Roper Technologies (NYSE: ROP) has a new look. The company has rearranged its reporting segments, but there was a very familiar refrain coming from its impressive set of first-quarter earnings. In a nutshell, Roper pleased investors by beating earnings expectations and raising full-year guidance. Here are the details behind yet another good quarter for the company.
Roper Technologies first-quarter earnings: The raw numbers
Let's start with the headline numbers from the quarter compared with management's expectations:
- Revenue of $1.29 billion represented an organic year-over-year increase of 6%.
- Earnings before taxes grew 15% from the prior-year period to $382 million.
- Diluted EPS increased 26% year over year to $3.30, compared to the guidance range of $2.74-$2.80.
Don't get too excited about the significant earnings beat, as there was a $0.41-per-share tax benefit in the quarter. However, even excluding the tax benefit, earnings per share came in above the high end of the guidance range at $2.89.
The strong performance during the quarter and the recent acquisition of software company Foundry led management to raise full-year guidance. Here are the details:
- Second-quarter diluted EPS is expected in the range of $3-$3.04.
- Full-year organic revenue growth is now forecast to be 4%-5% compared to a previous range of 3%-5%.
- Full-year diluted EPS should be $12.70-$13 compared to a previous range of $12-$12.40.
Behind the headline numbers, Roper is making good progress with ongoing margin expansion and cash flow generation. For example, the 7% reported revenue growth led to a 13% increase in earnings before interest, taxes, depreciation and amortization (EBITDA) thanks to EBITDA margin expanding to 34% from 32.3% in the year-ago period. Meanwhile, free cash flow increased 15% year over year to $312 million.
Introducing Roper's new segments
There's always a lot of interest when a company rearranges its business segments -- not least because it can signal corporate action in the future. However, in the case of Roper, it's more about defining the segments by mode of business than any kind of strategic realignment.
Roper's highly successful business model involves buying asset-light, high-margin businesses in niche end markets. They are run as separate entities, but capital deployment decisions are made centrally by Roper's leading executives. As such, there's no change to how the businesses are operated, merely that they will be reported within segments that better define their function.
The four new segments and management's second-quarter to fourth-quarter guidance are outlined in the table below. As you can see, the reordering of segments is partly a reflection of the growth in importance of software to Roper's revenue. For reference, all four segments expanded operating margin in the quarter.
|Segment||Share of Revenue||Q2-Q4 Revenue Growth Outlook|
|Network software and systems||27%||4%-6%|
|Measurement and analytical solutions||31%||4%-6%|
The largest segments all look to be on track in 2019, but the business that sticks out like a sore thumb is process technologies, where Roper is suffering from its exposure to upstream oil and gas capital spending, which will come up against difficult comparisons with last year.
That said, the steady appreciation in the price of oil this year from about $46 a barrel to around $65 at the time of this writing could lead to a relaxing of budgets. Meanwhile, process technologies is seeing growth from liquefied natural gas construction projects and industrial pumps.
All told, it was a good quarter for Roper and a demonstration of the strength of its acquisitive business model. One thing investors should remain aware of is the possibility of further merger and acquisition activity in 2019. After all, the strong increases in cash flow have led to a reduction in the company's net debt-to-EBITDA multiple to 2.2 from 2.6 in the prior-year period. Roper is in a good position to make capital deployments -- something to keep an eye out for.
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