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ROP - Roper Technologies

giofranchi

By giofranchi
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Broeb22 Newbie

Broeb22

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https://www.reuters.com/article/us-vertafore-m-a/exclusive-tpg-explores-sale-of-insurance-software-firm-vertafore-sources-idUSKCN0X92RW

 

It's dated but Vertafore EBITDA of $180 million in 2016 prior to a large acquisition of VUE Software in 2019.

 

It's tough to know what EBITDA is now, but its probably north of $300 million. If ROP paid $5.5 billion, that would be 18x $300 million in EBITDA, so hopefully ROP is not paying much above that.

 

If this is correct, ROP EBITDA would increase by about 15% (compared to 2019 EBITDA).

 

Hard to know if these acquisitions are creating value when paying that much and w/o knowing growth numbers.

 

I also have to wonder if ROP is prepared to compete against VC-backed competitors (though I'm sure they already do). It's kind of strange for a company like ROP to be able to successfully milk their software portfolio companies for cash flow while their competitors spend every last nickle they have on growth. How does the combination of those two strategies not result in ROP's companies over time losing share in their industries?

 

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Liberty Newbie

Liberty

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https://www.reuters.com/article/us-vertafore-m-a/exclusive-tpg-explores-sale-of-insurance-software-firm-vertafore-sources-idUSKCN0X92RW

 

It's dated but Vertafore EBITDA of $180 million in 2016 prior to a large acquisition of VUE Software in 2019.

 

It's tough to know what EBITDA is now, but its probably north of $300 million. If ROP paid $5.5 billion, that would be 18x $300 million in EBITDA, so hopefully ROP is not paying much above that.

 

If this is correct, ROP EBITDA would increase by about 15% (compared to 2019 EBITDA).

 

Hard to know if these acquisitions are creating value when paying that much and w/o knowing growth numbers.

 

I also have to wonder if ROP is prepared to compete against VC-backed competitors (though I'm sure they already do). It's kind of strange for a company like ROP to be able to successfully milk their software portfolio companies for cash flow while their competitors spend every last nickle they have on growth. How does the combination of those two strategies not result in ROP's companies over time losing share in their industries?

 

They're very specific about what they buy and what characteristics (financial, cultural, industry dynamics, etc) they look for, that's why it works. You can't just buy a random asset in the sector and get the same results.

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valueseek Newbie

valueseek

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From whatever can be seen over the years, while they might be running the companies for cash flow, imo they dont nickle and dime on R&D and organic growth or competitive moat for their companies - they spend the money where it is required. Their game is generally not to buy companies with huge growth and significant expenses (comp. expenses running through IS for most software companies) - they are not opposed to it but that is not their general area of looking. It is definitely the case that ROIC on the capital they put out to buy companies has come down over the years as multiples have expanded - so it is to be seen how all this plays out in stock returns from here. Definitely returns will be more muted than before.

 

The culture of the companies is different than SV companies (where the engineers/sales/PM's are paid much more on an absolute basis vs. rest of the US). The pros of that are higher cash flow and cons are lower growth. But going back to the deals, afaik they tend to continue to invest healthily in their companies.

 

 

https://www.reuters.com/article/us-vertafore-m-a/exclusive-tpg-explores-sale-of-insurance-software-firm-vertafore-sources-idUSKCN0X92RW

 

It's dated but Vertafore EBITDA of $180 million in 2016 prior to a large acquisition of VUE Software in 2019.

 

It's tough to know what EBITDA is now, but its probably north of $300 million. If ROP paid $5.5 billion, that would be 18x $300 million in EBITDA, so hopefully ROP is not paying much above that.

 

If this is correct, ROP EBITDA would increase by about 15% (compared to 2019 EBITDA).

 

Hard to know if these acquisitions are creating value when paying that much and w/o knowing growth numbers.

 

I also have to wonder if ROP is prepared to compete against VC-backed competitors (though I'm sure they already do). It's kind of strange for a company like ROP to be able to successfully milk their software portfolio companies for cash flow while their competitors spend every last nickle they have on growth. How does the combination of those two strategies not result in ROP's companies over time losing share in their industries?

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Broeb22 Newbie

Broeb22

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Looks like there's also a pretty big tuck-in at Strata:

 

https://www.healthcareitnews.com/news/allscripts-sells-its-epsi-financial-planning-business-strata

 

Strata Decision Technology, which develops cloud-based business intelligence tools, will pay $365 million for the subsidiary

 

h/t @Sagar B.

 

This was intriguing. I have not followed Allscripts but I felt like it was not always well-managed so I am optimistic about the opportunities with this acquisition, both on the purchase price paid and also the returns from plugging it in to Strata.

 

Piecing together Allscripts disclosures was easier than expected since they hived off the EPSi biz. The business does about $39 million in revenue and $21 million in EBITDA (unallocated segment in linked document), greater than 50% EBITDA margins. EV/EBITDA of about 18x

 

This seems more like a bolt-on that will get integrated into Strata, so Strata may be able to realize some revenue/cost synergies.

 

https://investor.allscripts.com/static-files/ea4a428f-b5ae-431f-ba21-af4a6e59bc5d

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Broeb22 Newbie

Broeb22

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I don't know that FCF/share is going to be a good yardstick for whether a company is creating value when they are constantly buying businesses. Outside of an immediate disaster which obviously destroys value, what is more likely to result in disappointment is that organic growth does not materialize as expected for the businesses.

 

The Roper model really holds a lot of power IF the businesses they acquire can grow at even low-single digit rates for long periods of time. The incremental margins on their software businesses are very high so I think Tusa correctly understands why the terminal value implied in Roper's price is so high.

 

Tusa and I don't necessarily agree on the organic growth profile, as there are a lot of factors that have been headwinds for Roper's other businesses in that time frame, but I don't think he's wrong in stating that the organic growth profile of the go-forward business is extremely important when they're paying full prices for businesses.

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nspo Newbie

nspo

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Liberty, that was a great read. Because you've followed the name for some time, and having witnessed the evolution of their acquisition strategy (cheap to quality), what's a reasonable estimate you have for coumpound-ability? Ie, an IRR you're confident in asuming.

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Liberty Newbie

Liberty

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I don't know that FCF/share is going to be a good yardstick for whether a company is creating value when they are constantly buying businesses. Outside of an immediate disaster which obviously destroys value, what is more likely to result in disappointment is that organic growth does not materialize as expected for the businesses.

 

The Roper model really holds a lot of power IF the businesses they acquire can grow at even low-single digit rates for long periods of time. The incremental margins on their software businesses are very high so I think Tusa correctly understands why the terminal value implied in Roper's price is so high.

 

Tusa and I don't necessarily agree on the organic growth profile, as there are a lot of factors that have been headwinds for Roper's other businesses in that time frame, but I don't think he's wrong in stating that the organic growth profile of the go-forward business is extremely important when they're paying full prices for businesses.

 

That's why FCF is not the only thing that you should monitor, but over long periods, it's a good marker.

 

I've had time to read Tusa's report in more detail since. It's pretty bad, full of bad thinking and ridiculous things.

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Broeb22 Newbie

Broeb22

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Posted

I don't know that FCF/share is going to be a good yardstick for whether a company is creating value when they are constantly buying businesses. Outside of an immediate disaster which obviously destroys value, what is more likely to result in disappointment is that organic growth does not materialize as expected for the businesses.

 

The Roper model really holds a lot of power IF the businesses they acquire can grow at even low-single digit rates for long periods of time. The incremental margins on their software businesses are very high so I think Tusa correctly understands why the terminal value implied in Roper's price is so high.

 

Tusa and I don't necessarily agree on the organic growth profile, as there are a lot of factors that have been headwinds for Roper's other businesses in that time frame, but I don't think he's wrong in stating that the organic growth profile of the go-forward business is extremely important when they're paying full prices for businesses.

 

That's why FCF is not the only thing that you should monitor, but over long periods, it's a good marker.

 

I've had time to read Tusa's report in more detail since. It's pretty bad, full of bad thinking and ridiculous things.

 

Can you share his report?

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Liberty Newbie

Liberty

Posted
Posted

I don't know that FCF/share is going to be a good yardstick for whether a company is creating value when they are constantly buying businesses. Outside of an immediate disaster which obviously destroys value, what is more likely to result in disappointment is that organic growth does not materialize as expected for the businesses.

 

The Roper model really holds a lot of power IF the businesses they acquire can grow at even low-single digit rates for long periods of time. The incremental margins on their software businesses are very high so I think Tusa correctly understands why the terminal value implied in Roper's price is so high.

 

Tusa and I don't necessarily agree on the organic growth profile, as there are a lot of factors that have been headwinds for Roper's other businesses in that time frame, but I don't think he's wrong in stating that the organic growth profile of the go-forward business is extremely important when they're paying full prices for businesses.

 

That's why FCF is not the only thing that you should monitor, but over long periods, it's a good marker.

 

I've had time to read Tusa's report in more detail since. It's pretty bad, full of bad thinking and ridiculous things.

 

Can you share his report?

 

Sorry, can't.

 

Some excerpts have been posted in this thread:

 

 

Let's just saw that part of the 'peer group" to which he compares Roper's software assets includes Microsoft, Adobe and Salesforce...

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Broeb22 Newbie

Broeb22

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I think Tusa brings up some good points on the importance of organic growth, but didn't really prove that organic growth is lacking in the recent acquisitions (in my view).

 

The SOTP valuation issue is of declining importance the more software acquisitions ROP does. The valuation reflects the clearly articulated strategy and decent execution of it, even if the market is giving ROP credit a bit ahead of schedule. 

Roper_Technologies__There_Is_No__R__in_Fang_Downgrading_to_UW._Tue_Sep_08_2020.pdf

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Liberty Newbie

Liberty

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I think Tusa brings up some good points on the importance of organic growth, but didn't really prove that organic growth is lacking in the recent acquisitions (in my view).

 

The SOTP valuation issue is of declining importance the more software acquisitions ROP does. The valuation reflects the clearly articulated strategy and decent execution of it, even if the market is giving ROP credit a bit ahead of schedule.

 

I mean, even on the industrial side, he talks about the lack of growth, and then briefly handwaves away "oh, yeah, they had divestitures there..." and doesn't adjust for (which they got good prices for, btw)  ::)

 

And then he compares against other "peers" like DHR, FTV, AME, and I don't think he looks at them ex-M&A (could be misreading, it's not entirely clear, iirc), but Roper's industrial segment hasn't had any M&A in forever.

 

Anyway, lots of stuff like that that makes no sense and is just trying to fit a narrative...

 

Like he calls them "worst in class" but then they rank like 5-7 out twenty in that hand-picked peer group (which is all pretty different businesses with different models and end markets and tradeoffs).

 

Even the peer group valuation stuff..

 

Here's a draft of what I wrote that will be published in my newsletter friday:

 

Earlier this week, I was reading an analyst report on a company I know fairly well, and after basically slapping my forehead a bunch because of one ridiculous claim after another, I came to the conclusion that I should considering myself lucky that I don't have to "precisely" value businesses by pulling together grab bags of "peers" that are mostly nothing like the business I'm looking at, and then comparing multiples...

 

I think it’s being done in good part because it’s (falsely) precise and can always be done mechanically over and over again, and because others do it too, so there's safety in numbers (nobody got fired for buying IBM… oh wait), and because it sounds smart and objective until you think about it too much and notice that it's like this:

 

"Why is company A worth this?"

 

"Because that's where company B, C and D trade"

 

"Why does company B trade there?"

 

"Because it's where company A, C and D trade"

 

"Why does company C..?"

 

“Because A, B, and D..."

 

And that the selection of the “peers” is itself an editorial choice, and that you can make something look cheap or expensive just by deciding what you include and leave out.

 

It reminds me of compensation committees that use “peers” to benchmark against, and they all aim to be a bit above average.. And they all use each others as peers, and avoid low-paying peers, so there’s constant inflation based on this self-referential, recursive, BS metric.

 

So you end up with this:

 

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And I noticed there's also this going on:

 

EhZ_4wfWoAE24fO?format=png&name=small

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  • 5 months later...
DooDiligence Newbie

DooDiligence

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Posted

I always wondered why people by a 1 share tracker.

 

Here's a great example of how most of my due diligence gets done after starting a position.

 

---

 

www.insurancejournal.com/news/national/2016/05/02/407284.htm

 

As Liberty said, these guys seem to be paying up for Bains shakeup of management. Bain seemed confident of the sale price a year in advance and Hunn must have liked the personnel changes, a lot.

 

www.insurancejournal.com/news/national/2019/10/31/547233.htm

 

 

Another quick take on Hunn passing on Vertafore & then getting to yes:

 

 

---

 

Financing the deal:

 

 

 

Comment of the day:

 

I remember when it was $WFC that had the cost of funds advantage, now it’s $ROP

 

---

 

One small vendor outlines problems with agency management software.

  • Agency Management Systems are inherently back-office platforms and have weak client engagement functionality
  • Bi-Annual release cycles means minimal feature expansion
  • Closed platforms means data is inaccessible and 3rd-Party apps can’t easily integrate
  • Legacy infrastructure means slow performance and frequent outages

 

www.brokerbuddha.com/simplicity/vertafore-acquisition-thoughts-from-jason-keck

 

I'm assuming Vertafore isn't standing still regarding client needs & that it's extremely labor intensive to try & port your customer data over to a new system. Not to mention integrating with DMV info, flood, more...

 

---

 

Vertafore helping clients compete with GEICO.

 

www.vertafore.com/resources/blog-posts/self-service-better-service-how-your-insurance-agency-can-deliver

 

They've been calling out GEICO as a threat to their customers for a while now.

 

www.vertafore.com/resources/blog-posts/4-trending-insurance-disruptors-2017

 

---

 

This is a big move for them & they seem to be very interested in insurance tech.

 

---

 

My take on the latest 10Q:

 

Deferred income plays a big part in working capital.

 

Goodwill & intangibles are scary and could wind up taking a big bite out of earnings.

 

I'll be watching the next auditors statement with regards to the 2020 acquisition audit exclusions.

 

Order backlog is an important indicator.

 

SaaS Acquisition premiums have been rising & CSU has stated they want to start buying bigger businesses. Will Roper take a break while it digests the past 2 years of purchases & pays down debt?

 

---

 

I really like all the platforms they own. They seem like they'd be sticky. I just bought a little more.

 

---

 

This link to my Twitter puddle jump includes excerpts from the most recent 10K & other nonsensical info:

 

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Liberty Newbie

Liberty

Posted
Posted

Q1 is out: 

 

https://www.ropertech.com/sites/default/files/Roper Q1 2021 Earnings Presentation FINALv.1.pdf

Quote

Revenue +13%; Organic Revenue (1)% vs +4% Comp
• EBITDA +20%; EBITDA Margin +220 Bps to 36.7%
• DEPS +18% to $3.60 
• Free Cash Flow +54%; Net Working Capital (8)% of Q1 Annualized Revenue
• Reduced Debt by ~$500M; Quickly Deleveraging After Acquisition

 

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