Earnings Call Transcript - ROP Q3 2021

Operator, Operator

Good morning. The Roper Technologies Conference Call will now begin. Today's call is being recorded. All participants will be in listen-only mode. I would now like to turn the call over to Zack Moxcey, Vice President, Investor Relations. Please go ahead.

Zack Moxcey, Vice President, Investor Relations

Good morning, and thank you all for joining us, as we discuss the third quarter financial results for Roper Technologies. Joining me on the call this morning are Neil Hunn, President and Chief Executive Officer; Rob Crisci, Executive Vice President and Chief Financial Officer; Jason Conley, Vice President and Chief Accounting Officer; and Shannon O'Callaghan, 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've prepared slides to accompany today's call, which are available through the webcast and are also available on our website. Now, if you'll please turn to Slide 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 Slide 3. Today, we will discuss our results for the quarter primarily on an adjusted non-GAAP basis. During and subsequent to the third quarter, Roper signed definitive agreements to divest TransCore, Zetec and CIVCO Radiotherapy businesses. Results for these businesses are reported as discontinued operations for all periods presented. Unless otherwise noted, the numbers shown in this presentation are on a continuing operations basis. For the third quarter, the difference between our GAAP results and adjusted results consists of the following items: amortization of acquisition-related intangible assets; purchase accounting adjustments to commission expense; and lastly, income tax restructuring associated with our pending divestitures. Reconciliations can be found in our press release and in the appendix of this presentation on our website. And now, if you'll please turn to Slide 4, I'll hand the call over to Neil. After our prepared remarks, we will take questions from our telephone participants. Neil?

Neil Hunn, President and Chief Executive Officer

Thanks, Zack, and good morning, everyone. Thanks for joining us. We're looking forward to sharing with you the details of our solid quarter performance, as well as summarizing the acceleration of our portfolio transformation. As we look at the sequence of our call this morning, we'll start with our quarterly highlights and our recent divestiture activity. I'll then turn the call over to Rob, who will share the details of our financial performance and our bridge to continued operations. I'll then walk everyone through our segment by segment performance and our outlook for the balance of the year. As usual, we'll leave plenty of time to talk to you and address all of your questions towards the end. Next slide, please. As we turn to Page 5, this was another quarter of solid operational and excellent financial performance. On a continuing operations basis, we grew revenue, EBITDA, and DEPS north of 20% in the quarter. It is important to highlight and characterize the underlying strength of these results. Revenue on an organic basis grew 12% in the quarter. End market and customer demand was very strong across our portfolio within both our software and product businesses. Importantly, our software segments performed well operationally with 10% growth in one segment and 17% in the other. Our software businesses' recurring revenue grew low double digits in the quarter, highlighting the underlying strength, stability, and increasing quality of our revenue base. To remind everyone, about 80% of our software revenues are recurring in nature. It's also worth noting that our 2020 acquisition cohort, led by Vertafore, continues to perform very well. As it relates to our product businesses, like most other companies, we are experiencing supply chain and logistical challenges. But the businesses nevertheless performed very well during the third quarter. As mentioned, customer demand was very strong throughout the quarter and backlogs are up over 50% versus last year. Given this strong operational performance, we continued our disciplined deleveraging of our balance sheet with net debt at 3.5x trailing EBITDA. Also, we are improving the outlook for the year, which we'll detail later in the call. Earlier this morning, we announced two new additions to our Board of Directors, Irene Esteves and Tom Joyce. The addition of Irene and Tom to our Board is part of our long-term board refreshment process. Both are tremendous additions to our board. Finally, we've been active over the last few months working to accelerate the transformation of our portfolio through the announced divestiture of three businesses. Let's turn to the next slide, Page 6, to walk through those details and highlights. During the last several weeks, we entered into definitive agreements to divest three of our businesses: TransCore, Zetec, and CIVCO Radiotherapy, the last of which we announced this morning. We agreed to divest TransCore to ST Engineering for $2.68 billion. In our view, this is the right time and the right buyer for TransCore, given their forward strategy and growth outlook. Taken together, we're divesting these three businesses for $3.15 billion, or about 20x this year's EBITDA. Following the completion of these deals, Roper will be improved. We will have a higher quality portfolio characterized by having a higher proportion of recurring revenue, a higher organic growth profile, and be significantly more asset light. Finally, we are and will be very active in deploying these after-tax proceeds. Together with our internally generated cash flow, we will have about $5 billion of available M&A firepower to deploy between now and the end of 2022, none of which is included in our current financial outlook. Our enterprise will be even further enhanced once we complete this activity. Before I turn it over to Rob, I wanted to take a moment and highlight Roper's ability to govern, build, and improve businesses over the long term. As part of these transactions, we are retaining our DAT and Loadlink network software businesses, which we purchased together with TransCore in 2004, and we are retaining our CIVCO Medical Solutions business. Given we do not usually get clean book-ins to transaction activity, this provides a unique opportunity to talk about the business building that occurs within Roper. Specifically, just after the acquisition of TransCore, we established DAT and Loadlink as standalone businesses with independent strategies and management teams who operated within Roper's governance and incentive system. Over the course of the last 15 years, these businesses have consolidated freight networks, continuously innovated their product solutions, built go-to-market capability, and grown revenues high single digits on a compounded organic basis. Similarly, the retained CIVCO Medical Solutions business has grown high single digits on an organic basis over the last 15 years as well. During this period, CIVCO Medical Solutions has continually innovated their product solutions, including the recent gel-free ultrasound products, and fundamentally restructured their go-to-market strategy. At Roper, we buy great businesses and provide an environment and incentive system where they get even better over the long arc of time. Now let me turn it over to Rob to walk through the details of our financial performance.

Rob Crisci, Executive Vice President and Chief Financial Officer

Thanks, Neil. Good morning, everyone. Turning to Page 7. On this page, we will review some Q3 financial metrics on a basis that includes the discontinued operations in order to compare our Q3 results to our previous guidance on an apples-to-apples basis. Including the businesses now classified as discontinued operations, we generated $1.621 billion of revenue and $602 million of EBITDA. Total DEPS was $3.91, which exceeded our Q3 DEPS guidance of $3.80 to $3.84. Free cash flow for the quarter was $431 million, down 2% versus prior year; year-to-date free cash flow is now up 29% through three quarters. Now turning to Page 8. Here, we'll review some of the key income statement metrics on a continuing operations basis. Revenue increased 22% to $1.463 billion. Q2 organic revenue increased 12% with strong growth across all four reporting segments led by 17% organic growth in our Network Software segment. EBITDA increased 21% to $558 million, net earnings grew 24% to $384 million, and DEPS also grew 24% to $3.60. Next slide. Turning to Page 9. This slide will update you on the latest installment in our successful deleveraging story. Year-to-date, we have reduced our net debt by nearly $1.3 billion and our total debt reduction is now $1.8 billion since completing the last of the 2020 acquisitions approximately one year ago. We continue to benefit from our excellent cash conversion as nearly $2.3 billion of total EBITDA generated over the last four quarters has converted to $1.94 billion of free cash flow, representing an EBITDA to free cash flow conversion of 85%. At the end of September, our net debt to EBITDA has decreased to 3.5. We are on track to be near 3x by the end of 2021 and therefore, well positioned to return to capital deployment even before accounting for the divestitures. The proceeds from the divestitures further amplify our capacity with $5 billion-plus available for deployment through 2022, as Neil highlighted earlier. Next slide. Moving now to Page 10. A quick look here at how the divestitures meaningfully improve our working capital position moving forward. This page repeats the working capital numbers we showed last October and adds a Q3 '21 column that shows the enterprise including the removal of the three businesses being divested, we are now at negative 12% net working capital to revenue compared to negative 6% in the same quarter last year, and negative 3% back in Q3 2019. Divesting TransCore reduces our net working capital by approximately $200 million with the majority coming out of our unbilled receivables balance. This structurally lower net working capital positions us very well for continued high cash conversion moving forward. So with that, I'll turn it back over to Neil to cover the segments.

Neil Hunn, President and Chief Executive Officer

Thanks, Rob. Let's turn to Page 12 and walk through our application software segment. Revenues in this segment were $603 million, up 10% on an organic basis. EBITDA margins were 44.4% in the quarter. Across this segment, we saw organic recurring revenue, which is about 75% of the revenue for this segment, increased approximately 10%. This recurring revenue strength is based on strong customer retention, continued migration to our fast delivery models, cross-selling activity, and new customer adds. Across this group of companies, the financial strength was broad. To highlight a few businesses, Deltek, our enterprise software business that serves the US federal contractor, architect, engineering, and other services end markets, had another good quarter. During the quarter, demand was particularly strong in Enterprise GovCon and construction end markets. Importantly, during the quarter, Deltek also had success at the top end of the market with their cloud or SaaS solutions. Vertafore, our agency management cloud software business focused on P&C insurance agencies, also had a nice quarter with very strong new bookings and nice expansion activity in some of their largest customers. Aderant, our legal software business continues its momentum and market share gains, as we talked about last quarter; Aderant is gaining momentum for their SaaS solutions this quarter, setting a record for SaaS bookings activity. Consistent with the theme of this segment, PowerPlan was strong as well both in terms of new bookings and adds to their recurring revenue base. It's nice to see PowerPlan's refocus strategies start to pay dividends. As relates to our healthcare IT businesses, Strata, the data innovations and CliniSys were rock solid in the quarter. For Strata, their recurring subscription-based software solutions continue to perform well and grow nicely. Strata's integration of EPSi is on track and nearly complete. The customer base continues to demonstrate excitement for this combination. Finally, CliniSys continued to gain market share in the UK lab market and has been established as one of the four strategic IT partners for the NHS. As we turn to the outlook for the fourth quarter, we expect organic revenue growth to be similar to that of the third quarter as recurring revenue growth rates are expected to remain strong. A solid quarter here for sure. And with that, let's turn to the next slide. Turning to Page 13. The financial performance for this segment, as well as the next two MAS and PT, are shown on a continuing operations basis. Revenues in our network segment were $343 million, up 17% on an organic basis, and EBITDA margins remained very strong at 51.6% in the quarter. The software businesses in this segment are now greater than 90% of the segment's revenue. Our NSF software growth was broad-based and driven by organic recurring revenue growth of approximately 17%. At the business level, our Freight Match businesses, both in the US and Canada continue to be solid growers. As reminder, our Freight Match networks are critical and necessary elements to help organize and transact the trucking, shipping spot markets. Strength in our businesses has been on both sides of the network, brokers and carriers with continued strength in the quarter on the carrier side of the network. In addition, these businesses had improving revenue per customer ARPU, as the value of the network continues to increase with higher levels of network activity. Foundry, our media and entertainment software business, which enables the combination of live action and computer-generated graphics to be combined into a single frame, demonstrated continued recovery and growth in the quarter. It is worth pointing out Foundry's continued commitment to product innovation and the recent release of their AI-enabled news features that allow for more automated workflow steps within the video compositing process. Our businesses that focus in and around the US Long Term Care markets, MHA, SHP, and SoftWriters did particularly well in the quarter. iTradeNetwork, our perishable food supply chain network business had a nice quarter as bookings growth was very strong and demonstrates this follow recovery in their end markets. Finally, we saw growth across the two product businesses within the segment, rf IDEAS and Inovonics Products with particular strength in our healthcare end markets. As we look to the fourth quarter outlook, we expect to see low double-digit growth in this segment again on a continuing operations basis. Please turn to the next slide. As we turn to Page 14, revenue in our MAS segment was $392 million, up 9% on an organic basis. Organic growth in this segment excluding Verathon was again north of 20%. Notably, this is the last quarter for the very difficult Verathon COVID comp, and we expect Verathon to return to growth in Q4. EBITDA margins for this segment were 32.4% in the quarter; the EBITDA margins in this segment were consistent with our expectations but lower than the prior year due to Verathon's extraordinary prior year quarter and the cost impacts of certain businesses navigating their supply chain challenges. Again, these results are on a continuing operations basis. Before getting into business specific details across this segment, demand can be characterized as being very strong. The demand was across all businesses and across both capital and consumable products. Product backlogs are up over 50% as compared to a year ago. Our businesses, each of which were impacted by supply chain challenges, navigated through the quarter. As relates to individual business performance, Verathon, having come off unprecedented demand for their intubation family of products a year ago, is roughly 40% larger today versus 2019. The momentum within this business continues, given the larger install base of intubation capital equipment, which enables considerable recurring pull-through volumes. In addition, Verathon is experiencing impressive growth in their Bronchoscope product family and sustained growth across their BladderScan ultrasound franchise. Our other medical product businesses accelerated nicely in the quarter with particular strength at NDI and CIVCO Medical Solutions. Strong demand at Neptune continued in the quarter. Neptune's end markets continue to open up and improve but have not fully recovered, especially in the northeast US and Canada. Demand across our industrial businesses was robust as well, and performance was strong, but somewhat impacted by supply chain challenges. For the fourth quarter, we expect low double-digit organic growth for this segment based on continued encouraging market conditions both in medical and industrial markets and easing prior year comp for Verathon. Now let's turn to our final segment, Process Tech. As we turn to Page 15, revenues in our Process Tech segment were $124 million, up 16% on an organic basis; EBITDA margins were 31.6% in the quarter. These results are also reported on a continuing operations basis. The short story here is we're seeing improving end market conditions across virtually every one of our businesses in this segment and strong demand. Both orders and backlog were up approximately 50% in the quarter versus a year ago. Recovery in our upstream oil and gas business has accelerated in the quarter. Cornell continues to perform well for us. This is partially based on market conditions but also on Cornell's product innovation, as they're seeing very nice demand pick up for their IoT connected pumping solutions. Similar to that of our MAS industrial businesses, the businesses in this segment are being impacted by supply chain challenges but continue to navigate through these issues. As we turn to the outlook for the fourth quarter, we expect high teen organic growth based on improving market conditions. Now please turn to Page 17, where I'll highlight our increased outlook for 2021. Based on strong year-to-date performance and expected continued momentum, we're establishing full-year 2021 guidance on a continuing operations basis of $14.08 to $14.12. As you read down this table, you will note that the full-year DEPS impact for the businesses being divested is $1.18. If you combine this with our newly established continuing ops guidance, you will note we are raising our full-year outlook on an apples-to-apples basis by $0.26 on the low end and $0.10 on the high end. As relates to the fourth quarter, we're establishing again on a continuing operations basis guidance in the range of $3.62 and $3.66. Now let's turn to our summary and get to your questions. As we turn to Page 18 and our closing summary, our third quarter was a solid quarter from both an operational and financial perspective. Simultaneously, we undertook significant work to further the transformation of our business portfolio. Revenue, EBITDA, and DEPS grew 20% plus; organic revenue was up 12%. Across our enterprise, end market and customer demand was strong in terms of software, product capital items, and consumables. Throughout the quarter, our product businesses navigated through the market-based supply chain challenges. Given all of this, we're able to increase on an apples-to-apples basis our outlook for the full year. We also continue to deleverage our balance sheet by $1.8 billion since the 2020 acquisitions with net leverage now coming in at 3.5x trailing EBITDA. As relates to the strategic governance of our enterprise, we're excited to be announcing the addition of Irene and Tom as new members of our Board of Directors. As part of our long-term board refreshment strategy, these two new directors will complement our existing directors and help enable Roper to continue our track record of long-term cash flow compounding. Over the last decade, we have worked to enhance the quality of our portfolio. To this end, recently, we took actions to meaningfully improve the quality of our portfolio by agreeing to divest TransCore, Zetec, and CIVCO Radiotherapy. Once complete, Roper will be a better version of Roper, will have higher proportions of recurring revenue, higher organic growth prospects, and be significantly more asset light. In addition, we expect to have roughly $5 billion of capital available to deploy between now and the end of 2022. As it relates to our M&A pipeline, it is and always has been characterized as having many high-quality opportunities. So we're clear, we're back on offense when it comes to our capital deployment portion of our strategy and have fully resumed our usual process-oriented and disciplined M&A activities. And with that, let's open up to your questions.

Operator, Operator

We will now go to our question-and-answer portion of the call. Our first question is from Deane Dray from RBC Capital Markets. Please go ahead.

Deane Dray, Analyst

Thank you. Good morning, everyone.

Neil Hunn, President and Chief Executive Officer

Hey, good morning, Deane.

Rob Crisci, Executive Vice President and Chief Financial Officer

Good morning, Deane.

Deane Dray, Analyst

Hey, look, when I look at free cash flow, organic revenue growth, recurring revenue, everything checks the boxes, and there's a lot of moving parts this quarter and I really appreciate all the reconciliation of previous guidance versus revised with a divestiture. So just set that aside and the first question I want to ask is for Neil, to help put in context, these recent portfolio moves. And I don't want to parse your words, but the slide says accelerating a portfolio transformation. You're not saying optimize; you are not trimming at the edges, but you are making some sizable moves here in a cluster. And it just begs the question, what is the strategic transformation? Is it more just making Roper a better Roper? Or is there a more sizable change in portfolio composition coming and what the timing might be? Thanks. We'll start there.

Neil Hunn, President and Chief Executive Officer

Yes, thanks, Dean. So hey, the - it's all about Roper being a better version of ourselves. Our strategy, as you know, and most people listening know, for the last 20 years has been fundamentally based on improving the quality of our enterprise. Historically, that's been characterized as being more asset light or, recently, it's not just that, but increasing the mix towards recurring revenue, increasing the mix towards higher and slightly higher organic growth businesses. So that strategy has been in place and will remain in place; nothing's changed there relative to these three transactions. These are really the result of two different decisions. Zetec was really an opportunistic situation with a strategic buyer who offered a compelling price, and it just made sense, in our view, for our shareholders to let that go to that buyer and reduce a little bit of cyclicality and exposure to the Zetec end markets. As it relates to CIVCO Radiotherapy and TransCore, those were independent decisions, the result of a single process which was our sort of our new and revised deep strategic review of all the businesses. We do this with each business on a rolling sort of three-year basis. The CIVCO Radiotherapy and TransCore reviews were late last year, early this year, and we just felt, given their future growth prospects, which are interesting and likely robust but also capital intensive, in both cases, we're going to just be sub-optimized with us as an owner. You overlay that with the valuations we will get for the businesses; the three together were roughly 20x this year. It just made sense from all vectors for us.

Deane Dray, Analyst

Is there just to circle back for the timing? And just like what's ahead, how far down the road are you on this optimization? Are there other bigger pieces coming? What kind of timing should we expect?

Neil Hunn, President and Chief Executive Officer

Yes, I believe this represents an acceleration of the transformation. Over the past 20 years, the transformation has been gradual, moving from 40% cyclical to now about 10% or 15% cyclicality. We’ve shifted from being more asset intensive to less so, transitioning from products to software. This has been a gradual process, and we anticipate that it will continue.

Deane Dray, Analyst

Good. Well, just, I really appreciate the specifics you provided; each one of these divestitures makes sense. You're getting good valuations for them. So, kudos to you guys. And then the second question, and this feels more like something that would be asked at an Analyst Day, but just it jumped off the page here on your board additions. Today, adding Tom Joyce from Danaher, Irene from CFO of Time Warner. I've presented to your board last November; I've got an appreciation for how high-powered the group already is and how hands-on they are. Talk about the partnership with the board dynamics, especially at this stage of the evolution of the portfolio. And what were the priorities for the board is in at this time?

Neil Hunn, President and Chief Executive Officer

Yes, appreciate the opportunity, any opportunity to talk about our board because it is absolutely and undeniably a strategic asset for our business. The board, we are highly engaged with five times a year, three days each time. So it's a board that works hard. They enjoy working hard; it's a board and that amount of time that we spend, it's not just a series of presentations where there is space to have conversations, deliberation, and challenge one another, and then form a point of view on the forward direction of our enterprise. It's a highly collaborative group, but one where people express their points of view openly and freely. So it's a great environment. Also, in governance, there's a refreshment process that goes with that; the Board Chair that became the Board Chair at Brian's passing, Will Prezzano just aged off the board. We have a sort of that requirement to refresh the board, and we're super fortunate to have Irene and Tom join us. Irene will bring just a tremendous addition as she's most recently professionally as an executive at Time Warner, with a long track record in financial institutions; she's just a very astute and financially savvy executive who understands risk and risk management and is also a very experienced board member at this stage in her career. Tom, this will be his first public, outside public company board. Everybody here listening knows Tom very well, but just the combination of what he's done in his 30-year career at Danaher, combination of business building and capital deployment is core to what we are all about. I think both will just bring tremendous new thoughts to our boardroom as we continue to evolve and build our business.

Operator, Operator

Our next question comes from Allison Poliniak from Wells Fargo. Please go ahead.

Allison Poliniak, Analyst

Hi, good morning, guys.

Neil Hunn, President and Chief Executive Officer

Hey, Allison.

Allison Poliniak, Analyst

I just want to talk of the CRA metric. Obviously, core to your M&A strategy and I suspect going forward, but with some of that asset intensive business coming out, elevating Roper's on CRA. I guess one is that is it more challenging in terms of the pool of potential properties that you want to acquire? And I just maybe any thoughts on does that CRA metric relative to Roper kind of shift going forward? Just any color there?

Neil Hunn, President and Chief Executive Officer

Yes, cash return for us is our North Star, right? It guides not just our capital deployment strategy; it guides every operational decision in the business. It defines for us what good organic growth is versus just growth at any cost, right? It's how you do it. CRA for those that aren't intimate with it is really just a measure of business quality. Do you have a cash flow relationship with your customer, if you will? We're able to provide value, capture value for that, and have an underlying business model that doesn't require a lot of assets to deliver that value. That's what cash return is; it is our North Star and will continue to be our North Star. It's just core to our culture here. Allison, in terms of your question about the number of targets, mathematically yes, the number of targets is fewer as we're looking to buy companies that have CRA that are higher than our existing; but it's not a limiter to our strategy, right? There's a vast ocean of software, informatics, and data-enabled business models that are out there that we've been fishing in for the last ten years, and it's not a practical constraint for our capital deployment strategy.

Allison Poliniak, Analyst

Got it. That's helpful. And then just a quick question on measurement and analytical solutions at core without Verathon, obviously, up 20%-plus. But then you talked about EBITDA, some headwinds there, one being Verathon, but the other being supply chains. Is that just a headwind in terms of growth? Is it cost you can pass through, just any incremental color there to help me reconcile that?

Neil Hunn, President and Chief Executive Officer

Hey, I'll start and I'll pass over to Rob. So first, I would say, our businesses more broadly, like most businesses around the world, certainly as a country, over the last 20 years have built their supply chain to optimize on the lowest cost and less so on resiliency. A nice thing that our businesses did, starting a couple years ago, is build some resiliency with the China sort of tariff situation. So that was a precursor that helped us a bit for us relative to the headwinds. Yes, growth was limited a bit, certainly across all of our product businesses. And then also the choice that our businesses made when there's an opportunity to either expedite a part or go into a spot market or an alternative source for a part and pay incrementally a bit more, they did that. And so there's a little bit of gross margin headwind; hard to notice in a macro sense, but a little bit of headwind on GP percentage, and then certainly some impact on the revenue side. Rob, if you want to add something?

Rob Crisci, Executive Vice President and Chief Financial Officer

Yes, about 25% of that MAS segment are the industrial businesses. And so that's where you see some of this. I think we mentioned earlier that backlog is up 50%, so we're getting great orders, and that bodes well for the future. But yes, I think what Neil said was spot on.

Operator, Operator

The next question is from Julian Mitchell from Barclays.

Trish Gorman, Analyst

Hey, good morning. This is Trish Gorman on for Julian. Just maybe following up on that last question regarding the supply chain constraints. Can you just talk more about what your assumptions are kind of embedded in for guidance for when those might be?

Rob Crisci, Executive Vice President and Chief Financial Officer

Yes, so we're not expecting that they're going to ease really anytime soon. So we're expecting what we saw in the third quarter similar to what we'll see in the fourth quarter. And then as we get into next year, we'll update that next quarter, but we're continuing to build backlog; the customer relationships are great, as Neil said we're expediting wherever we can to get products to customers. And so I think long-term it's a great story; short-term, it's hard to say what's going to happen.

Trish Gorman, Analyst

Got it. Thank you. That's helpful. And then just maybe a follow-up, kind of broader. We've been seeing industrial companies paying anywhere from 30x to 100x EBITDA for software assets now. And so does Roper think you'll have to pay this kind of price too, or can it still buy software assets for 20x EBITDA or less as it did with Vertafore? Thanks.

Neil Hunn, President and Chief Executive Officer

Yes, thank you for the question. Valuations for high-quality software businesses have been elevated for some time and continue to be so. A few quarters ago, I mentioned that they might be stabilizing at a certain high level, and I still believe that could be true. However, that level remains very high. Roper focuses on acquiring established businesses with clear competitive landscapes and observable market growth. The outlook for future growth is measurable and comprehensible, and the factors driving growth can be effectively modeled. When we identify companies in smaller markets that are leaders and demonstrate mid to high single-digit organic growth alongside EBITDA margins of 30% to 40%, those typically trade around 20 times EBITDA, possibly 18 times or 22 times. This is the range we expect to continue to pursue.

Operator, Operator

Next question comes from Christopher Glynn from Oppenheimer.

Christopher Glynn, Analyst

Oh, yes. Thanks. Good morning. So given the comment that the number of targets is not a practical constraint, and I appreciate repeating that, which we've heard previously. I'm wondering if the expectation is actually to, at least, replace the divestiture earnings and EBITDA in fairly short order? And can you under head of receiving those proceeds in terms of your negotiations with agencies and such?

Neil Hunn, President and Chief Executive Officer

Yes, so appreciate the question. So first, we said it in the prepared remarks; it's on the slides; it's worth mentioning, we take the proceeds from these transactions, add to our cash flow. We're generating our current balance sheet leverage; there's about $5 billion of M&A firepower between now and the end of next year. So that's all good, the balance sheet is in good shape. As we mentioned, we are super active in the M&A markets. But we always have been and always will be patient and disciplined, right? I mean, this is every deal matters; we're buying these businesses with the very long term in mind to never sell them. So you have to buy the very best asset you can find, and sometimes that takes time. So I'm not, we're sort of putting out this mathematical marker of $5 billion, but I would not associate any specific timeframe with that. We're just patient, discipline-focused, but active in the M&A markets.

Rob Crisci, Executive Vice President and Chief Financial Officer

And I would say we do have flexibility in terms of the timing on when that capital is deployed. I think you have to wait for the proceeds to come in the door. But as Neil said, we're going to be very, very disciplined and we don't feel like we're rushing in any way.

Operator, Operator

Okay, and just wanted to dive into the backlog of 50% plus that the MAS segment, curious the play of medical versus industrial and how Verathon factors into it.

Neil Hunn, President and Chief Executive Officer

So it was the backlog was up over 50% in both MAS and Patterson. I'll certainly turn over to Rob here in a second, but the backlog was strong at medical products, Verathon, Northern MMI. It was strong at Neptune and it was strong at industrial.

Rob Crisci, Executive Vice President and Chief Financial Officer

Yes, it's very broad-based. It really is across all the businesses. And again, that's getting a lot of orders in and then being able to get the products out the door.

Operator, Operator

Okay, last one for me any estimate on the after-tax impact of the $3.15 billion?

Rob Crisci, Executive Vice President and Chief Financial Officer

Yes, I think we want to wait until we get the deals closed to comment on that. I mean, there certainly will be some tax leakage. But we'd rather wait until next year; we get the deals closed, and then we can give you a good number.

Operator, Operator

Next question comes from Joe Giordano from Cowen.

Joseph Giordano, Analyst

Hey, good morning, guys. So does this mean that I'm not going to be able to ask you guys about the New York City deal?

Rob Crisci, Executive Vice President and Chief Financial Officer

You can ask. We're under contract to not disclose a lot of details about that going forward.

Joseph Giordano, Analyst

It will be sadly missed. Yes, I just wanted to ask on Neptune. A lot of different things are being said out there in that market. Can you talk about where that business is this year? Like is that business growing this year? Or is it still down? How much did it decline last year? Just curious to see what's really going on in that metering market right now.

Neil Hunn, President and Chief Executive Officer

Yes, so I'll give you a little bit of color and turn it over to Rob. So for Neptune this year, it will be like really close to '19. Just from a size perspective that absolutely is growing this year, in the very short term, we actually believe it's hard to measure in the very short term but the reports from Neptune indicate we picked up a little bit of market share this quarter because we are able to deliver product on a much shorter lead time than some of the people we compete with. The thing about the market itself is that the markets are opening but nowhere close to fully recovered, especially in Canada and less so but certainly not open in the Northeast United States. Final thing I'd say about Neptune is the strategy here is, I mean, it's very clear, and it appears to be working, if you will, having traction around the strategy on the product with the static meter product that we introduced to the market, the way we read the data off the meter. And importantly, now the software and analytics that play that Neptune is developing, right? What do you do with all that data once you capture it off the meter in a more frequent basis? So the strategy has certainly got traction in the marketplace, and the business is growing, and they have record levels of backlog as we sit here at the end of the quarter.

Joseph Giordano, Analyst

Can you just remind me how much of the product at Neptune are you guys manufacturing, like in-house and how much is contract?

Neil Hunn, President and Chief Executive Officer

It's mostly produced in-house. There are some elements that come from the supply chain, but between the two facilities at Neptune, it operates as a vertically integrated business.

Joseph Giordano, Analyst

Okay. And then my last question, and I promise next quarter I'll ask software questions. So this is like the first one. But the process got, is that I mean, it's slightly less growth expectation than previous, is that just supply chain limiting your ability to deliver or does the market change at all?

Neil Hunn, President and Chief Executive Officer

No, 100% supply chain related across all the businesses and incrementally the market is more favorable. We talked about the backlogs but obviously, you know that the US rack markets are more favorable; energy prices are more favorable; the project work at CCC is going well. So yes, it's all supply chain related.

Operator, Operator

Next question comes from Jeff Sprague from Vertical Research.

Andrew Shlosh, Analyst

Hey, good morning, guys. It's Andrew Shlosh on for Jeff. How are you? Sorry about that. I was on mute. So just Firstly, you said Vertafore was strong in the quarter and really good bookings there. Are you able to quantify the growth on a sales basis?

Rob Crisci, Executive Vice President and Chief Financial Officer

Yes, it's right on track with the numbers that we laid out last year when we acquired the business; they're doing very, very well.

Neil Hunn, President and Chief Executive Officer

Yes. At the time of the acquisition, we said it was a mid-single-digit organic grower. And it's, that's where it is.

Andrew Shlosh, Analyst

Awesome. No, that's great color. And the other thing I was kind of thinking about, so measurement and analytical solutions was up 9%, organic, 20%, organic, excluding Verathon, we talked a little bit about the growth there and I know revenues significantly above 2019 levels, how do we think about the growth going into 2022?

Rob Crisci, Executive Vice President and Chief Financial Officer

Yes, we will guide 2022 in beginning January, February, when we announced earnings, so I think the trends are very, very good. And all those businesses, we talked about the movement at Verathon to these to the equipment that has been critical to the COVID fight, and now it's become more common. And so that leads to consumables. And so I think it's a great long-term growth story at Verathon, all those businesses. But we'll wait till next year to give you the numbers on that.

Neil Hunn, President and Chief Executive Officer

The one thing I'd add is that we're going to carry a very high backlog going into next year; there's momentum and demand. We'll see to the extent that it's going to be, we expect it to carry through for the full year, but it'll certainly start strong.

Operator, Operator

Our next question comes from Alexander Blanton from Clear Harbor Asset Management.

Alex Blanton, Analyst

Hi, good morning. Yes, very interesting quarter. I wanted to ask about the organic growth; it was 12% average and 10% for application, 17% for network, 9% for measurement, 16% for process. These are numbers that are way above historical rates of organic growth for this company, and it's really stunning. One comment that I had from our group this morning was, well, last year was depressed. So that really won't continue. Could you comment on that how much of that growth is just due to a depressed base, if any, and do you expect these kinds of things to continue, these organic growth rates?

Rob Crisci, Executive Vice President and Chief Financial Officer

Yes, so these businesses, when we acquired them, I think we're pretty consistent. They're mid-single-digit organic growth businesses; sometimes they're high. We work hard to get them from mid to high. I think if you look at the double digits, certainly last year was down low single digits, and now we're up double digits. So if you take the sort of the two-year run rate, you're in that mid to high single digit organic, which I think is the natural run rate for those businesses, which we're always looking to accelerate.

Neil Hunn, President and Chief Executive Officer

Yes, Alex, it's Neil. I mean, I would say a couple of things there. I mean, we certainly, we're going to carry momentum from this year into next year, so if you just look across the portfolio, I think next year, we haven't done the guidance yet, it will probably be a little bit better than trend; trend sort of mid-single digits over a long arc of time. Next year might be a touch better than that. We'll see we do our guidance next year. But what we're trying to do from for three years now, as CEO, we've been trying to increase the organic growth rate of this business and of the portfolio through a very structured, process-oriented way that focuses on strategy, the execution of strategy, and really building world-class teams and team effectiveness. We're starting to see that sort of work in pockets of the organization that's a bit more mature. So the final story chapter hasn't been written on that story for us yet; it's got another several years to play out, but certainly encouraged by the early signs. Yes. Second question is on the outlook for acquisitions. You mentioned a very robust pipeline in the new release and your earnings release, which was unusual; you don't usually comment on the pipeline in that location. But could you give us a little more color on that? What kind of timing can we look forward to; are there super acquisitions right away in the next year, or is it going to be later on and so forth? So I'll give you a very generic answer on the timing, which is, it's the pipeline always has a lot of deals in it; we are able to because of our approach filter that pipeline, where it's high quality, and we are spending our time on sort of high impact things. But the deal business, you can have a deal where you think you're the winner until you're not at the finish line. And so, the timing is always a little bit subject to a handshake, if you will, between the buyer and the seller. It's not just a one-way thing. And so we're going to be very patient and very disciplined. And we don't feel any sense of urgency to get this $5 billion deployed just for the sake of getting it deployed, we're going to do it in the way we've done for the last 20 years. And so it's hard to handicap the specific timing of when anything would happen, but we're going to be busy at work trying to get it done.

Operator, Operator

Our next question comes from Rob Mason from Baird.

Rob Mason, Analyst

Yes, good morning. Thank you for the question. I wanted to discuss the software businesses briefly; the growth has been impressive across both application software networks. Neil, your comments often highlighted the strength in SaaS bookings. I know you have several businesses actively transitioning to SaaS. Given the overall strength, I wonder what kind of headwind you are facing as you convert some of those on-premises businesses to a subscription model, especially in light of the growth you are reporting.

Neil Hunn, President and Chief Executive Officer

I appreciate the opportunity to discuss this. To clarify, a significant portion of the revenue from our network business is already in the cloud or on a recurring basis, exceeding 90 percent. So, the bulk of the cloud conversions you mentioned are reflected in our application software segment, primarily at Deltek, Aderant, and PowerPlan, with a small contribution from Seaport. When we convert, we believe it serves as a modest growth driver rather than a setback. The growth comes from two opposing factors. One is the challenge of the J curve; when we replace a perpetual deal with a recurring revenue deal, we don't receive the full revenue upfront, but rather a smaller percentage based on when the subscription is booked. On the other hand, we have a large base of existing customers who pay annual maintenance on their perpetual licenses, and we are actively migrating them to the cloud. This provides enhanced value for them, as they benefit from current releases, managed infrastructure, and improved cybersecurity. Because of this added value, we can charge a higher recurring revenue rate. Thus, the uplift from recurring revenue outweighs the initial loss from the upfront sale, resulting in modest net growth for us. I'm happy to discuss this in more detail offline if you're interested.

Rob Mason, Analyst

And is there a timeframe that you're thinking about where these conversions, largely complete themselves for the existing businesses?

Neil Hunn, President and Chief Executive Officer

It's going to be elongated. Companies can make a decision; they can either force the transition to the cloud this year, which reflects their perspective. In our case, we're allowing our customers to control their pace. Our customers are the ones indicating when they are ready to move to the cloud, and we're meeting them where they are. Therefore, it's going to be a prolonged period, likely five or more years, and it could extend up to ten. So, the transition to being fully cloud-enabled will happen gradually.

Rob Mason, Analyst

How do you think about balancing, I guess, internal investment into support both sides of that?

Neil Hunn, President and Chief Executive Officer

Yes. So it's the way that the architecture of as our companies have become more cloud-enabled, the architecture allows them with a service orientation, to make investments, one investment, and deploy it to both platforms. So it's not really an either or; it's an and.

Operator, Operator

The next question comes from Steve Tusa from JPMorgan.

Steve Tusa, Analyst

Hey, guys, good morning. Yes. On the organic, you guys didn't provide an update to the 7% plus; I know like there's some noise around disc ops and continued ops. What is that number now for the year? I mean, I can kind of add up all the segments, but again, there's a lot of noise in the numbers, just moving stuff around. So just an update to that 7% plus now on the continuing ops, for the year, total count?

Rob Crisci, Executive Vice President and Chief Financial Officer

Yes, I think on a continuing ops basis for the year is the eighth on an apples-to-apples basis; the seven is unchanged.

Steve Tusa, Analyst

Okay, got it. So then why next year, if you kind of have some supply constraints and stuff pushing revenue in the next year and this ridiculously strong backlog? Why would that slow next year? I mean, is there any particular reason why that would slow?

Rob Crisci, Executive Vice President and Chief Financial Officer

I mean, I think we'll guide next year in January and after we do all of our business reviews, but I don't see a reason why there should be a challenge.

Steve Tusa, Analyst

Okay, and then just one last one just on margins. What do you expect kind of this year for these continuing ops, roughly EBITDA margin range and then in particular for MAS total company and then MAS EBITDA margins just for baseline for next year?

Rob Crisci, Executive Vice President and Chief Financial Officer

So I think the total company margins are we sort of just gave you Q3; Q4, similar. Like I said, we'll guide next year after we do all of our reviews.

Steve Tusa, Analyst

Okay, and then MAS, any comments there?

Rob Crisci, Executive Vice President and Chief Financial Officer

Yes, I mean, I think generally similar to the third quarter.

Operator, Operator

This concludes our question-and-answer session. We will now return to Zack Moxcey for any closing remarks.

Zack Moxcey, Vice President, Investor Relations

Thank you, everyone, for joining us today. We look forward to speaking with you during our next earnings call.

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.