper Technologies conference call will now begin. Today's call is being recorded, and all participants will be in listen-only mode. Should you need operator assistance, please signal a conference by pressing the star key, followed by 0. Now I'd like to turn the conference over to Zack Moxcey, Vice President of Investor Relations. Please go ahead, sir.
Zack Moxcey (VP of Investor Relations)
Good morning, thank you all for joining us as we discuss the 2nd quarter 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, Vice President of Finance. Earlier this morning, we issued a press release announcing our financial results. The press release also includes replay information for today's call. We have prepared slides to accompany today's call, which are available through the webcast and are also available on our website. If you'll please turn to Page 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. Now, please turn to Page 3. Today, we will discuss our results primarily on an adjusted, non-GAAP, and continuing operations basis. For the second quarter, the difference between our GAAP results and adjusted results consists of the following items: amortization of acquisition-related intangible assets and the 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'll please turn to Page 4, I will hand the call over to Neil. After our prepared remarks, we will take questions from our telephone participants. Neil?
Neil Hunn (President and CEO)
Thanks, Zack, and thanks to everyone for joining our call. We're looking forward to sharing our second quarter results with you this morning, which, like Q1, were quite good. As we turn to Page 4, let's look at today's agenda. I'll start with our second-quarter enterprise highlights, then ask Jason to share our financial results. After that, we'll turn to our segment-specific discussion and wrap up outlining our increased 2023 enterprise guidance. Let's go ahead and get started. Next slide, please. As we turn to Page 5, the four main takeaways for today's call are, first, we continue to perform extremely well and had a very strong second quarter, another demonstration of the quality of our portfolio of businesses. Second, we're increasing our full-year guidance, both in terms of total and organic revenue growth and adjusted DEPS. Third, Generative AI.
We're very excited by the promise of this technology and outline reasons why today. Fourth, we remain very well positioned for disciplined capital deployment. As it relates to the first takeaway, a strong start to the year and a solid second quarter, we saw total revenue grow 17% and organic revenue grow 9%. Consistent with our long-standing strategy, we continue to not only scale our enterprise, but also simultaneously improve its underlying quality and recurring revenue base. Importantly, we had very strong cash flow performance, with free cash flow growing 17% in the quarter. Our results this quarter are another proof point that our higher quality, less cyclical portfolio was purpose-built to consistently perform at a very high level.
Given the strong second quarter, we're increasing our full-year total revenue growth to be around 13%, increasing our organic revenue growth to be around 7%, and increasing our full-year DEPS guidance to be in the range of $16.36 to $16.50, or up $0.23 at the midpoint versus our previous guidance of $16.10 to $16.30. Third, relative to GenAI, we feel we're structurally advantaged and excited by this technology, as our vertical and application-specific businesses will use their specialized market positions and knowledge to provide context to these enabling technologies, both to create customer value and internal productivity gains. More on this during today's call. Finally, we continue to be well-positioned relevant to capital deployment. We remain active in the market as we evaluate and actively diligence many high-quality opportunities.
Jason, I'll turn the call over to you so you can walk through our second quarter results and our very strong financial position. Jason?
Jason Conley (EVP and CFO)
Thanks, Neil. I hope everyone is doing well this morning. Turning to Slide 6, the second quarter was another good post in 2023. Revenue came in at $1.53 billion, which was up 17% over prior year. Organic growth was 9%, which was led by 8% software recurring revenue growth across the enterprise, and outsized growth 19% in our tech-enabled product segment. EBITDA increased 20% to $617 million, with EBITDA operating leverage of 46%. Notably, margin expanded across all three segments in the quarter. DEPS of $4.12 was $0.12 above the high end of our guidance range and 20% above prior year. DEPS growth was in line with EBITDA growth, given the offsetting impact of a higher tax rate and lower net interest expense.
Moving to free cash flow, as a reminder, the second quarter is always our lowest conversion quarter in the year as we make two federal tax payments. We delivered $295 million in free cash flow in the quarter, which was up 17% over prior year. As I have previously mentioned, Frontline's cash flow is seasonally weighted to Q3 and Q4, especially in Q3. This is in line with their K-12 customers' annual renewals. We expect a meaningful increase to cash flow in the second half. Taking a broader view of cash flow on this slide, recall that we acquired Vertafore in 2020 and had a one-time cash tax benefit of $120 million, of which about $60 million benefited the second quarter of 2021.
We've therefore had very strong multi-year cash flow performance when normalizing for this 2021 tax item. For the year, we are confident that free cash flow will be greater than 30% of revenue. Turning to our balance sheet on Slide 7, our net leverage sits at 2.2 times at the end of the quarter, with about $6.7 billion of debt and just under $1.5 billion of cash against our TTM EBITDA of $2.35 billion. Our $3.5 billion revolver remains fully undrawn. To summarize, we have significant acquisition capacity and remain quite active in many bespoke processes.
To that end, in Q3, we expect to close on Replicon, which is a bolt-on acquisition for our Deltek business, with a purchase price of $450 million, or about $370 million net of a long-term cash tax benefit. Neil will discuss the details around this exciting addition to the Deltek platform in the segment discussion. With that, I'll turn it back over to Neil to talk about our segment performance and outlook. Neil?
Neil Hunn (President and CEO)
Thanks, Jason. Let's turn to Page 9 and walk through our Q2 highlights for our application software segment. Revenues here were $770 million, up 6% on an organic basis, and EBITDA margins increased to 43.7% in the quarter. In this segment, we continue to see consistently strong performance across the entire group of companies. We'll start with Deltek. Deltek was once again solid across both their government contracting and private sector businesses. Importantly, Deltek continues to see momentum build with their SaaS offerings, and retention rates remain at historically high levels. In the quarter, as Jason mentioned earlier, we announced the acquisition of Replicon for Deltek, Roper's largest bolt-on to date. Replicon is a market-leading timekeeping and workforce management SaaS solution focused on professional services firms, and it's highly complementary to Deltek's strategy.
We expect Replicon to contribute north of $70 million of revenue and $24 million of EBITDA next year. We expect the deal to close during the third quarter. As it relates to Deltek, we wanted to brag on them for a moment. During the quarter, the Washington Post awarded Deltek the number four top workplace in the D.C. metro area for large companies. As you know, we have a closely held belief that talent and culture can create long-term competitive advantage. This is certainly the case for Deltek. During Roper's ownership of Deltek, the company has increased its organic growth rate, retention levels, recurring revenue, and margin structure. A big contributor to that success is the structural talent advantage that Deltek continues to build. Congrats to Mike. Congrats to your entire team.
Aderant, our software business focused on the needs of law firms, continues to be excellent. In the quarter, Aderant saw record bookings and continued success in the adoption and cross-sell of their SaaS solutions. Also, and importantly, during the quarter, Aderant launched their generative AI enabler, MADDI. Today, MADDI is enabling two solutions: outside counsel guidelines management and time entry, with plans to extend this to AR cash receipt matching and docketing over the coming months. Over time, MADDI will be integrated widely across Aderant's product platforms. Generative AI for the legal space has tremendous potential. One such example in the market today is Onyx. Onyx, powered by MADDI, solves a massive challenge that all law firms face, namely, how to navigate outside counsel guidelines or the billing requirements that clients impose on their law firms.
It's fairly common for a large law firm to have to navigate hundreds of thousands of bespoke client billing requirements. Today, Onyx uses generative AI to extract contractual terms and convert them into business rules used in the time entry and billing processes, a true game changer. More broadly across Roper, we're excited about the potential of generative AI and large language models. We believe, given our deeply verticalized and application-specific business model, that our businesses are structurally advantaged, given that all AI, computational and generative, need context, specifically data and workflows in which to train or target the technology. Internally, we're working closely with our businesses on the productivity and product-enabled opportunities associated with GenAI. Certainly, much more to come on this. Now back to the segment performance in Vertafore, our software business that tech-enables property and casualty insurance agencies.
Vertafore continues to be a great asset for us, with solid performance across their core P&C business and their recent MGA Solutions bolt-on. Our healthcare IT businesses also performed very well in the quarter, with growth in each of our healthcare IT franchises, Clinisys, Data Innovations, and Strata. Frontline also continues to deliver for us. Frontline's mission is to empower the frontline of education. As many of you know, the hiring of teachers and administrative staff is particularly challenging, and Frontline software solutions better equip K-12 school districts to navigate these challenges. Because of this, Frontline Solutions are mission-critical and of high importance to their school district customers. As such, Frontline's net retention is consistently strong. Looking to the second half of the year, we expect to see organic revenue growth to be in the mid-single-digit area for the segment. Overall, very strong results and outlook for this segment.
Turning to Page 10. Revenues in the quarter for our network software segment were $358 million, up 5% on an organic basis, and EBITDA margins were strong at 54.2%. As with our application software segment, growth and performance was solid across the segment. Relative to business-specific comments, we'll start with the U.S. and Canadian freight matching businesses, DAT and Loadlink, both of which grew in the quarter despite continued challenges across the broader freight and logistics markets. I'll remind you that our businesses are critical to the operation and execution of the North American spot freight market. In addition, and importantly, the spot market is a long-term secular beneficiary in terms of the volume of future freight shipments.
Throughout the freight and economic cycle, DAT and Loadlink continue to innovate and launch new products and offerings to help drive enhanced customer value and share of wallet. As we speak, DAT is launching a generative AI-enabled solution, among other initiatives targeted to combat freight industry fraud. This is in addition to their existing set of computational AI and data science-driven solutions like DAT iQ, which they've deployed at scale over the last three or four years. iPipeline, our network software business that tech enables the distribution channel for life insurance and annuities, had very nice ARR gains in the quarter, driven by strong retention and customer expansion activity. Foundry continued its string of strong performance and had terrific growth for their flagship product, Nuke, which enabled continued double-digit recurring revenue growth.
As we mentioned last quarter, Foundry commenced their subscription pricing transition for Nuke, and in the first half of the year, had north of 60% of their Nuke units sold under their new model ahead of their transition plan. Finally, our alternate site healthcare businesses, led by SoftWriters and SHP, were strong in the quarter. Execution was solid, and the businesses benefited by an improving census in skilled nursing, assisted living facilities, and home health, reaching the highest occupancy levels and patient volumes since the onset of the pandemic. Turning to the second half of the year, we expect to see mid-single-digit organic growth for the segment based on sustained ARR momentum. As we turn to Page 11, revenues in the quarter for our tech-enabled product segment were $403 million, up 19% on an organic basis.
EBITDA margins for this segment were strong at 36.4% for the quarter. Across the segment, business performance and execution was exceptional. Importantly, the broad-based supply chain issues continued to ease. Neptune, our water meter and technology product business, continues to be great. In the quarter, they had a record revenue performance. Importantly, Neptune continues to see increasing demand and momentum for their residential and commercial ultrasonic or static meters. We remain bullish about Neptune and the market in which they compete, given this market tends to be quite steady, as Neptune's customers' budgets are typically fixed year to year and not tied to broader macroeconomic trends or cycles. Verathon was awesome in the quarter as well, with double-digit order growth and tremendous operational execution.
Specifically, Verathon saw strength across their recurring single-use products, both Bronchoscope or Bflex, and video innovation or GlideScope, as well as BladderScan capital purchases. Northern Digital, or NDI, was also strong in the quarter, setting a record revenue for the business. A group of smaller businesses here, IPA, rf IDEAS, and Inovonics, were fantastic in the quarter as they substantially worked through a series of nagging supply chain challenges. Relative to the second half of the year, we expect to see high single-digit organic revenue growth. Recall, we have a tough Q3 revenue and margin comp to lap from the prior year. Please turn to Page 13, and let's review our increased 2023 guidance. Based on our strong second quarter performance, we're raising our full year 2023 guidance for total revenue, organic revenue, and adjusted DEPS.
For 2023, we now expect total revenue growth to be around 13%, an increase from 12%+ last quarter. In addition, we're raising our full year organic revenue outlook to be in the 7% zip code, an increase from 6%-7% last quarter and 5%-6% in our original guide. As a result of our improved revenue outlook, we're increasing our DEPS guidance to be in the range of $16.36 and $16.50, up from our prior guidance of $16.10-$16.30. Assumed in this guidance is a tax rate trending to the high end of our 21%-22% range. Specific to the 3rd quarter, we're establishing our DEPS guidance to be in the range of $4.16 and $4.20.
Please turn with us to Page 14. We'll look forward to answering your questions. We want to leave you with the same 4 points with which we started. First, the year started strong and we delivered solid second quarter results. In the quarter, we saw revenues increase 17% to $1.53 billion. This growth was underpinned with 9% organic revenue growth and 8% organic software recurring revenue growth. EBITDA margins were quite strong at 40.3%. Second, based on the strong second quarter performance, the recurring nature of our revenue stream, and the importance of our solutions to our customers, we're increasing our full year total and organic revenue growth outlook, and increasing our full year DEPS outlook to be between $16.36 and $16.50.
Third, we're excited by the potential of generative AI, both as it relates to internal productivity and using our application specificity to provide context for new product development ideas. We look forward to sharing progress and updates in coming quarters and years. Finally, we continue to be active with our capital deployment activities as we have north of $4 billion of available M&A firepower. As we've been discussing over the past several months, we have a very large pipeline of opportunities, though, as always, we will remain super patient and highly disciplined to ensure the continued optimal deployment of our available capital.
As we turn to your questions, and if you flip to the final slide, our strategic flywheel, we want to once again thank those of you who joined us in New York for our first-ever Investor Day and for the hundreds who have watched the replay over the past few months. During that long form overview of Roper, we were excited to share with you our long-term strategy, the high-quality nature of our portfolio of businesses, our operating ability to improve our businesses, our process-driven capital deployment approach, and our compelling long-term business model that compounds cash flow in the mid-teens area. Thank you for your continued interest in Roper, with that, let's open it up to your questions.
Operator (participant)
Yes, thank you. We will now go to our question-and-answer portion of the call. Request that all callers limit their questions to one question and one follow-up. If you'd like to ask a question, you may do so by pressing star, the key followed by the digit 1 on your touchtone telephone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then the digit 2. Again, we request that callers limit their questions to one main question and one follow-up. The first question comes from Julian Mitchell with Barclays.
Julian Mitchell (Managing Director and U.S. Industrials Equity Research Analyst)
Hi, good morning. Maybe just the first question around in network software, you had a very strong margin performance, up over 200 basis points, of only mid-single-digit organic growth. I just wondered if there was anything driving that, perhaps on mix or anything kind of one time. Also in that division, how are you thinking about second half growth in DAT and Loadlink versus first half?
Jason Conley (EVP and CFO)
Good morning, Julian. It's Jason. Yeah, I mean, I think we had a strong performance across a lot of the businesses. Probably the one standout is our ConstructConnect business. We acquired, we had a bolt-on that we closed last year, we're seeing realizing the benefits from that deal. Then, like I said, beyond that, it's just across the segment.
Neil Hunn (President and CEO)
Relevant to your second question, second half for DAT and Loadlink, you know, are pretty much businesses. We continue to be cautious there and conservative. Held that posture the whole year. DAT performed very well in the quarter. It grew high single digits. The broker part of the business and the data analytics part of the business remained super solid, high retention rates. As we all know, the carrier side of the market, the excess carriers, are trading out of the market, and that has a weighing effect on DAT. We've modeled that in all year long, and it's playing out, you know, generally in line with what we thought here in Sarasota. Maybe a touch better, but we'll just say in line with Sarasota's expectations.
Relevant to the second half for DAT, the big wild card is what happens with Yellow and UPS. I mean, we'll see what happens there. Could be a pickup for the spot market if something were to turn negative on either one or both of those.
Julian Mitchell (Managing Director and U.S. Industrials Equity Research Analyst)
That's interesting. Thank you. Just, you know, as we look at the second half guidance you called out in TEP, the tough comp for third quarter, just one other thing I wanted to check on the back half. It looks like the guidance implies fourth quarter DEPS doesn't really go up much sequentially in Q4. Historically, you know, you've had often a mid-single digit type EPS increase in Q4 sequentially. I just wondered if that was just kind of conservatism in the construct for this year, or if there's anything specific going on.
Jason Conley (EVP and CFO)
Nothing really specific, sequentially. I mean, I think, you know, we've talked about a little bit about just, you know, the seasonal shutdown at Neptune. We've had that historically. I wouldn't point to any conservatism. I mean, we've got sort of networks, you know, still at mid-single digits, so maybe in the prior years, you might have seen some acceleration coming into the fourth quarter, but, you know, nothing really unusual there. What was your first question? Sorry, Julian.
Julian Mitchell (Managing Director and U.S. Industrials Equity Research Analyst)
That was really it. Just around if there was anything on the fourth quarter to kind of call out, it doesn't. It sounds like this year should be fairly typical in terms of seasonality.
Jason Conley (EVP and CFO)
Correct.
Neil Hunn (President and CEO)
Correct.
Julian Mitchell (Managing Director and U.S. Industrials Equity Research Analyst)
Great.
Neil Hunn (President and CEO)
Thank you.
Julian Mitchell (Managing Director and U.S. Industrials Equity Research Analyst)
Thank you.
Neil Hunn (President and CEO)
Yep, thanks.
Jason Conley (EVP and CFO)
Thanks.
Operator (participant)
Thank you. The next question comes from Deane Dray with RBC Capital Markets.
Deane Dray (Managing Director and Multi-Industry & Electrical Equipment Equity Analyst)
Thank you. Good morning, everyone.
Neil Hunn (President and CEO)
Morning.
Jason Conley (EVP and CFO)
Good morning.
Deane Dray (Managing Director and Multi-Industry & Electrical Equipment Equity Analyst)
Hey, can we start with just broadly the tone of business? There was a reference in the first quarter, and I think also at the Analyst Day, that you were seeing some slower customer decision-making. The way I look at this quarter, with the upside, on the organic side and the outlook, has that improved? You know, very specifically, would you measure that in new logos, in SaaS conversions? Just kind of that tone of business, please.
Neil Hunn (President and CEO)
I would characterize it, our software businesses are playing out about as we expected, coming into the year, right? Expecting a little bit of a slowdown. You see delayed decision-making that pushes out, you know, net new sales, but it also has the impact of having higher gross retention because decisions are being deferred. Then also, just the amount of expansion activities that we have, activity we have with our customers is a little bit less, as our customers are just more cautious, as they look forward. That's playing out about as we expected. It's not acute in any one of our businesses. It's just sprinkled across the universe of our portfolio. Relative to TEP, I mean, it was just fantastic.
You know, we had a lot of demand, and the medical businesses remained very strong, especially at Verathon and CIVCO. A lot of supply chain clear up in the first half, especially in the second quarter. We called out. Very rarely do we call out the three small businesses that we did on the slide, but they had just terrific supply chain sort of performance and operational performance in the quarter.
Deane Dray (Managing Director and Multi-Industry & Electrical Equipment Equity Analyst)
Yeah, that's really good to hear. Just as a follow-up, can we talk about the impact AI is having in how you're evaluating M&A candidates? You know, is there AI towards, you know, the barriers to entry? Roper is focused on these deep domain expertise types, of, you know, deep vertical. How do you look at where and how AI might be a threat to these? How do you look at the candidates in terms of where and how AI might advance their business model? Just, you know, what has changed there?
Neil Hunn (President and CEO)
Yeah, I think, it's certainly a consideration today, where, you know, computational AI has been a consideration for a few years. Generative is newer this year. I think the thing that is nice about our portfolio or M&A strategy is it just happens to play into the strength of where generative AI and computational AI is best suited.
Deane Dray (Managing Director and Multi-Industry & Electrical Equipment Equity Analyst)
Mm-hmm.
Neil Hunn (President and CEO)
More verticalized, more application-specific, more intimacy with customers. Our M&A approach is well suited, given the development of these technologies. As always, you've heard us say this for decades, if we're looking in our capital deployment, if there's a zero in the Monte Carlo, if we can envision a doomsday, then we're out. We're just not gonna lean into that. We'll look at, you know. We always look at that, and to the extent we can dream up a zero in the Monte Carlo because of generative AI or computational AI, then we're not gonna consider it in any way. That's not a new thing for us. Anything to add, Jason?
Jason Conley (EVP and CFO)
No, I think that's right. Any sort of content type business, we've always, you know, steered away from, and I think this just accentuates that with the advent of AI, generative AI.
Deane Dray (Managing Director and Multi-Industry & Electrical Equipment Equity Analyst)
Thank you.
Operator (participant)
Thank you. The next question comes from Joe Vruwink with Robert W. Baird & Co.
Joe Vruwink (Senior Research Analyst)
Great. Hi, everyone.
Neil Hunn (President and CEO)
Hey, good morning.
Joe Vruwink (Senior Research Analyst)
Hey, hey, good morning. If I go back to last quarter, I think you referenced the leadership summit and the business unit presidents coming together. This quarter, there was an announcement about iPipeline and Vertafore partnering together on product. Is it maybe possible to connect these two things together? By doing more to share best practices across the operating divisions, can Roper actually uncover incremental product opportunities and maybe offering a broader suite when it comes to certain end markets that are jointly served today?
Neil Hunn (President and CEO)
Yeah, I think there's definitely and demonstrably benefits for getting our leaders together, unequivocally. It's gonna be more in sharing best practices, sharing leadership philosophy, sharing failures and what they learned from the failure. It's gonna be more about how do you lead, how do you manage, how do you inspire teams for, you know, terrific performance. It's gonna be less on connection with the product teams, 'cause most of our businesses are in independent and disconnected markets and swim lanes. So if there's something that makes sense, we'll certainly do it. If it doesn't make sense, we won't. The good news about this particular, you know, iPipeline and Vertafore, is it happened organically between the businesses without any push from the center. You know that's authentic, and it's gonna drive value for our customers.
Joe Vruwink (Senior Research Analyst)
That's helpful. Just on the topic of generative AI, as you say, your businesses, they provide the context that the applications need, growth retention, if anything, is biased higher in many aspects. How do you think about net retention and just participating in new avenues for growth? With some of the early products discussed today, does that really strengthen the core, or is there separate monetization that can happen?
Neil Hunn (President and CEO)
No, no, I think there's definitely monetization that can happen. It'll happen over time. There's no silver bullet in the short run. You know, we play the long game, build for long-term customer value and relationships. There's just massive amounts of value that can be created by doing things with both computational and generative AI. Our relationship with our customers are such that we're, at least for the last, you know, 20 years, we're able to capture our fair share of the value that's created. I don't know why that would be any different going forward. As we all know, there's a tremendous amount of value or productivity to capture inside the four walls of our businesses, using generative AI as well.
Joe Vruwink (Senior Research Analyst)
Great. Thank you very much.
Neil Hunn (President and CEO)
Thank you.
Jason Conley (EVP and CFO)
Thank you. Thank you. The next question comes from Allison Poliniak with Wells Fargo.
Allison Poliniak (Director and Senior Equity Analyst)
Hi, good morning. Just I saw the announcement with IntelliTrans sort of stepping out and partnering with the product, sensor business. Is that something that's just unique to IntelliTrans, or is it something that you're doing to sort of leverage that sort of asset-light business that you have? Just any thoughts there.
Neil Hunn (President and CEO)
No, that's very, very bespoke to IntelliTrans. I mean, there's not an enterprise-wide strategy to do anything like that. If there was, we wouldn't push it down. It's antithetical to what Roper's about, so that's very bespoke to IntelliTrans. Gold star for asking IntelliTrans question, by the way.
Allison Poliniak (Director and Senior Equity Analyst)
you know, it helps when I also cover in transport, so.
Neil Hunn (President and CEO)
Sure.
Allison Poliniak (Director and Senior Equity Analyst)
Just on tech-enabled products, you know, that business continues to outperform organically. You mentioned difficult comps in Q3. Is there any more color you can give us to the cadence between Q3 and Q4 to kind of reach that target, and what sort of drove that outperformance this quarter? Thanks.
Jason Conley (EVP and CFO)
Allison, it's Jason Conley. I think it's pretty consistent cadence in terms of the quarters. You know, what I would say is the outperformance in Q3 was really across the board. We had, you know, Neptune continues to execute really well on their backlog. Their daily sales are up over their plan. You know, healthcare is doing really well in terms of procedures, just executing on a kind of book and ship basis there. Our, some of our product businesses had some backlog that finally got cleared, that really drove the Q3. You know, the second half, like I said, organic growth should be fairly consistent.
It's just what we had last year, we had a lot of black backlog clear in the third quarter that was very high margin products. That's sort of the comp issue that we're lapping in the third quarter.
Allison Poliniak (Director and Senior Equity Analyst)
Great. Thank you.
Neil Hunn (President and CEO)
Thank you.
Jason Conley (EVP and CFO)
Thank you. The next question comes from Terry Tillman with Truist.
Terry Tillman (Managing Director and Senior Equity Analyst)
Yeah, good morning. Can you all hear me, gentlemen?
Neil Hunn (President and CEO)
We can hear you perfect.
Jason Conley (EVP and CFO)
All good.
Terry Tillman (Managing Director and Senior Equity Analyst)
Wonderful. Happy Friday, Neil, Jason, and Zach. Maybe the first question, it's almost technically two questions, but I'm gonna call it one and a half questions. actually back on Deltek, one of your biggest businesses, if not biggest business on the app software side. I'm just curious on the relative health and demand. Somebody earlier asked about macro, but how the government side's performing versus private sector side. The second part of that first question is, it seems like something with Replicon, and I think you said it's about $70 million, you could have some pretty good revenue synergy opportunities. How do you think about that $70 million business, you know, kind of unleashing that product into that large Deltek installed base, and then I had a follow-up.
Neil Hunn (President and CEO)
We'll call that 2 questions, but give you grace. Deltek demand, as we talked about in the prepared remarks, or performance, was solid across both government contracting and private sector. We are encouraged by the pipeline build in the quarter for Q4 and early 2024 in government contracting. There definitely was a little bit of a lull or an air pocket in government contracting relative to the debt ceiling, it's nice to see, you know, activity get back to normalized or maybe slightly better than normalized activities relative to early pipeline build. That was encouraging to see. We've got to see how that plays out, for sure. Replicon, you know, we really like this bolt-on. As we said, it's the largest bolt-on we've done at $450 million, $370 net of the tax benefit.
It's time entry without attachment to an ERP. Time only is a highly demanded solution in the PS world. It is not sold today in government contracting. We have not underwritten into a revenue synergy opportunity. That's not part of the $70 million or the $24 million that we talked about. It is certainly the expectation over time as Deltek takes this product into their core market of government contracting.
Terry Tillman (Managing Director and Senior Equity Analyst)
Got it. Thanks for being generous. Yes, I guess this technically is the third question then. On the idea of the M&A pipeline, you talked about you're just kind of, you know, working through opportunities and bespoke situations, et cetera. Compared to, like, 90 days ago, would you suggest that there's more, you know, it's more actionable on the bolt-ons versus the potential platform deals? Just maybe a temperature gauge on the stock ranking of the two types. Thank you.
Neil Hunn (President and CEO)
Yep. It's been a, an interesting 90 days, so we continue to be active. Our pipeline still skews more towards bolt-ons, for sure. More broadly in the market over the last 90 days, we are encouraged by the fact that there are a couple sizable deals, private, that did not happen because the buyer universe rejected the seller's expectation on value. We view that as the deal ultimately did not consummate. We view that as actually an encouraging sign as an early indicator that valuations are gonna pull in to being more normalized with cost of capital. We're encouraged by that, but still, our pipeline leans into the bolt-on opportunities.
Jason Conley (EVP and CFO)
Yeah, I mean, I would say.
Terry Tillman (Managing Director and Senior Equity Analyst)
That's great. Thank you.
Jason Conley (EVP and CFO)
Yeah.
Terry Tillman (Managing Director and Senior Equity Analyst)
Sorry, Jason.
Jason Conley (EVP and CFO)
PEF is down dramatically year-over-year. There's just a lot of assets that, you know, at some point need to go, and it's been a year and a half now, so we think, you know, it's getting closer.
Terry Tillman (Managing Director and Senior Equity Analyst)
Thanks.
Jason Conley (EVP and CFO)
Thank you. The next question comes from Christopher Glynn with Oppenheimer.
Christopher Glynn (Managing Director and Senior Analyst)
thanks. Good morning.
Neil Hunn (President and CEO)
Good morning.
Christopher Glynn (Managing Director and Senior Analyst)
Hey, wanted to touch on Foundry. Curious if there's any, you know, risk of any fallout or perturbations from labor strife risk, and also if you could revisit the comments on the transition plan for that?
Neil Hunn (President and CEO)
Sure. Foundry, for those that aren't familiar with it's a business and media entertainment that's used in post-production for a process called compositing, where you take a live-action image and a computer-generated image and push them together in a single scene. Think Game of Thrones. Pretty much every scene in Game of Thrones was used, was composited with Foundry software, as is, in almost any high-end production or streaming series. As it turns out, I think this is the first time since 1960, we've had both a writer strike and an actor strike concurrently. The current production of content is ceased. There's still a very active pipeline of things in post, it has no impact currently on Foundry.
The current expectation is the strikes will be resolved this year, and if that's the case, then there'll be very little impact, Foundry next year, as they'll be back in production and sort of catch up. If it extends, you know, beyond this year, yeah, Foundry will likely be negatively impacted to some extent next year. That's just a watch item for us. Your second question, Foundry, this year commenced the transition to a subscription pricing model for their core product of Nuke. This year, you can buy it either as a license or a subscription. As we mentioned, about 60% of, north of 60% of Nuke units were sold on a subscription basis this year. It's a nice transition ahead of their plan.
ARR is growing double digits. Beginning next year, it'll be 100% subscription, no opportunity to buy, in the license format. Going according to a little bit of a head plan.
Christopher Glynn (Managing Director and Senior Analyst)
Thanks for that.
Neil Hunn (President and CEO)
You bet.
Operator (participant)
Thank you. The next question comes from Steve Tusa with J.P. Morgan.
Steve Tusa (Managing Director and Senior Equity Research Analyst)
Hey, guys. Good morning.
Neil Hunn (President and CEO)
Good morning.
Jason Conley (EVP and CFO)
Good morning.
Neil Hunn (President and CEO)
You okay?
Steve Tusa (Managing Director and Senior Equity Research Analyst)
Am I okay?
Neil Hunn (President and CEO)
Yeah. Okay. You sounded a little froggy there. Okay.
Steve Tusa (Managing Director and Senior Equity Research Analyst)
No, no, no. It's just a little bit early. thanks for the concern. I appreciate it. Just a couple of things. Can you just talk about what you expect for third quarter, free cash? Maybe just talk about the deferred revenue drag you guys have had in the first half, what's driving that? Just what are organic bookings year-over-year for the software businesses in the second quarter? Thanks.
Jason Conley (EVP and CFO)
Yeah. You know, as we mentioned before, the Frontline is a new dynamic, right, for Roper, where all of the renewals happen in the third quarter. We're already tracking really strong, just, you know, month to date, if you will, for the renewals there. They actually consume cash in the first half, just to give you a perspective on that. You know, I think we historically have very, you know, strong second-half seasonality. That plus just I think some of the timing of working capital in the second quarter, points to a much better second half. You know, first half, we usually, you know, we pay out incentives.
We had this year, we had that legal settlement, so that even points to sort of that seasonal change for this year. We're, you know, we're still on track to deliver north of 30% of free cash flow to revenue. You asked about the trends on. We kinda look at enterprise software bookings, and it was up sequentially a bit and up year-over-year, not quite as strong as the first quarter, maybe like low singles in area, which is about in line with what we had. You know, it's obviously embedded in sort of our slowdown for the second half for new activity.
Steve Tusa (Managing Director and Senior Equity Research Analyst)
Great. Thanks, guys. Appreciate it.
Jason Conley (EVP and CFO)
Yep.
Operator (participant)
Thank you. The next question comes from Brent Thill with Jefferies.
Dave Bustamante (Equity Research Associate)
Hey, good morning, guys. This is Dave Bustamante-
Neil Hunn (President and CEO)
Good morning.
Dave Bustamante (Equity Research Associate)
-for Brent. Appreciate you taking some questions. Maybe just on the AI theme, you know, appreciate some of the color that you guys gave. What was curious is there some sort of, you know, AI playbook that you guys are laying out for the portfolio companies to be thinking through? Just curious how you're approaching that across the portfolio and appreciate some of those, you know, one-off case studies.
Neil Hunn (President and CEO)
Yeah. Playbook, I would say no. Accelerated education across multiple fronts, yes. What is it? What's the art of the possible? What are the risks? What are the IP ownership issues? How do you get productivity with an R&D? How do you get marketing lead productivity, marketing content productivity, you know, customer service productivity? We're doing a series of teach-ins and learnings that is highly subscribed by our, by our businesses. That's how we're sort of accelerating the learning across the enterprise.
Dave Bustamante (Equity Research Associate)
Got it. That's helpful. You know, maybe wanted to just ask about, you guys often talk about the portfolio being, you know, mostly macro-insulated. You know, I think the macro hasn't been as bad as many have feared, as you guys, you know, kind of think through that, have there been any companies that, as things have softened a little bit, that maybe have stuck out and maybe were a little surprising, where you thought, "Hey, maybe these were a little bit more macro immune than they've been shown up to be?
Neil Hunn (President and CEO)
Look, Jason, I think to our surprise, no. I mean, obviously, the one that gets a lot of attention is our DAT business. It's just truly exceptional last couple of years, and then this year it's moderated. It's still growing. We talked about that quite a bit last quarter. We. Really nothing. I mean, Neptune is solid. As we said in the prepared remarks, their customers' budgets tend to be very fixed year to year and not tied to housing starts, which some people think is the case, but it generally is not. Jason, anything?
Jason Conley (EVP and CFO)
I don't think so.
Neil Hunn (President and CEO)
Any surprises?
Jason Conley (EVP and CFO)
No, not really.
There's really nothing surprising on the cyclical piece. Yeah, I mean.
Dave Bustamante (Equity Research Associate)
Got it.
Neil Hunn (President and CEO)
... as Shannon just pointed out, maybe there was a little bit around government contracting, as I mentioned earlier, on the debt ceiling. It's not a macro point, per se, but that's now clear. At Deltek.
Dave Bustamante (Equity Research Associate)
Understood. Thank you, guys. Appreciate it.
Neil Hunn (President and CEO)
Yeah.
Jason Conley (EVP and CFO)
Thanks.
Operator (participant)
Thank you. The next question comes from Joe Ritchie with Goldman Sachs.
Joe Ritchie (Managing Director)
Thanks. Good morning, guys.
Neil Hunn (President and CEO)
Good morning.
Jason Conley (EVP and CFO)
Good morning.
Joe Ritchie (Managing Director)
Maybe just to round out that free cash flow margin point, going forward now that the seasonality has maybe changed a little bit. Should we think about then, like, the second quarter as being, you know, kind of like a free cash flow margin around 20% going forward as you kinda think about, you know, modeling that business?
Jason Conley (EVP and CFO)
I mean, it's gonna be lower. I'm not sure if I'd point to a specific margin for every year, but we do make two federal tax payments, so that obviously just drags on the second quarter. So it's always gonna be lower than the full year. So that's how I would model it.
Joe Ritchie (Managing Director)
Okay. All right, great. That's helpful. I guess lastly, you know, we talked a little bit about technology-enabled products and the growth this quarter, tougher comps going forward. I'm just curious, is there a way to potentially quantify the supply chain, you know, easing impact that occurred this quarter? Is that gonna continue? I guess, is that part of the headwind then, potentially, as you think about the second half of the year?
Neil Hunn (President and CEO)
That might be hard. We might have to, I mean, mid-single-digit growth is normal for that, for that segment. We got to parse how much might be, you know, strength at Marathon and CIVCO that might be a little bit recurring on top of that, and then the balance would be the supply chain, sort of, pull in a release.
Joe Ritchie (Managing Director)
Okay. We can always follow up offline. Thank you, guys.
Neil Hunn (President and CEO)
You bet.
Jason Conley (EVP and CFO)
Thanks, Joe.
Operator (participant)
Thank you. This concludes our question-and-answer session. We'll now return back to Zack Moxcey for any closing remarks.
Jason Conley (EVP and CFO)
Thanks, everyone, for joining us today. We look forward to speaking with you during our next earnings call.
Operator (participant)
Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.