Diversified industrial company Roper Technologies, Inc. (NYSE: ROP) reported a solid set of second-quarter results, which contained the usual hallmarks of a Roper earnings report. Revenue and core operating margin expanded in all four segments, and the company's asset-light business model helped to ensure strong ongoing free cash flow generation.
Meanwhile, Roper's acquisitions are settling in well, and the company's transition to more software-based revenue continues. Let's take a look at the report.
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Roper Technologies, Inc. second-quarter earnings: The raw numbers
Starting with the headline numbers from the quarter:
- Revenue of $1.15 billion represented reported growth of 23% and organic growth of 6%.
- Gross margin of 62.7% expanded from 61% in the same quarter last year.
- EBITDA margin of 34.3% increased from 33.6% in the same quarter last year.
- Adjusted diluted EPS of $2.24 came in at the top of the guidance range of $2.16 to $2.24.
Earnings came in at the high end of expectations, and management was moved to increase its full-year earnings guidance:
- Full-year adjusted EPS guidance in the range of $9.12 to $9.30 compared to a previous range of $8.98 to $9.28.
- Full-year organic revenue expected to increase by more than 5% compared to a previous estimate of 4% to 5%.
- Third-quarter diluted EPS guidance in the range of $2.24 to $2.30.
What happened in the quarter
The company operates in such a wide range of niche and specialist markets that it's a good idea to break out its earnings by segment. As you can see below, the combined profit from the industrial technology and energy systems and controls segments doesn't account for more than the profit from the medical and scientific imaging segment.
In a sense, the declining importance of the company's industrial and energy businesses is a deliberate consequence of its shift toward software and information technology. Indeed, the 64% increase in revenue in RF technology and software was largely due to contributions from two acquisitions, Deltek and ConstructConnect.
Both businesses "continue to perform at an exceptional clip" according to CEO Brian Jellison. Deltek is a provider of enterprise software and information solutions for government contractors, while ConstructConnect provides information solutions to the construction industry and is a business that comes with a high percentage of recurring revenue.
What the shift is doing to Roper's results
The expansion into software and recurring revenue is changing the nature of Roper's earnings and cash flow. The company generated negative working capital in the first quarter, and did the same in the second quarter. This means it can generate strong cash flow because it doesn't have to tie up cash in working capital.
For example, inventory as a percentage of annualized net sales was only 4.4% in the quarter compared to 5.5% in the same quarter two years ago. Meanwhile, deferred revenue was 11.4% of annualized net sales compared to just 6.6% in the second quarter of 2015.
Software and intellectual capital businesses tend to have fewer inventory requirements, and deferred revenue is higher due to recurring revenue generation through things like subscriptions.
All told, Roper expects to generate more than $1.15 billion in operating cash flow, a figure which, based on estimates, will represent around 25% of full-year revenue. Incidentally, the cash flow guidance is an upgrade from the $1.15 billion forecast at the start of the year.
It was a solid quarter of execution for Roper, and investors will be hoping the acquisitions continue to perform as expected. Meanwhile, the company's structural shift toward more software-based revenue is ongoing, and this could lead to more margin and cash flow.
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