Q2 2024 Earnings Summary
- Roper's enterprise software bookings increased high single digits in the quarter, showing strong momentum, with multiple businesses like Aderant, Strata, Vertafore, and Frontline contributing to this growth.
- Aderant is experiencing increased customer adoption of its cloud solutions, indicating a multiyear journey of migrating on-premise customers to the cloud and unlocking expansion sales opportunities.
- Roper is successfully integrating generative AI capabilities across its product offerings, with customers looking to Roper for innovation, supporting continued investment and no diversion of IT spending.
- Production efficiency issues at Neptune's mechanical meter production are causing revenue delays, pushing some Q3 revenue into Q4 and impacting margins.
- Application Software margins are expected to decline year-over-year in Q3, with management anticipating stronger performance only in Q4.
- Continued pressure in the freight market is adversely impacting DAT and Loadlink businesses, with the company "bouncing along the bottom" and not expecting improvement in the outlook until it actually materializes.
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Neptune Production Issues
Q: What's causing the production issues at Neptune, and when will it be resolved?
A: Roper's Neptune business is experiencing production inefficiencies with its mechanical water meters due to a loss of focus while expanding static ultrasonic capacity. The issue doesn't require breakthrough improvements, just a return to prior efficiency levels. The company has implemented countermeasures and expects the problem to be resolved within the year, with a catch-up in the fourth quarter. Demand remains strong, and there's no issue with capacity on the mechanical side.
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Enterprise Software Bookings Growth
Q: Can you discuss the high single-digit growth in enterprise software bookings?
A: Roper's enterprise software bookings grew by high single digits organically, indicating positive momentum for future revenue. This growth was broad-based, with strong contributions from businesses like Strata, Aderant, Vertafore, and Frontline. Deltek's bookings were still down slightly, but overall, the company is optimistic about the software segment's outlook into 2025.
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Deltek GovCon Weakness and Outlook
Q: What's driving the bookings weakness in Deltek's GovCon segment, and will it improve?
A: The slowdown in Deltek's GovCon segment, especially among large enterprise customers, is due to government spending uncertainty. However, there was some encouraging enterprise bookings activity in the second quarter. The company doesn't anticipate seasonal or election-related impacts and notes that achieving FedRAMP compliance will unlock SaaS migration opportunities in this segment.
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Aderant's Cloud Transition
Q: How is Aderant progressing with its customers moving to the cloud?
A: Aderant continues to gain market share and is in the early stages of a multi-year journey to transition customers from on-premise to cloud solutions. Approximately a few dozen conversions have occurred over the last few years, and the adoption of cloud services is accelerating, opening up expansion opportunities.
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Freight Market Outlook
Q: What's the outlook for the network software business amid the freight market conditions?
A: The network software business has been impacted by the freight recession over the past several quarters. While volumes were flat in the quarter, there are some early signs of improvement, such as stable to slightly improving spot market volumes and increased freight rejection rates. The company believes they're bouncing along the bottom and isn't projecting a recovery until they see more definitive signs.
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M&A Market Opportunities
Q: Are you optimistic about M&A opportunities this year?
A: Roper remains very optimistic about M&A opportunities, noting a significant amount of pent-up demand and an encouraging volume of potential deals. Market dynamics, including more reasonable valuations as sponsors adjust expectations, are favorable. The company is proactively engaging with sponsors to pursue high-quality assets.
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Pricing Power in Software Businesses
Q: Is it getting harder to achieve year-over-year price increases in software?
A: Roper hasn't experienced outsized pricing benefits in its software businesses over the last couple of years. Pricing remains a part of the growth strategy to offset attrition on the ARR base, but the company didn't rely heavily on price increases historically and doesn't expect significant changes going forward.
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ConstructConnect and Deltek Construction Markets
Q: Are you seeing any impact from weakening construction starts on ConstructConnect and Deltek?
A: Both ConstructConnect and Deltek's construction vertical are performing well. Deltek continues to see strong pipeline activity and bookings in its construction segment, focusing on small and medium-sized customers. ConstructConnect has achieved double-digit bookings growth for four consecutive quarters, driven by strategic focus on trade contractors and building product manufacturers, as well as strong execution.
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Neptune Product Mix and Margins
Q: What's the current mix between ultrasonic and mechanical meters at Neptune, and are there margin differences?
A: While specific mix details are not disclosed for competitive reasons, the market is clearly moving towards static ultrasonic meters. Currently, the margin profiles of the ultrasonic and mechanical products are similar-ish.
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CrowdStrike Incident Impact
Q: Has the CrowdStrike incident earlier this week impacted your businesses?
A: The incident has been a non-event for Roper. Based on available information, the company doesn't anticipate any impact on its businesses.
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