Roper Technologies Inc
F:ROP
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Earnings Call Analysis
Q3-2024 Analysis
Roper Technologies Inc
In the third quarter, Roper Technologies showcased an impressive financial performance, with total revenue rising by 13% year-over-year to $1.76 billion. This growth was largely driven by acquisitions, which contributed 9% to the revenue, while organic growth accounted for 4%. Notably, the company's EBITDA increased by 10%, reaching $717 million, resulting in an EBITDA margin of 40.7%. Free cash flow also saw a significant boost, growing by 15% in the quarter and 20% on a trailing twelve months (TTM) basis, which is a strong indicator of the company's financial health.
Roper Technologies recently completed the acquisition of Transact Campus for a net purchase price of $1.5 billion, which is expected to generate approximately $325 million in revenue and $105 million in EBITDA for the upcoming year. This acquisition fits well within Roper's strategy of acquiring mission-critical software solutions in niche markets, specifically aimed at enhancing the student experience in higher education. The initial customer feedback from this acquisition has been positive, indicating a promising integration with Roper's existing Seaboard business.
The company has raised its total revenue growth outlook for the full year to exceed 13%, reflecting the anticipated contributions from the Transact acquisition. While the guidance for organic revenue growth remains steady at around 6%, Roper is optimistic about improving quarterly performance, especially with enterprise software bookings growing in the double-digit range, up from high single-digits in previous quarters. For the fourth quarter, adjusted diluted earnings per share (DEPS) is projected to be between $4.70 and $4.74. The new acquisition is expected to have a slightly dilutive effect of about $0.03 on DEPS for the quarter.
Within the Application Software segment, total revenue grew by 23%, with organic revenue up 5.5%. The strong performance is attributed to improvements in enterprise software bookings, which have shown increasing momentum. The Neptune business, facing recent production challenges, has resolved its mechanical meter issues and is now poised to contribute positively going forward. The management expects this segment to see mid-single-digit organic growth in the final quarter of the year.
Roper's financial strategy continues to focus on generating substantial free cash flow, which is anticipated to exceed 30% of revenue for the year. With a net debt of $8.1 billion, yielding a leverage ratio of 3x EBITDA, Roper maintains significant flexibility for capital deployment, with over $4 billion available for future acquisitions. The management expresses confidence in pursuing additional M&A opportunities, as the market appears to be favorable for attractive acquisitions.
Overall, the company remains optimistic about the market's recovery and its impact on enterprise software and other segments. Roper's diversified portfolio and strategic acquisitions position it well for sustained organic growth in the coming quarters. The focus on customer intimacy and mission-critical solutions across markets such as education and healthcare underpins its long-term growth potential, suggesting that investors can expect continued positive performance.
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Good morning. The Roper Technologies Conference Call will now begin. Today's call is being recorded. [Operator Instructions].
I would now like to turn the call over to Zach Moxcey, Vice President and Investor Relations. Please go ahead.
Good morning, and thank you all for joining us as we discuss the third quarter 2024 financial results for Roper Technologies. Joining me on the call this morning are Neil Hunn, President and Chief Executive Officer; Jason Conley, Executive Vice President and Chief Financial Officer; Brandon Cross, Vice President and Principal Accounting Officer; and [Shannon O'Callaghan], Senior Vice President of Finance. Earlier this morning, we issued a press release announcing our financial results. The press release also includes replay information for today's call. We have prepared slides to accompany today's call, which are available through the webcast and are also available on our website.
And now if you 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. And now please turn to Page 3. Today, we will discuss our results primarily on adjusted non-GAAP and continuing operations basis. For the third quarter, the difference between our GAAP results and adjusted results consist of the following items: amortization of acquisition-related intangible assets, the financial impacts associated with minority investments; and lastly, transaction and restructuring-related expenses associated with the completed acquisition of Transat campus. Reconciliations can be found in our press release and in the appendix of this presentation on our website.
And now please turn to Page 4, I'll hand the call over to Neil. After our prepared remarks, we will take questions from our telephone participants. Neil?
Thank you, Zach, and thanks to everyone for joining our call. We're looking forward to sharing our third quarter results with you this morning. As we turn to Page 4, we'll see the topics we'll cover today. Also by highlighting our third quarter financial performance, Jason will then go through our financial results in greater detail, review our balance sheet, including our M&A capacity and discuss our very strong cash flow performance. Then I'll walk everyone through a summary of our most recent acquisition, Transact campus, then discuss our second highlights and review our increased guidance for the full year. After our closing remarks, we'll open the call for your questions. So let's go ahead and get started.
Next slide, please. As we turn to Page 5, the 4 key takeaways for today's call are: first, we again delivered another solid quarter results and expect an expectation in sequential organic revenue growth heading into Q4. Second, we completed the TransAct Campus acquisition, a very attractive business at a very attractive net purchase price. Third, we're raising our full year items to the high end of our range. And fourth, we continue to be very well positioned relative to executing on our capital deployment strategy. Now digging a bit deeper into these 4 key takeaways. We grew total revenue by 13%, organic revenue by 4% and EBITDA by 10%. Importantly, we grew free cash flow by 15% in the quarter and by 20% on a TTM basis. Operationally, in the quarter, Neptune performed slightly better than our expectations as a result of last quarter's mechanical meter production challenges.
And also importantly, we're encouraged to see strong organic enterprise software bookings momentum continue this quarter, growing in the double-digit area, up from last quarter's high single-digits bookings growth. Also in the quarter, we completed the acquisition of TransAct Campus. Our Seaport business is being combined with TransAct and the integration activities are well underway. This is yet another very compelling value creation opportunity for our shareholders which we'll discuss in a bit. Based on strong enterprise margin performance, we're increasing our full year 2024 debt guidance to the high end of our range. In addition, we're increasing our outlook for total revenue growth to be 13% plus given the addition of our most recent acquisition, Transact campus.
Finally, we're maintaining our approximate 6% organic revenue outlook for the year. If we step back a bit, we recognize we just posted back-to-back 4% organic growth quarters, although not unexpected, without question unsatisfied. That said, we do see quarterly organic growth momentum improving and expect our Q4 organic growth to sequentially improve, given back-to-back quarters of strong enterprise bookings growth, stabilizing freight market conditions, albeit at the bottom or resolved Neptune operational issue and NDI returning to growth in Q4. So with this mostly behind us, we're confident we're seeing a reacceleration of our growth.
And finally, we continue to be very active on the M&A market, an environment that continues to improve and one where we have a very large pipeline of highly attractive opportunities. We continue to be quite bullish about our ability to be active on the M&A front. So with that, Jason, let me turn the call over to you, so you can walk through our quarterly and full year financial results as well as our very strong financial position. Jason?
Thanks, Neil, and good morning, everyone. Let's take a look at Slide 6. Revenue was $1.76 billion and up 13% over prior year. Acquisitions contributed 9% led by [indiscernible] and TransAct Campus and organic growth was 4%. Just unpacking organic growth a bit. In [indiscernible] Software, revenue grew over 5% with recurring and reiterate growth in the high single-digit area. Nonrecurring revenue was down low single digits, led by declines in new license sales. New business activity for enterprise software continues to lean towards SaaS, which ultimately creates higher customer lifetime value while yielding a slight drag on near-term nonrecurring revenue. In Network Software, recurring revenue growth of 1% includes temporary headwinds at DET, Link and [indiscernible]. The balance of the segment saw growth in the mid-single-digit area. As Neil will discuss later, we see stabilization in freight markets and expect some improvement in Q4. Organic growth of 4% was underpinned by strength at Verathon and prior year comp challenges at NDI [indiscernible]. As we discussed last quarter, NDI had a very significant customer program in 2023 that created year-to-date comparison challenges. However, we expect a return to growth in Q4. Separately and importantly, Neptune rapidly resolved its mechanical meter production challenges in the quarter.
EBITDA of $717 million was 10% over prior year, and EBITDA margin came in at 40.7%. The DEPS, we posted $4.62, which was above our guidance range of $4.50 to $454 million. Of note, the Transact acquisition contributed $0.03 in the stub period as the third quarter is seasonally the highest driven by fees from annual tuition payments and annual renewals of term licenses. Excluding Transact, our guidance beat came from strong over margin performance in our Application Software segment. Turning to free cash flow. We had our highest ever quarter with free cash flow of $719 million, up 15% over prior year. Transact was cash accretive in the step period of ownership and off to a fast start with Q3 being once again seasonally strong for this business. We also have a simply great execution across our software and tech product businesses. Of note, net working capital as a percent of revenue, excluding acquisitions, was negative 19%, a new Q3 record. A special thanks to our world-class finance teams across the Roper family, who are laser-focused on cash returns and cash flow growth, tremendous job. The bottom-right chart provides a trailing 12-month view of free cash flow over a 4-year period.
The CAGR from the corresponding 2021 period is 12%. We adjust for the Section 174 that went into effect in 2022, we've compounded cash flow in the mid-teens area. The strong Q3 results places our year-to-date cash flow at 31% as a percentage of revenue. And with renewal season at many of our software businesses in Q4, we expect free cash flow margin to be north of 30% for the year. Turning to Slide 7, I'll now discuss our balance sheet. So net debt of $8.1 billion on trailing EBITDA of $2.75 billion yields leverage of 3x at the end of the quarter and a bit lower if we proforma for the recent acquisitions. In the quarter, we entered the bond market and issued $2 billion across 5-, 7- and 10-year tenors for a blended rate of 4.8%. This was used to fund the Transact deal and partially pay down the revolver, which has a quarter end balance of $925 million. As we move forward, our strong cash flow and use of investment-grade leverage provides us with $4 billion or more of capacity to deploy towards high-quality acquisitions.
With that end, I'll turn it over to Neil to talk about the Transact deal and its compelling combination with our Seaboard business. Neil?
Thanks, Jason. Let's turn to our most recent acquisition review. Transact campus is another fantastic addition to the Roper portfolio. Let's start with the investment highlights. We paid $1.5 billion net of a $100 million tax benefit for the business. We expect Transact to deliver about $325 million of revenue and $105 million of EBITDA next year, which means we paid about 14x EBITDA. We expect this business to contribute next year.
TransAct is adjusted debt breakeven this year to be accretive to our adjusted depths next year and immediately cash flow accretive. And we will report Transact as combined with Seaboard at our Application Software segment. On a stand-alone basis, Transact meets all our long-standing acquisition criteria, leader in the niche market, delivers mission-critical, verticalized software solutions, competes based on customer intimacy, operates an asset-light business model and is led by a skilled, passionate leadership team.
Let's talk about what the company does. Transact is a leading provider of mission-critical and purpose-built software and integrated payments to higher education institutions in 2 focused areas. First, in Campus Identity Management and second, related to tuition management. The market itself is quite attractive and in the midst of the long-term secular tailwind of universities working to improve the on-campus experience required to attract and retain the next generation of students. We estimate the combined market size to be in the $1.5 billion range and growing 6% to 8% per annum. As previously mentioned, we're integrating our Seaboard business to Transact. Seaboard will combine its university campus business without Transact creating a leading provider of these solutions. We expect a long-term organic growth rate of the combined business to be in the high single-digit area.
The go-forward leadership team has been announced, the 2025 $20 million cost synergy plan is well underway, and the initial set of customer feedback has been quite positive. As you can see, Transact is a highly compelling value creation opportunity for Roper and our shareholders. As we turn to Page 10, let's review our Application Software segment results. Revenue here grew by 23% in total and organic revenue grew by 5.5%. EBITDA margins were 43.6% and core margins improved 20 basis points in the quarter. Before getting into the business specific details, I would like to share a few macro trends we're seeing across this segment. First, we continue to see improving organic enterprise bookings performance growing in the double-digit area in the quarter following HSD growth in Q2. Importantly, the enterprise class customer sluggishness we saw during 2023 and the first quarter of this year appears to be waning. Finally, we continue to see strong growth in recurring and reoccurring revenue in this segment growing in the high single-digit area in the quarter.
Turning to our business unit specific commentary, we'll start with patterns. Our software business focused on the needs of large law firms. Aderant continues to perform incredibly well in the market and had another great quarter. Over the past few quarters, we have highlighted Aderant's improved product development velocity and in particular, with Gen AI-powered features. Now this innovation activity is adding to their already strong bookings momentum, including very nice new customer additions and continued progress in adding new and expanded products within their existing customer base. Deltek, our software business serving government contracting, architecture, engineering and construction markets was strong in the quarter as well. In particular, Deltec enterprise class government contracting customer activity improved in the quarter, which is encouraging to see. Also, and as a reminder, Deltek continued their ongoing cloud-based software momentum and expanded their Gen AI embedded functionality.
PowerPlan, our financial planning and tax software that is serving heavy fixed asset industries continues to impress with their operating and financial results. PowerPlan has done a tremendous job over the last 3 or 4 years on improving their customer experience, coloring their software innovation velocity and improving upsell, cross-sell activity. Great job by Joe and his team in Atlanta. Frontline continues to perform nicely and had strong renewal activity and delivered excellent seasonally high cash flow. Of note, we're excited to announce Matt [indiscernible] as Frontline's new CEO. As some of you may recall, Matt joined Roper as Deltek's go-to market leader, then was promoted to be the CEO of ConstructConnect. Matt did a wonderful job at ConstructConnect and we're excited about having this growth-oriented leader at the helm at Frontline.
Also of note, we promoted Buck Brody, ConstructConnect's CFO, to assume the CEO role. Buck has been on the Roper ecosystem, mostly as a CFO over the past 13 years. This is one of the first though certainly not the last time we'll promote leaders across and within Roper. We continue to remain quite bullish about the future for frontline. Our healthcare IT businesses led by Strata and data innovation were also strong in the quarter and delivered excellent growth. Finally, Procare continues to execute well. Importantly, as part of our evolving governance processes tied to faster growth or maturing leader nature of our portfolio, Procare is working to improve its go-to-market capabilities from lead generation to deal execution as well as the market leadership.
We really like what we're seeing here, although it's early days. As it relates to the guidance for the final quarter of the year, we expect to see mid-single-digit organic revenue growth. Please turn to Page 11. Organic revenue in our Network Software segment grew 1% in the quarter and was impacted by the fact we continue to experience pressure with our Freight Matching businesses and work through the impact on foundry from the recent actors and rider strikes. Excluding our Freight Matching businesses and foundry, the segment grew in the mid-singles area, which demonstrates the underlying quality of this group of businesses. EBITDA margins continue to be strong at 56.2%. Let's dig into the details and start on their Freight Matching businesses, DAT and Loan, which declined slightly as expected due to the continuing challenging freight market conditions that adverse impact from the businesses.
That said, we continue to see further signs of market stabilization for both carriers and brokers. During this softer period, DAT continues to invest to accelerate new product development philosophy. Now let's turn to the foundry, our postproduction media and entertainment software business. Foundry continued to roll out innovative product updates and ML-powered functionality this quarter, meaningfully enhancing the creative process for high-quality production visual effects. Given the continued impacts related to the recent industry strikes, Foundry declined in the quarter as expected. We now expect the hangover from the strikes to carry into next year as Foundry's customers continue to navigate through tight economic conditions until the creative pipelines matriculate to the post-production phase, which we expect to be sometime during 2025.
As mentioned, the balance of this segment grew mid-singles organically in the quarter with solid execution across this portfolio. In particular, ConstructConnect continued its solid march of improved financial results and bookings momentum. In addition, ConstructConnect continues to lead the market with their Gen AI power takeoff and estimating solutions. Finally, our alternate-site health care businesses performed well led by our software solutions at MHA, SoftWriters and SHP, and further benefited from improved senior care occupancy.
Turning to the final quarter of the year, we expect organic revenue to improve a bit, but remain in the low single-digit area as we continue to experience stable but need freight market conditions. Now please turn to Page 12 and let's review our TEP segment's results. Revenue here grew 4% in total and on organic basis, and EBITDA margins came in at 35.4%. We'll start with Neptune. Neptune rapidly resolved our mechanical meter production issue within the quarter, performing slightly better than we anticipated. Importantly, during the short-term bespoke manufacturing challenge, Neptune was able to deliver on all their customer commitments. In addition, Neptune continues to see solid demand for both mechanical and static meters positioning Neptune very well for the foreseeable future. Next, we'll turn to Verathon. Verathon continues to perform exceptionally well with solid growth across our GlideScope and BFlex product offerings. Of particular note, we're pleased to report that Verathon is the market share leader in the U.S. for single-use bronchoscopes.
Five years ago, we entered this market with a strong belief that we had a high right to win given our incumbent GlideScope position, and now we have claimed the market share leadership position and Verathon is not done. Great job by team, Verathon Northern Digital, our MDI declined as we expected in the quarter based on customer program timing that led to a very difficult comp. That said, OEM order activity remained strong in the quarter. Finally, [indiscernible] each declined against difficult prior year comps. As a reminder, these businesses started recovering from supply chain challenges last year. For the fourth quarter, we expect to improve to high single-digit growth given Neptune is back on track operationally and NDI's customer program timing began to normalize. With that, please turn to Page 14.
Now let's review our full year 2024 guidance and discuss our fourth quarter outlook. Based on strong application segment margin performance and the addition of Transat Cmpus, we're increasing our total year growth outlook to be north of 13%, and we expect full year organic growth to remain consistent in the 6% area. In addition, we're raising our full year guidance to be in the range of $18.21 and $18.25, the high end of our previous range, an increase of $0.06 at the midpoint. Please note, we expect Transact to be death neutral for the full year. Our guidance continues to assume a full year effective tax rate in the 21% to 22% range. For the fourth quarter, we expect adjusted DEPS to be between $4.70 and $4.74. Please note, our newest acquisition Transact will be about $0.03 dilutive in the quarter. Also, as a reminder, the impact of our $20 million synergy plan meaningfully skews to 2025.
Now please turn us to Page 15, and then we'll open it up for your questions. We'll conclude with the same key takeaways with which we started. First, we delivered a solid quarter of financial results and expect an acceleration in sequential organic revenue growth heading into Q4. Second, we completed the acquisition of Transact Campus and commenced the integration with Seaboard. Third, we're increasing our outlook for the full year. And finally, we are fairly well positioned relative to our capital deployment strategy. For the quarter, we delivered 13% total revenue and 4% organic revenue growth while increasing our EBITDA 10%.
Of note, we grew our enterprise software bookings in a double-digit area and continue to see high single-digit ARR growth. Importantly, free cash flow was impressive growing 15% in the quarter and 20% on a TTM basis. Next, we completed a compelling acquisition of Transact Campus. The combination with Seaboard creates a leading software and integrated payments business that helps universities solve the present issue of making the student campus experience more compelling. The cost synergy execution risk here is quite low, most of which has already been actions, leading to a very attractive shareholder return.
Next, we're increasing our full year outlook for total revenue to be north of 13% and maintaining our approximate 6% organic revenue growth outlook. In addition, we're increasing our full year debt outlook to the high end of our prior guidance. Finally, we continue to maintain a strong financial position with over $4 billion of capacity for capital deployment. The M&A markets continue to be very active. We have a robust pipeline of attractive acquisition opportunities that we're excited to pursue with our unbiased and disciplined approach. We remain quite bullish about our ability to execute this part of our strategy. Now as we turn to your questions, and if you could flip to the final slide, our strategic compounding flywheel, we'd like to remind everyone that what we do at Roper is simple. We compound cash flow over a longer time by operating a portfolio of market-leading application-specific and vertically oriented businesses. Once the company is part of Roper, we operate a decentralized environment, so our businesses can compete and win based on customer intimacy.
Culture businesses have structurally improved our long-term and sustained organic growth rates and underlying business quality. Finally, we run a centralized process-driven capital deployment strategy that focuses in a deliberate and disciplined manner on finding the next great business to manage our cash flow compounding [indiscernible] wheel. Taken together, we compound our cash flow over a long arc of time in the mid-teens area.
With that, we'd like to thank you for your continued interest and support and open the floor for your questions. Please go ahead, operator.
[Operator Instructions] Your first question comes from Deane Dray with RBC.
Maybe we can start with the strategy around Transact Campus and I know that SeaBoard is being combined with the business right way. And historically, Roper really never clustered the application software businesses preferring more stand-alone siloed businesses. You never talked about scale, and I don't think I've seen a cost synergy estimate coming out of a transaction in a long time. Does this -- is this more of an opportunistic acquisition? You've done it before, you've combined medical purchasing, you've done some insurance business, back office customers. So we've seen this before, but this is out of the blocks being combined and the synergies look obvious. But just maybe is there a subtle difference here, more willingness to look at these attractive growth areas? Maybe start there.
I appreciate the opportunity to talk about that, Deane. The short answer is yes. So even going back to our Investor Day 18 months or so ago, we outlined, I think, there a modest evolution of our capital deployment strategy to focus on a bit more, what we call multiactivity and then also businesses that are a bit faster-growing [indiscernible] leaders. And so since then, if you look at our acquisitions we've done, since we've done [indiscernible] combined it with Strata, that was archetype that is very similar to Trasact. We bought ProCare, which was our first maturing leader, slightly faster growing business and Transact.
If you go back to 2019, I think we've done 26-ish acquisitions, and there'll be a handful of platforms out of that. So we have leaned into a fair number of bolt-ons I would say on the bolt-ons, the driving -- the pencil driving recent for that is to buy business or have a high right to win and adjacencies that are close to ours that we think increases the likelihood for accelerated organic growth once the bolt-on turns organic. So yes, it's very much part of our strategy and we've tooled out the capital deployment team that Jana has. We've got folks that are focused on partnering with our businesses doing a lot of the development work in the marketplace. So yes, it's a strategic intent, and we've started the execution pathway.
That's great to hear. And maybe for Jason, and I appreciate you guys putting the spotlight on the free cash flow compounding flywheel because it seems like that's what you got this quarter with free cash flow up 15% and DEPS up 7%. So just talk about that spread and was there any sort of seasonal contribution to free cash flow this quarter, Frontline typically has that a higher contribution in the third quarter. Just any dynamics there?
So I mean, Q3 is now our strongest cash flow quarter. I mean, since we acquired Frontline a couple of years ago and now with the addition of Transact, it's definitely our strongest quarter. Transact [indiscernible] a little bit, maybe a couple of points of growth in the quarter. It's, as I mentioned, seasonally strong then. But aside from the have, we just had tremendous execution through the renewal seasons, which is Q3 and Q4 for us. So Q4 is expected to be strong as well. And I would just say DSO improved almost across the board for a number of our businesses. And so just good old-fashioned execution, I think, is what that drove that outsized growth relative to debt.
Your next question comes from Brent Thill with Jefferies.
Neil, you mentioned some of these macro headwinds, seem like they're turning a bit. I'm curious if you can just dig into what you're seeing in some of the tone in some of the buyers? And then just maybe for Jason, just -- if you can just speak to Neptune and how confident that you think we're through some of the challenges that we saw? And what are the reasons why you're confident in that recovery?
Sure. So I'll take the first one, Jason, I'll start to take the second one. So [indiscernible] on everybody. We worked hard over the last handful of years to really be a lot of the cyclicality and matter out of what we do. If you think about end markets we serve, education, there's legal contracting, there's health care, insurance, and what we sell and what we deliver is mission critical to software. So we're generally not turned on off based on the macro. And then most of our pricing is subscription-oriented versus transactional. So there's sort of 3 levels of muting in that regard. But we're not immune to the macro, but we measured it. I would highlight a couple that we've been talking about really since the beginning of last year. First we're talking this time where even call it, 6 quarters ago, it was about the interest rates and economic slowdown. It was that I think the most anticipated economic slowdown in the modern history and the psychology of that just slowed down to some extent, the enterprise buying activity across software.
We're cautiously optimistic based on the last couple of quarters of enterprise software bookings activity last quarter. in the high single-digit area growth this quarter in the double-digit area growth. Pipelines look very robust trending into the end of the year. So we need to execute that -- those pipelines. So we're encouraged by that. The second macro factor certainly that takes the headline for us is the transportation macro with our D&T and Loadlink businesses. They're subscription-oriented on both sides of the network, both the carrier and the broker, but the number of carriers in the market loosely follows the amount of tonnage that flows over the roads. And so as the tonnage has come down, so it's the number of carriers that are participants in the network, which could put pressure on that. We've just seen -- there's probably been 20 to 25 weeks of negative brokerage low as compared to prior year, that actually in the last handful of weeks is more normalized to last year. So we're very much seeing it stabilizing in the freight market. So those would be the macros that have infected our business. Jason?
Yes. And just to talk about Neptune a little bit. So if you recall, we stood up the ultrasonic or static line last quarter, the second line. And so we had some constraints in our mechanical meter production. And so how to report the root causes of identifying corrective actions implemented. We had some yield issues on plastic molding [indiscernible] some of the machines we're creating some constraints as well. That's been remedied. We would like the trends we saw through September and that as trends repermission form the production output for the fourth quarter and beyond. So we feel good about it. Demand is really strong there, so it's really just getting through this mechanical meter production issue, and we feel good based on what we saw in Q3 and the confidence the teams.
The only thing I'd add to Jason on Neptune, as I said in the prepared remarks, Neptune is able to deliver 100% on a customer commitment. So this was -- there's no issue there. Kaiser continue to improve and gain -- get even further [indiscernible] and the team did a great job just going again on the shop floor and getting to root cause.
Your next question comes from Julian Mitchell with Barclays.
Maybe just one to follow up on the sort of the macro context as it pertains to network software specifically. As we're thinking out sort of beyond this quarter trying to gauge how you're thinking about the recovery slope at network software, you cautioned that Foundry in aggregate next year may not see much growth because of the ongoing sort of strikes hangover. Just wondered on sort of DAT and Loadlink that portion, what the expectation is? Do you think it's plausible we could just keep moving sideways sort of sequentially for some time? And maybe just frame as you see it now, how much are Foundry and the Freight Match businesses down in 2024?
So I'll take the first part. So on DAT and Loadlink, it was intention that we changed our work choice this call to be stabilizing. So it was very much a stabilized market. We anticipate for -- until we see anything other stabilized are going to be in this position from just a tonnage or load volumes that are going over the road and into the network. That said, DAT have a pathway to plan -- high confidence plan to return to some modest levels of growth next year with no assumed improvement in carrier network participation through packaging price. And so we'll have, like I said, some modest growth at DAT next year that we have a pretty high degree of confidence heading into our AOP sections that will occur next month.
And then on Foundry, it's just the waiting for the post-production employment to return to its historical levels. I think we're about 15% below pre-pandemic or pretty strike, I should say, employment levels of post production, and we just need the content is being produced. It's just got to matriculate through the pipeline, so that will be some time in 2025. So it's definitely taken a few quarters longer than we anticipated earlier in the year. Jason?
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Yes. So Freight Matches is down sort of low singles for this year. I think we definitely think for NS in general, that Q3 is the low point for us. And that will start to trend up, as Neil said, for the fourth quarter and then into next year and the pacing is just dependent on sort of the market momentum there. On Foundry, it's been down double digits this year, and that's been pretty consistent throughout the year. So we expected a little bit of more of a recovery in the second half of this year. But as Neil said, it has taken a little bit longer. So as we think about the trends for next year, I think the first quarter, just to remind you, we had -- we called out an MHA sort of onetime item this year. So beyond that, that we expect steady growth in this year for the segment.
And then just my follow-up, switching back maybe to the EBITDA margins at TEP. So those have been sort of down year-on-year for a few quarters. You've mentioned the production issues, clearly, supply chain efficiency sort of moving around. As we look ahead at TEP, kind of what's the confidence maybe that margins can return to year-on-year expansion in the coming quarters?
You're, right. I mean, the second and third quarter, we had -- if you recall, last year, we had some big supply chain liberation for our med product businesses and our product businesses. This year, we're down a little bit. NDI down, had a little bit of negative mix, and we're obviously investing for growth there just because it's always been a consistent double-digit grower for us. So we're continuing to invest in MDI. But I think for the year, just thinking broadly, we're going to be flat EBITDA margin. And so it should inflect back up in the fourth quarter.
Your next question comes from Terry Tillman with Truist Securities.
Neil, Jason and Zach. My primary question is actually on the enterprise software bookings. I think you said double digits, up from high single digits. I don't know what you could share in terms of what kind of budget flush you're looking for I assume there is some of that. So if you can make either a comment on that? Or just more importantly, if the bookings are picking up, do you think there's potentially an inflection in the first half next year or second half, just depending on how some of that activates to revenue? And then I have a follow-up.
Yes. To provide some color there, Terry. I mean, I think you're right. The fourth quarter is not necessarily a budget flush. It's probably just more customer behavior. It's typically our biggest quarter. So we're obviously keen to see how that plays out. The last couple of quarters have been strong. I think just a little bit of color. You mentioned that Deltek [indiscernible] Enterprise got a little bit better. So if you think about what happened from Q2 to Q3, that was a little bit of the delta. Also, Verathon was really strong, specifically in the carrier space. We also have good broker expansions, but carriers is been an area that has been a focus for them. So good to see some new logo wins there. And then [indiscernible] has been really strong, as we've mentioned, but it's really good to see the balance of both expansion of existing customers and then some new logo wins with their Sierra Cloud products. So it's good to see that they're continuing to win in the market with new logos. And then when we think about the -- the foreign part is going to be important, as I mentioned, in terms of how that plays into next year and sort of how that will matriculate into revenue, but we're encouraged with what we saw in the last couple of quarters.
Yes. We are -- obviously, we continue to have enterprise bookings momentum that will matriculate into revenue. And next year, the timing of which depends on implementation time frames and customer go lives. But yes, I mean, it's definitely a trend that we're watching carefully.
That's good to hear. And just my secondary question, Neil, you commented earlier when you get into kind of business level commentary and kind of talent management moves you make. I think you talked about ProCare and Frontline I guess kind of what drove kind of some changes there, and I think you go-to-market is the idea that, hey, they're doing well, but they could be doing even better or just maybe you could double-click a little bit into ProCare and Frontline and what to expect with some of those leadership changes?
Sure. So there are 2 different things. I'll start with ProCare. So ProCare, we identified in our diligence process that there's an opportunity to improve modernize whoever or whatever choice you want to pick, the go-to-market function. And so within a couple of months of ownership, by the way, we shared those diligence finding and value creation lever with the leadership team at ProCare, they agreed with that. We made a leadership change like what's happening there. Obviously, with the leadership change in go-to-market for ProCare, which was an internal promote that was signed from within the company.
Then you can start attacking the underlying opportunities, which was generation opportunity. There's a way they actually staff the calls between inbound, outbound between business development and closures, there's a compensation angle, there's call scripts around attach rates and upselling, all that is happening. And we're -- it's very early days but starting to gain some encouragement, starting to yield some fruit. So again, a diligence finding where we thought there was a value creation lever attached to it and the team sort of attacked it pretty quickly. So it's typically different.
So our existing leader retired or indicated he wanted to retire. So we had an opportunity with [indiscernible] that we have a long history with, as I mentioned, hired -- came the organization as a go-to-market leader of Deltek, did a wonderful job there, then his first CEO opportunity was constructing that, just did a terrific job in terms of the way the business is run, very much run in a Roper-style and he's a very growth-oriented leader. And so given that Frontline is one of our more attractive growth assets, we want a growth leader there. And it's very early days. I mean, he's 2 months into the job or something like that at Frontline. And then the matter of the fact of that is the CFO [indiscernible] became the CEO of ConstructConnect and then [indiscernible] became the CFO of ConstructConnect. So from a price risk perspective, we're able to sort of promote and rotate leaders inside Roper essentially the outside hire is an FP&A leader in the business versus CEO, one of our larger businesses. So it's a win-win for the organization and individuals.
Your next question comes from Scott Davis with Melius Research.
Wanted just to -- a little bit of a high-level question, but there was a lot of price in the last couple of years, not just you guys pretty much everybody out there. But have you found any harder to get price incrementally? Are we back to kind of more normal -- when we walk into 2025, for example, would be back to kind of the more normal price increase cadence, particularly in software, obviously, but just high-level picture, what do you see there?
I would say I would -- I seem to recall asking a price question a few years ago as well. So for us, on software, we have always had a pricing mechanism in the [indiscernible]. As a general matter, we had 95 or so percent gross retention. So we're going to trip 5 or so percent. We're going to offset the vast majority of that at each business unit level with price. It's just in the algorithm, it's in the price expectation with the customers, it's in what we do from a new product feature point of view, with the R&D and efforts we support that obviously cross-sell itself from there to get you net retention in the 1.05-ish range across the blended enterprise, and we have net new on top of that.
That, I would say, it's a muscle that is very well understood and built. We obviously get better, an example, we've gotten better with that over the last few years at PowerPlan, like they didn't have that muscle built years ago. But I would say we did get outsized pricing in software and so -- in the past, and so it's just reverting to normal. On the DEPS businesses, I would say, that's a little different. Most of the businesses would take price when they launch a new product. Now there's just a more normalized inflationary every year or 18 months or so opportunity to pass the regular way of [indiscernible] across.
Yes, typically, [indiscernible] it' all about new products versus price just because you're sort of bound by some of the customer contracts with hospitals and the like. But I think, Neil's point on software, it's been part of the rhythm for a long time. A lot of what we've done in strategic plan reviews is understand key purchasing criteria and really unpacking that at a more detailed level for each of our businesses, and that's helped them -- that provided some confidence or just some insight into what the customer thinks about the value proposition, and that's been helpful as well.
Okay. Yes, that makes a lot of sense. And that's consistent with what you said a couple of years ago. But there's just a lot of debate as it relates to software around AI, generative AI, but I just wonder kind of your view now that you've got a chance to dig more into this and spend more time on it, it's certainly in your slide decks and launching products. But does generative AI essentially raise the barrier to entry because you have the relationship with the customer already and you can shorten your your time to market on product innovation? Or is it the opposite and people can come in with a lower-priced product easier because just the development cycles are somewhat shorter? How do you guys think about that?
I think it's very much the form or the first. I mean, it is -- if you think about what we're doing, first of all, it is the highest level, I mean it's a real thing. We definitely I think the whole market is in sort of the trough of dissolution, if you will. I mean, the high -- the reality is starting to catch up with the hype. I would say, the number of new use cases that are being treated., I think just not only side Roper, but a REIT externally is slowing, but we're very much advancing the existing use cases, whether it's internal productivity or customer-facing product stuff. I would remind you that everybody that from a -- while we think this is an accelerator and it sort of raises the barrier to entry is, to do generate AI, I think you have to have 2 things well, right? And our [indiscernible] software businesses are naturally positions better than others in regards to these 2 questions. The first is you need to have elements [indiscernible] questions. You need to have the data that is very, very specific to what the question is for answering, but then you also need to know what question to ask.
And the more we watch the question, the better the generative tools are.Giving a very simple example, we have a legal business that is the ERP backbone for large law firms, right? It's professional services, project-based billing. The question is not how you create professional-based bill? It's how do you create a -- how does law firm A create a compliant bill for technologies, right? And so the very specific bespoke question, the Nuance question is where the generative tools really, really shine. So unless you have the incumbency really matters in that regard. So it's not about the -- we can't develop software as fast or faster than any startup can build software from a generative point of view, but we have the incumbency and the data. Obviously, verticalized software businesses generally and the incumbency and the data and the specific questions of which to sort of to ask, if you will.
Your next question comes from Steve Tusa with JPMorgan.
Just on the -- following up on Julian's question on the NSS business for next year. So which businesses are accelerating? And how much of a headwind is that MHA benefit in the first quarter? And then will you be able to kind of get into that mid-single-digit range for that business next year?
I think, Steve, I think we want to stop short even implying any guidance in the next year. What I would say, just broadly, across the enterprise as we like that we're seeing in enterprise offer bookings and the fact they normalized, a pretty normalized 2024 year from which to grow. You've seen a reacceleration heading into Q4. We expect those Q4 trends to carry in the 25%, but I think we want to just sort of stop there sort of issuing guidance next quarter.
That's right. I think our new MHA, we can call that [indiscernible] MHA a couple of points of drag in Q1.
Got it. Okay. And then just lastly on cash. obviously, really strong result here seasonally, it steps up. How does it now behave seasonally in Q4? Last year, you were down but not by much like basically kind of flat to down, is that kind of the new seasonality? Or was there something unusual in Q4? Maybe just help us with the seasonality because it's definitely different than it's been in the past given the Frontline?
Yes. Q4 used to be our strongest and now, like I said, Q3 is our strongest. I think it will be -- we won't see quite the same increase in the fourth quarter as we did the third. Obviously, we got -- Transact came in. So that was helpful, but that's obviously the strongest collections quarter as well. So it will be up but not as much as Q3 in the fourth quarter.
Got it. Sorry, one more, just Vertafore. I didn't see it in the slides. Any updates there?
Vertafore had -- I think Jason mentioned in his prepared remarks, they had a couple of very, very nice wins in the quarter. You can't really talk about them quite yet, but we will be able to. Also, they had a very impactful product release. And they have a product called BenefitPoint, which is the leading product for sort of managing the medical health insurance book. And the -- an automation feature that saves like 45 minutes per customer per benefit plan. So this is this is tens of thousands of hours of productivity that were sort of given to our customers. It's a huge release. They worked on this for quite a bit. So like what's happening in the new product development point of view, a couple of nice exciting wins and steady as it goes.
Your next question comes from Joe Giordano with TD Cowen.
So on Neptune, is good to hear the production issues have been fixed. Just curious, like we've been hearing some kind of mix, I guess, about order patterns in that business? Like I know almost everyone in that sector had like huge orders for a multiyear period and backlogs are really high. Are you getting any sense of like change in the incoming flow from like a new booking standpoint for Neptune?
I would say, it's very much what we expect and what you just described. So during the pandemic, I mean pre-pandemic, this was a 4-week lead time business. very much a book business. during COVID, we got our lead times gapped out to maybe 12 or 14 weeks. We had 12 to 18 months of backlog order -- the order activity and now that order duration is [indiscernible]. But the number -- the order volume, if you will, the peak orders or not. So we're not -- it's just a -- instead of booking a year out, they're looking whatever -- customers are booking 6 or 9 months out. So that order and duration is coming in as expected. But nothing again in terms - for competitive purposes, nothing from the number of meters that are being shipped to an account-by-account basis. That is all healthy.
Yes. That makes sense. Just curious if any of your businesses, like if you -- when you talk to the leaders, are any of them like super excited or super nervous one way or another about the election outcome, like I think in maybe is Deltek get excited about a potential like inflationary kind of spending spree from the government. Like just I guess across the portfolio, the anything that you call out one way or the other?
As a general matter, I'd say, very political and no. I mean, we're not really impacted, positively negative by either administration relative to Delta, I want to remind you and others is that the government always spends, the administration determines the nature of the spend. So if you go way back in the Bush area was defense, Obama was education, health care. So the spend flow change when the government contracts has just positioned our capabilities where the flow of federal spending is going. And so that's relatively just what their business is. I would say for '25, the '25 appropriations are actually pretty well understood at this stage and aren't going to change based on the election. That's why I think we're starting to see some of the enterprise government contracting activity starting to fall a little bit, at least for the 1-meter target, if you will, is relatively well understood.
Your next question comes from Joe Ritchie with Goldman Sachs.
So my first question, just a little bit longer term, Neil, as you have these ambitions to grow the portfolio at a faster clip over the longer-term period. Do you think you have the right portfolio in place? Or is there maybe some addition by subtraction to help you kind of achieve the ambitions of maybe more of like a high single group digit type organic number going forward?
I think we -- the portfolio like, we think that there is some -- we have high confidence there's opportunity for every business inside of Roper to do better. No company has reached its full potential for relative to its organic growth. What we like about our approach of organic growth as it tends to be quite sticky and sustainable, the downside takes time, right? There's no -- that doesn't happen in a year. And we cited it at our Investor Day, and I'll cite it here again. I mean, a great example for us, incepts our Verathon business 8 or 9 years ago, it was a low single-digit growth business now, it's low teens, maybe higher growth business, we think, sustainably for quite some time.
It takes -- unfortunately, it takes time to get the strategy right, to enable the strategy to build the talent office, the seed and deeply culture [indiscernible] improvement. We're 4 or 5 years in across the portfolio for that. And so we're definitely gaining some traction, but we like our odds in terms of being able to improve organic growth. And in addition, as I mentioned, I think 1 of the -- definitely want to think the first question today is, as we deploy our capital, we're definitely tilting towards slightly higher growth businesses; Transact and Seaboard, high singles; ProCare in teens. So there's going to be a little bit of mix up over time in terms of the portfolio.
Got it. That makes a lot of sense. And maybe just following up on that last point, with your leverage now around 3x net leverage, I recognize that the pipeline is still strong. Do you expect to see any pause in M&A activity as you delever and then start to get a little bit more opportunistic? Or could you see yourself doing transactions in the next -- in the near term, call it, the next 3 to 6 months?
Yes. I mean -- as Jason alluded, we've got $4 billion plus of M&A capacity as we sit today over the course of the next 12 months or so. We're very active in the M&A market. It's a very attractive market. There's lots of sellers, one of the largest sponsors in the world, European sponsors on CNBC earlier this week and asked about what's [indiscernible] it sell, sell, sell. So there's a lot of LP pressure [indiscernible] matters a lot. And so there's essentially 3 or 4 years' worth of deals that are pressing here next year or 2. And so it's a very attractive market, and we plan to be active in that.
Your question comes from Christopher Glynn with Oppenheimer.
ItI was going to ask also about the deep dynamics out there. You answered the supply side. On the demand side, is that still very favorable to where you're seeing diluted buyer activity per deal?
In terms of the competitive intensity on a per deal basis, that's the question. It's hard to ultimately know. I mean, I would call out that we did the Transact deal on a proprietary basis. I would say that our M&A teams are engaged in implementing more proprietary or quasi proprietary opportunities and I can recall quite some time. But Yes, I think it's -- so we those are facts. I think we're on to speculate a little bit with so many opportunities that are going to be coming to the pipeline. I think all [indiscernible] going to be a little more discerning early processes, which might lead to a little bit lower competitive intensity, but hard to know that to be an absolute case.
Okay. And then in terms of Deltek and the general GovCon exposure, one of the stimulus and mega projects, a lot of compliance hurdles are gating that process. Are you seeing any increased letting or momentum in that? And what's the implication for those platforms in '25?
I would say the -- I would just refer back to what we're talking about before we go on, it has been for 6 quarters slowish based on the uncertainty, about 4 to 6 quarters slow based on the uncertainty of the government spending, the operation of the government. We saw some green shoots here in the last quarter or 2 relative, especially the enterprise class. Some of the larger customers are starting to be acquisitive again of Deltek. The exact underpinnings of the drivers, some of that might be infrastructure, but some of it might be other things, that's not in our specific purview.
This concludes our question-and-answer session. We will now return back to Zack Moxcey for any closing remarks.
Thank you, everyone, for joining us today. We look forward to speaking with you for our next earnings call.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.