ROP - Roper Technologies

[chrispy]

What are the main contributors to their high margins? Is it just a blend of the high margins of each company? Does it have to do with their debt structure?

 

On the earnings call they briefly mention how negative working capital is beneficial to their returns. I am having trouble understanding that one. Can you shed any light on it?

[Broeb22]

On negative working capital, that is a common feature of most software companies. Basically, you receive the money for rendering services before you render the services. Which is different from most of other businesses which need to invest in raw materials, inventory, etc. before they generate a dollar of sales. So, a negative working capital business is much more likely to be able to self-fund its growth. You're basically getting a perpetual interest-free loan from customers AS LONG AS you continue to grow. Similar concept to Buffett's idea of float.

 

If I earn 100% of my revenue January 1st, knowing that I'll earn 40% of that in cash flow, I can take that profit and reinvest back in the business on January 1, as opposed to needing capital to invest in building inventory on Jan. 1  in anticipation of sales.

 

Now, this sword cuts both ways, because while negative working capital is great when you're growing, it is a lot less fun if the business begins to shrink. You basically need to pay back that interest-free loan from your customers faster than your sales are decreasing. Conversely, a positive working capital business, such as a distributor, will be able to reduce inventory as sales decline. I found this out while researching MRC Global, an energy distributor, during the 2015-2016 oil downturn.

[chrispy]

Broeb, thanks for the clear explanation

[Liberty]

What are the main contributors to their high margins? Is it just a blend of the high margins of each company? Does it have to do with their debt structure?

 

On the earnings call they briefly mention how negative working capital is beneficial to their returns. I am having trouble understanding that one. Can you shed any light on it?

 

Broeb22 explained the negative WC well, so I'll do the margins:

 

They started out as a more industrial conglomerate that still had decently high margins because it focused on niche stuff where there isn't a ton of competition and where performance matters. If you're selling some kind of industrial pump, the buyer cares a lot more about reliability and performance than price, because if the pump fails, it might screw up their whole operation and they'll lose a lot more than the price of the pump. Or if you are doing structural testing on nuclear power plants, they care more about the results being accurate than saving a couple bucks, etc.

 

Over time they climbed the quality ladder by buying even higher non-industrial niche businsesses, lately mostly medical products and software, and application software (for law firms, construction planning, etc).

 

They also are good at improving operations over time. Their legacy segments that haven't had any acquisitions in many years are still improving their margins and reducing their capital intensity. They don't market it like DHR does with its business system, but they get the results.

[AdjustedEarnings]

Their process is excellent, much better than DHR in my view. Starts with acquiring well in the first place (the "making silk purses with silk" thing...). How they are compensating people, etc. is also much better than DHR. Jellison was a genius and it's really terrible that he's gone. People look for the next Warren Buffett among investor-type CEO... but Jellison was it... brilliant operationally and also for cap allocation. More like Malone than Buffett I suppose. And unlike Howley, ROP did not leverage crazily. I've had the opportunity to meet subsidiary leaders at both companies and I'm convinced ROP does it much better with better assets than DHR... though, of course, DHR is nothing to scoff at... it's waay better than your average company. You are really picking among winners here. If you have to pay the same multiple or even a little more, ROP >> DHR in my view.

[chrispy]

Thanks for all of the details! This is one I'll be keeping an eye on and investigating further

[Liberty]

Restructured segments:

 

http://www.ropertech.com/sites/default/files/190304_New%20Segments%20Press%20Release%20-%20FINAL.pdf

 

• Application Software - Aderant, CBORD, CliniSys, Data Innovations, Deltek, Horizon, IntelliTrans, PowerPlan, Strata, Sunquest

• Network Software & Systems - ConstructConnect, DAT, Inovonics, iTradeNetwork, Link Logistics, MHA, RF IDeas, SHP, SoftWriters, TransCore

• Measurement & Analytical Solutions - Alpha, CIVCO Medical Solutions, CIVCO Radiotherapy, Dynisco, FMI, Gatan, Hansen, Hardy, IPA, Logitech, Neptune, Northern Digital, Struers, Technolog, Uson, Verathon

• Process Technologies - AMOT, CCC, Cornell, FTI, Metrix, PAC, Roper Pump, Viatran, Zetec

[Liberty]

New acquisition:

 

http://www.ropertech.com/sites/default/files/190318_Foundry%20Announcement_Final.pdf

 

Buying Foundry for £410 million (all-cash), "Foundry is a leading provider of software technologies used to deliver award-winning visual effects and 3D content for the digital design, visualization, entertainment industries." (that's a new niche for them)

 

https://www.foundry.com

 

By my math they paid 7.13x revenue for it.

 

"Clients and partners include major feature film studios and post-production houses such as Pixar, ILM, MPC, Walt Disney Animation, Weta Digital, DNEG, and Framestore as well as automotive, footwear, apparel, and technology companies such as Mercedes, New Balance, Adidas, and Google."

[khturbo]

This must be a high growth / high margin business if they paid 7x sales for it. It will be interesting to see what types of companies they buy going forward to try to hit that kind of mid-teens IRR on their deals.

[Spekulatius]

ROP looks like one if the nifty fifties of our generation.

[Liberty]

Gatan deal is off because of UK regulators:

 

https://www.prnewswire.com/news-releases/thermo-fisher-scientific-and-roper-technologies-announce-termination-of-gatan-acquisition-300864264.html

[peterHK]

ROP looks like one if the nifty fifties of our generation.

 

Trades at a 3.6% FCF yield with a proven track record of growing that 10-15% per year through smart capital allocation. Doesn't seem that unreasonable to me.

[Liberty]

Acquisition:

 

http://investors.ropertech.com/file/Index?KeyFile=399106539

[chesko182]

Pretty sizable, second biggest one (after Deltek for 2.8b) and entering a new vertical, they don't have any exposure to Life insurance SaaS

[scorpioncapital]

I don't see a bright future for software. I mean just plain 'software' or even industry specific software unless it's some earth shattering can't live without only one global product type situation. Software is quickly becoming as commoditized as any other industry like manufacturing or agriculture. We need it but it doesn't mean profits to shareholders. Now, there are regions of the world where software is still a status symbol. I know in EE and India it's like a status symbol to be in IT. It means higher salaries and a good life. But I feel it will be eroded, already I see some signs of this.

[peterHK]

I don't see a bright future for software. I mean just plain 'software' or even industry specific software unless it's some earth shattering can't live without only one global product type situation. Software is quickly becoming as commoditized as any other industry like manufacturing or agriculture. We need it but it doesn't mean profits to shareholders. Now, there are regions of the world where software is still a status symbol. I know in EE and India it's like a status symbol to be in IT. It means higher salaries and a good life. But I feel it will be eroded, already I see some signs of this.

 

Have you ever tried to rip out and replace an essential piece of software, and retrain your entire workforce around a new system?

[estoybien]

I don't understand the comment from Scorpion re "software". Seems to me that software is becoming MORE important and a more reliable source of profits. A significant source of productivity gains in production-frontier economies is from better algorithms, streamlining via software, etc, and as processes become more complex, software becomes more crucial to creating efficiencies and extracting value. But maybe I don't know what is meant by the generic term of "software" and how it is being "commoditized" in the way that I understand the word.

[Liberty]

I don't see a bright future for software. I mean just plain 'software' or even industry specific software unless it's some earth shattering can't live without only one global product type situation. Software is quickly becoming as commoditized as any other industry like manufacturing or agriculture. We need it but it doesn't mean profits to shareholders. Now, there are regions of the world where software is still a status symbol. I know in EE and India it's like a status symbol to be in IT. It means higher salaries and a good life. But I feel it will be eroded, already I see some signs of this.

 

Software is a tool. You can do multiple things and run multiple business models using it. Generalizing about it this way isn't very useful.

 

Roper happens to be very niche and deep into complex verticals. This is pretty far from commoditized software.

[colinwalt]

I don't see a bright future for software. I mean just plain 'software' or even industry specific software unless it's some earth shattering can't live without only one global product type situation. Software is quickly becoming as commoditized as any other industry like manufacturing or agriculture. We need it but it doesn't mean profits to shareholders. Now, there are regions of the world where software is still a status symbol. I know in EE and India it's like a status symbol to be in IT. It means higher salaries and a good life. But I feel it will be eroded, already I see some signs of this.

 

That's true in many cases, however, even when true, other considerations can mean it's not that relevant - for example, I work in the IT industry and we use many many 3rd party software packages to support our software engineering teams - for example, software for tracking bugs is a major requirement and we, like many of our peers, use Jira by Atlassian...

 

In theory, it's a commodity product, in practice we have dozens of teams and many times that number of projects that rely on it, with hundreds of configuration settings, customizations (workflows, filters, scripts), additional 3rd party apps that integrate with Jira providing additional features that we use, etc

 

So even though there are dozens or hundreds of competing products out there, migrating to a new bug tracking system would be incredibly disruptive and costly - never mind the costs of trying to evaluate a competing product to see if it would be better...

 

And believe me, some features of Jira are crap... but we live with it...

[Spekulatius]

I don't see a bright future for software. I mean just plain 'software' or even industry specific software unless it's some earth shattering can't live without only one global product type situation. Software is quickly becoming as commoditized as any other industry like manufacturing or agriculture. We need it but it doesn't mean profits to shareholders. Now, there are regions of the world where software is still a status symbol. I know in EE and India it's like a status symbol to be in IT. It means higher salaries and a good life. But I feel it will be eroded, already I see some signs of this.

 

Have you ever tried to rip out and replace an essential piece of software, and retrain your entire workforce around a new system?

 

Broadly categorizing software makes no sense. Software plays a huge part in what makes the world more productive and distinguishes products. I use specialized software at work and without it, I simply couldn’t do my work. I could use a different notebook, screen, or even work at a different company in the same business and it would be easier than doing without the software.

[Broeb22]

Anecdotally, I saw a job description on LinkedIn recently from Duke Power (DUK) stating an important job qualification was to have experience with PowerPlan, one of Roper's recent acquisitions. In my opinion, when you see people start to include a software in the job description, that begins to resemble where you see job descriptions saying you need SAP or some other kind of experience. That definitely seems like a sticky product when you are going to make hiring/firing decisions based on someone's competency with a specific software.

[peterHK]

Again, has anyone actually tried to rip and replace essential enterprise software in their business. 

 

I work in a global bank with 42k FTE employees, and my divison is probably 3 or 4k of that. To get new financial planning software in, for instance, has taken 2 years, and it STILL isn't up and running for everyone because there's a 1 year phase out/trial period etc. The whole thing will probably take close to 4 from initial talks to everyone using it, meanwhile the old software continues to be used and I'm sure generates high margin revenue for the vendor. We've all had to go to training multiple times for the new software, and nobody is happy about it because we all knew how to use the old software. At my hourly salary rate, just retraining me has cost hundreds of dollars. Multiply that by ~3k frontline employees.

 

My subgroup tried to get approval for a piece of software that would give us a massive edge on the competition. Management's answer? It'll take a year because we have to get it to interface with like 20 different things to get the data feeds up and working.

 

To rip and replace essential software is incredibly challenging, I can't stress this enough. There's a reason a player like Tyler Technologies is replacing government software from the 1980's: it's because essential, backbone systems are just really freaking hard to replace, and if it ain't broke, don't be the guy who risks shutting down the business for a week by pushing for some new software vendor that ends up not working.

[Jurgis]

Again, has anyone actually tried to rip and replace essential enterprise software in their business. 

 

Yes.

[Liberty]

https://www.ametek.com/pressreleases/news/2019/september/ametek-acquire-gatan

 

"AMETEK to Acquire Gatan from Roper Technologies" (all-cash transaction valued at $925 million for the electron microscopy business)

[chesko182]

if anyone has the deck/report of the Hedgeye Roper short can you please share?

 

thank you!