Roper Technologies Inc (ROP) Q1 2021 Earnings Call Transcript

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Roper Technologies Inc (ROP 0.45%)
Q1 2021 Earnings Call
Apr 27, 2021, 7:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning. The Roper Technologies First Quarter 2021 Financial Results Conference Call will now begin. [Operator Instructions] I would now like to turn the conference -- 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 first 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 have prepared slides to accompany today's call, which are available through 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. Reconciliations between GAAP and adjusted measures can be found in our press release and in the appendix of this presentation on our website. For the first quarter, the difference between our GAAP results and our adjusted results consists of the following items; amortization of acquisition-related intangible assets, purchase accounting adjustments to acquired deferred revenue and related commission expense, and lastly, a gain on sale related to a minority investment in Sedaru.

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

Good morning, and thanks for joining us. For this morning's call, I'll start with a brief summary of this quarter's results and activities. Rob will then highlight our P&L performance and balance sheet metrics. I'll then walk through our segment details, our increased outlook for the year and our concluding comments. As usual, we'll leave plenty of time to talk to your questions toward the end.

Next slide, please. As we turn to Page 5, we got off to a better start than we expected. Business execution was strong across the portfolio and it was also broad based. We are encouraged by seeing nice improvements across the vast majority of our software and product-based end markets. In addition, we continue to see accelerating software recurring revenue growth, growing approximately 6% on an organic basis. Importantly, our 2020 cohort of acquisitions, led by Vertafore, continue to perform very well versus our expectations. When we put this all together, we experienced double-digit growth across virtually all financial metrics; revenue, EBITDA, DEPS and cash flow. The growth in cash flow performance in the quarter allowed us to continue our rapid deleveraging with about $500 million in debt pay-down during the quarter. Based on this encouraging start, we're increasing our outlook and guidance for the full year.

And with that, let me turn it over to Rob to review the financial details. Rob?

Robert Crisci -- Executive Vice President, Chief Financial Officer

Thanks, Neil. Good morning, everyone. Turning to Page 6 and covering the Q1 financial highlights. Total revenue increased 13% to $1.53 billion, which was an all-time record for any Roper quarter. Organic revenue for the enterprise declined 1% versus last year's plus 4% pre-pandemic comp. EBITDA grew 20% to $561 million. EBITDA margin increased 220 basis points to 36.7%, on really great incrementals across the portfolio. Adjusted DEPS was $3.60, 18% above prior year. Free cash flow was $543 million, up 54%. We continue to benefit from our business transformation to a more software-weighted model, where working capital boosts cash flow as our growth accelerates. Our results were enhanced a bit by approximately $40 million of accelerated payments that were the result of wins at our UK-based CliniSys laboratory software business. Aided by our outstanding cash flow performance, we reduced our debt by approximately $500 million in the quarter. More on that to follow. So in summary, a great start to 2021.

Next slide. Turning to Page 7, an update on our deleveraging. The charts on this page are a good preview for how we expect 2021 to look as we follow through on our commitment to reduce debt after our 2020 opportunistic capital deployment. As each quarter passes by, we will benefit from meaningfully improved trailing EBITDA as the performance of last year's acquisitions rolls into Roper's financials. EBITDA is then further enhanced by our accelerating organic growth. Concurrently, our strong cash conversion allows us to apply our high levels of excess free cash flow toward consistent reduction of our debt. In the first quarter, we reduced our debt by approximately $500 million. Over the first three months of the year, our EBITDA growth, combined with debt reduction, enabled us to lower our net debt to EBITDA ratio from 4.7 to 4.2. We expect this downward trend in leverage ratios to continue, moving forward.

So with that, I'll turn it back over to Neil to discuss our segment performance.

Neil Hunn -- President and Chief Executive Officer

Thanks, Rob. As we turn to Page 9, revenues in our Application Software segment were $578 million, up 2% on organic basis. EBITDA margins were an impressive 44.9% in the quarter. Across this segment, we saw organic recurring revenue, which is about 75% of the revenue for this segment, increase approximately 6%. This recurring revenue strength is based on strong customer retention and continued migration to our SaaS delivery models. Of note, this quarter should be the last quarter of non-recurring revenue declines as we come across the COVID comp from last year.

From a business unit perspective, Deltek continued its long string of great performance. As we expected, Deltek's recurring revenue grew nicely. Of particular importance, Deltek saw an increase to the perpetual revenue during the quarter, coming off a decently strong quarter a year ago. Also encouraging was the nature of the bookings activity, which was broad based across our architecture, engineering, creative and government contracting end markets. For reference, the professional services end markets tied to AEC and creative have been slow since the onset of COVID. Also, CliniSys, our European lab software business, just crushed it during the quarter. As Rob mentioned, CliniSys had exceptionally strong cash flow as they gained tremendous market share within the clinical lab consolidation occurring within the United Kingdom. CliniSys has approximately 85% market share in the UK and is now recognized as one of four critical IT vendors for the entire National Health Service. Just outstanding execution by the CliniSys team, and congrats. We also saw sign in the higher education markets that CBORD serves; certainly encouraging.

Finally, our 2020 cohort of acquisitions continues to perform very well. Specific to Vertafore, we continue to be encouraged by their customers' comfort in having Roper as a long-term owner for the business. Also, Amy and her team have done a great job transitioning to Roper and our governance model.

As we turn to the outlook for the balance of the year, we expect high single-digit organic growth for the segment. This is based on the expectation for sustained levels of recurring revenue growth and resumption of non-recurring revenue growth. As it relates specifically to the second quarter, we expect our growth to be a touch below high single digits due to our global lab software group coming off across a challenging comp from a year ago as they are instrumental standing up COVID testing on a global basis. Solid and encouraging quarter for sure.

And with that, let's turn to our next slide, please. Turning to Page 10. Revenue in our network segment were $440 million, flat versus last year and down 3% on an organic basis. EBITDA margins were 40.9% in the quarter. Our software businesses in this segment, about 65% of the revenues were up 4% on an organic basis. This revenue was broad based among our software businesses and driven by organic recurring revenue growth of approximately 6%. Recurring revenue growth is underpinned by strong customer retention. Recurring revenues are also benefited by increasing network participation. At the business level, our Freight Match businesses, both in the US and Canada, continue to be solid growers for us. As a 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. We also continue to see nice organic gains at ConstructConnect as their network enables commercial construction planning and bidding to occur in a more efficient and transparent manner. Lastly, as it relates to our Network Software businesses, we saw improved end market activity, especially in the middle market for Foundry, our media and entertainment compositing software business. Our non-software businesses in this segment were down 13% for the quarter; a touch better than we anticipated. TransCore's New York project work continues and is tracking well. TransCore's tag volumes declined versus a year ago based on lower traffic volumes across the US.

Turning to the outlook for the balance of the year. We expect to see high single-digit organic revenue growth for the segment with consistent high single-digit growth through out -- through the balance of the year for our Network Software businesses. As it relates specifically to the second quarter, we anticipate our segment organic growth to be a touch below HSD, given TransCore's should be stronger in the second half versus next quarter based on timing of project for execution and tag shipments. All in all, a solid outlook for the balance of the year.

Please turn to the next slide. As we turn to Page 11, revenues in our MAS segment were $381 million, up 2% on an organic basis. EBITDA margins were 34.8% in the quarter. As usual, in this segment, we will profile the three macro parts; medical products, Neptune and our industrial businesses. To start, our medical product businesses performed very well this quarter. Verathon continued its strength based on consistent factors; GlideScope unit placements and recurring consumables pull through and continued momentum and share gains with our single-use Bronchoscope product offering. What is also encouraging to see is the growth in our Bladder Scan product line. We believe this was based on a broader base trend of hospitals resuming some normal level of clinical capital spending. We saw similar strength in our other medical product businesses as well. For instance, Northern Digital had their best Q1 bookings quarter in history. This trend bodes well for the balance of the year. Neptune, as expected, declined in the quarter for the same reasons discussed in each of the last three quarters, having limited access to indoor meters in the Northeast United States and Canada. However, we did see some easing of these restrictions in March, and Neptune's customers are beginning to increase their maintenance schedules throughout Q2 and into the second half of the year. Finally, our industrial businesses benefited from improvements in their end market conditions. For the balance of the year, we expect high single-digit growth for the segment. This is based on broadly improving conditions both in medical and industrial end markets and increases to access in indoor meter replacements at Neptune. This strength will be somewhat offset by the extraordinary prior-year COVID demand at Verathon. We're encouraged by our expected high single-digit growth for the balance of the year.

Now, let's turn to our final segment, Process Tech. As we turn to Page 12, revenues in our Process Technology segment were $131 million, down 10% on an organic basis, EBITDA margins hung in at 31% in the quarter. The short story here is we're seeing improving end market conditions across virtually every one of our businesses in this segment after nearly two years of declines. For instance, at CCC, we're seeing the resumption of previously deferred projects and demand for field services to come back online. Also, greenfield bidding activity is back in full swing, especially on an international basis. Cornell continues to perform well for us. This is particularly partially based on market conditions, but also based on Cornell's product innovation as they're seeing very nice demand pick-up for their IoT-connected pumping solutions. As we look to the outlook for the balance of the year, we see double-digit organic growth based on improving end market conditions and continued even comps.

Now, please turn to Page 14, where I'll highlight our increased guidance for 2021. Based on strong Q1 performance and our increased confidence for the balance of the year, we're raising our full-year adjusted DEPS to be in the range of $14.75 and $15 per share and organic growth to be in the 6% to 7% range. The 6% to 7% organic growth is against a 1% organic decline in 2020. This demonstrates that we have meaningfully improved on an organic basis since 2019. The compounding continues. Our tax rate should continue to be in the 21% to 22% range. For the second quarter, we're establishing adjusted DEPS guidance to be between $3.61 and $3.65 and expect second quarter organic revenue growth to be in line with the full-year organic growth rate.

Now, let's turn to our summary and get to your questions. Turning to Page 15 and our closing summary. This was an encouraging start, and we're raising our outlook for the year. We performed well across virtually every financial metric with double-digit increases in revenue, EBITDA, DEPS and cash flow. EBITDA margins expanded nicely and free cash flow grew 54% to $543 million, which enabled us to continue our rapid deleveraging in the quarter. Importantly, we are well positioned for continued double-digit compounding. We are seeing improving conditions across virtually all of our end markets. When combined with our leading market positions, we expect high single-digit organic growth for the remainder of the year. As owners or prospective owners of Roper Tech, you should be encouraged by our increasing levels of recurring revenue and the stability of our recurring revenue growth. Also, our 2020 cohort of acquisitions are performing very well and Vertafore has proven to be an excellent addition to our growing portfolio of software businesses. We continue to focus on deleveraging our balance sheet and remain committed and focused on our long-term capital deployment strategy. To this end, our pipeline of M&A candidates is active, robust and has many high-quality opportunities. As our balance sheet becomes more offensive toward the end of this year, our active pipeline of M&A targets will enable us to resume capital deployment in our usual process-oriented and disciplined manner.

In closing, and as we turn to your questions, we recently announced that Amy Woods Brinkley will become our new Board Chair effective June 1st. Amy has been a tremendous Board Member since 2015 and will be a fantastic Board Chair. I certainly look forward to working with Amy and the full Board for many years to come. But as we turn to your questions, I would like to take a moment to acknowledge and thank our outgoing Board Chair, Bill Prezzano. Bill has been a Roper Director since 1997 and has reached our mandatory Board retirement age. He served as our Lead Independent Chair Director and became Board Chair during the CEO transition from Brian Jellison to myself. Bill has been a wonderful Board Chair, enabling a smooth CEO transition and the continued evolution of our strategy and business model. On a personal note, Bill has been a tremendous mentor to me, which I hope will continue on an informal basis for years to come. Bill, thank you for your years of service to Roper shareholders, I think the share price was around $16 when he started, and thank you for helping me become a better leader and Chief Executive Officer.

With that, we'd like to open it up to your questions.

Questions and Answers:

Operator

We will now go to our question-and-answer portion of the call. [Operator Instructions] Our first question is from Christopher Glynn from Oppenheimer. Please go ahead.

Christopher D. Glynn -- Oppenheimer -- Analyst

Hey, thanks. Good morning, everybody.

Neil Hunn -- President and Chief Executive Officer

Good morning.

Christopher D. Glynn -- Oppenheimer -- Analyst

So, strong margins across the board. I was curious, in particular, application software look particularly better than expected. I don't know if Vertafore had some incremental revenue versus what you expected, but what kind of drove the app soft margins in the quarter?

Robert Crisci -- Executive Vice President, Chief Financial Officer

Hey, Chris. Good morning. Yeah, there is strength across those businesses. I think Neil mentioned CliniSys was strong, Sunquest had a nice quarter, Deltek sort of perpetual license wins. They are -- All that stuff comes in really high incrementals and that drove most of the margin performance.

Christopher D. Glynn -- Oppenheimer -- Analyst

Okay. And then, a question on acquisition philosophy. You've kind of highlighted financial profile and returns and characteristics over strategic end markets, but it strikes that Vertafore and iPipeline, two out of your three biggest deals ever, both kind of serve in the insurance marketplaces. I'm wondering if there is any emerging prioritization in types of end markets.

Neil Hunn -- President and Chief Executive Officer

Hey, Chris. I appreciate the question and the opportunity to talk about that. The short answer is no. I mean, our M&A strategy for 20 years is centered on picking the best businesses and business models that we can identify from the range of opportunities in the marketplace. If you go back to really starting in 2011, you might have thought from '11 to '13 we're all about healthcare/IT; and then maybe from '14 to '17 about professional services, ERP; and then the last couple of years about insurance tech. But all of those steps are completely coincidental. We really just evaluate the range of opportunities and pick the very best business that we can find.

Operator

The next question is from Deane Dray from RBC Capital Markets. Please go ahead.

Deane M. Dray -- RBC Capital Markets LLC -- Analyst

Thank you. Good morning, everyone.

Neil Hunn -- President and Chief Executive Officer

Good morning, Deane.

Robert Crisci -- Executive Vice President, Chief Financial Officer

Good morning.

Deane M. Dray -- RBC Capital Markets LLC -- Analyst

Hey. First question is, how would you characterize the software demand this quarter? It might be hard to parse this out, but how much might have been pent-up from the COVID shutdowns kind of a catch-up versus a true recovery and resumption of growth? I'm not sure you can characterize it broadly, but maybe some individual examples within the businesses. Thanks.

Neil Hunn -- President and Chief Executive Officer

Yeah. I don't think there's much pent-up here from our call-downs to our businesses this year. So this quarter, it's more of a recovery story. For instance, we talked about -- in the prepared remarks about the professional services end markets that Deltek serves; architecture, engineering, creative agencies started to come back in the quarter, which is great to see. Vertafore was steady as she goes. They were not particularly impacted by the pandemic. Aderant law firms continued to proceed with their transition. We did see some recovery start in the education and healthcare markets at CBORD, the middle market at Foundry, which is great to see, as production -- live production begins and comes out of production in the post-production. It was really just a nice increasing sort of start to recovery. And then anytime anybody asked a question about soft, we've got to talk about the recurring revenue stream. It was -- There was around 6% growth organically across the two segments and in total, which bodes well for the future.

Deane M. Dray -- RBC Capital Markets LLC -- Analyst

That's great to hear. And then just second question. Since it is such a high-profile project, any updates on the New York City congestion tolling? I saw in the slide, it says that work has continued, but any update there would be helpful. Thanks.

Neil Hunn -- President and Chief Executive Officer

Yeah, just the project continues. The customer continues to want us to get the project done so you he commence the discussions on how they're going to do the tolling and begin to start the tolling. Certainly, the most macro backdrop is more favorable now with the administration and the White House and Secretary, Pete, and all the -- That is all in a much more favorable position than it was just a quarter or two ago. So, the project continues.

Operator

The next question comes from Julian Mitchell from Barclays. Please go ahead.

Julian Mitchell -- Barclays -- Analyst

Hi, good morning. Maybe my first question, just to try and circle back on to the margin aspect. So in Application Software, you did have a very substantial margin increase year-on-year in the first quarter. You laid out some of the reasons why. But maybe just help us understand sort of as we think about the balance of the year for that business and maybe for Roper firm wide, what type of incremental margins or margin trajectory we could expect, because it looks as if the sort of drop-through margin is may be around 20% in the guide for the balance of the year. I just wanted to sort of check how you are thinking about that.

Robert Crisci -- Executive Vice President, Chief Financial Officer

Yeah. So, I'll get a crack at that. On an EBITDA margin basis, right, I mean Vertafore is a higher EBITDA margin business. So, that -- you're seeing that and we talked about when we bought the business, it's around a 50% or so, a little low -- below that EBITDA margin business. So, that helps. I think on a core basis, it's going to be relatively consistent year-over-year for the rest of the businesses on an EBITDA margin basis. And that's conversion at 40% to 50% and that's just consistent with what we see in these businesses as they grow. And as you know, they have great cash characteristics, very negative working capital. So, the cash flow growth can often be even faster than the EBITDA growth. And so, it's a great story there and I think we'll continue to see margins high within that segment.

Neil Hunn -- President and Chief Executive Officer

And Julian, it's Neil, just to underscore one thing Rob said; I mean, the incremental EBITDA margins for the year of 40%. He said it; I just wanted to underscore.

Robert Crisci -- Executive Vice President, Chief Financial Officer

Yes.

Neil Hunn -- President and Chief Executive Officer

That's right.

Julian Mitchell -- Barclays -- Analyst

Perfect. Thanks very much. And then the second question would really be around the -- in Network Software. How are you thinking about the -- leaving aside TransCore, not the sort of core piece of it. You did have some big impacts there in Network Software last year from COVID in sort of healthcare, food and media that I think you'd called out before. Maybe just clarify what pace of sort of top-line acceleration you're seeing in some of those COVID-impacted areas and what kind of cyclical recovery, if you like, in Network software you're experiencing.

Robert Crisci -- Executive Vice President, Chief Financial Officer

Yeah. So, the network software businesses are strong high single-digit organic for the rest of the year. That's the consistency in the recurring, which we talked about has been growing all along. But then you do get a little bit of the bounce back in some of the markets you mentioned, Foundry and others. So, I think you're on the right track there. Neil, you want to add anything to that?

Neil Hunn -- President and Chief Executive Officer

Yeah, just a color on the three; the healthcare, entertainment and food. So, MHA's the healthcare business that was tied and indexed to patient and volumes going through the long-term care skilled nursing assisted-living facilities that's normalized. That business also has added products to its port -- contract portfolio. So, that business is on its way to recovery as we speak. We talked about Foundry in the prepared remarks, which is there's just tremendous content budget, not surprising in the marketplace and all that content requires post production and we're a critical element in that post. And then finally, iTrade. iTrade is going to be one of the longer recovery cycles for us. It will be a second half of this year and the next year as they're indexed partially to retail food, but also partially to what I'll call institutional food, which is -- think about that as restaurants, schools, universities, a little bit of stadiums, and that's going to come back on a longer recovery curve.

Operator

The next question is from Allison Poliniak from Wells Fargo. Please go ahead.

Allison Poliniak -- Wells Fargo Securities, LLC -- Analyst

Hi, guys. Good morning. Just wanted to circle back on to Deane's question around, I know you mentioned around the reopening kind of theme in Q2 and it sounds like you are seeing some green shoots. Just trying to reconcile for the balance of the year. It sounds like you guys are expecting a more, I would say, gradual recovery in some of those businesses. Any color from your customers in terms of are they still a little concerned about the COVID impact, or are they thinking maybe there could be some pent-up demand as we sort of exit this year? Any thoughts there?

Neil Hunn -- President and Chief Executive Officer

Well, we've got to sort of run through the portfolio, Allison, in that regards. I think it will be -- I think our comments here will be around the product businesses as opposed to the software ones. First is the tag volumes at TransCore. I mean, that's going to be a -- probably a second half of this year recovery cycle just based on when the tags were bought last year and this year and having the customers burn through existing inventories traffic patterns come back on. We talked about medical products. We've got the COVID headwind for a quarter or two with Verathon, but the other businesses definitely saw a palpable improvement in the capital purchases of their medical equipment in the quarter and we have no sense that was pent-up or one-time. We'll find out in the next quarter or two, but that was not the read-through from the conversations we've had with our customers. In fact, NDI had record bookings in the quarter. As we go through the industrial businesses, Struers, we definitely saw an improvement across the portfolio of industrial businesses through the quarter with Struers having record March bookings, which shows that there is some sort of gradual improvement there to continue. And then on the process technology businesses, there was just nice -- I would call that very similar to what we saw at Struers and industrial. March got better than February, and February was better than January.

Allison Poliniak -- Wells Fargo Securities, LLC -- Analyst

Great, that's helpful. And then a strong deleveraging in the quarter. You talked about an active pipeline, maybe more comfort toward the end of the year. Any change to thinking just given the strong performance so far, obviously, strong cash flow characteristics, that you would have some comfort level of staying slightly above your comfort range at this point, or are you still focused on getting that down in terms of the net debt leverage?

Robert Crisci -- Executive Vice President, Chief Financial Officer

Yeah, Allison, it was a great start to deleveraging for Q1. So, that certainly helps boost our ability to pay down the debt faster and we'll continue to do that throughout. And as Neil mentioned, we're making sure the pipeline is active and there is some exciting things that we're looking at in the early stages and we'll be ready to deploy capital at some point. But for right now, we're really focused on the deleveraging.

Operator

The next question is from Joe Giordano from Cowen. Please go ahead.

Joe Giordano -- Cowen and Company -- Analyst

Hey, good morning, guys.

Neil Hunn -- President and Chief Executive Officer

Good morning.

Robert Crisci -- Executive Vice President, Chief Financial Officer

Hey, Joe.

Joe Giordano -- Cowen and Company -- Analyst

Hey, Rob. Just -- I'm going to pick on the guide a little bit. So revenue for the year, you're expecting 6 to 7. It was kind of mid single-digit plus before, came in pretty good in the 1Q, good margins. And we're kind of just passing through the 1Q beat essentially, maybe a tad higher than that for the full year. So, like, how would you kind of argue that? Are you seeing anything incrementally challenging? It sounds like you're -- everything seems to be at least [Technical Issues], if not a bit above. So, just want to think through the framework there.

Robert Crisci -- Executive Vice President, Chief Financial Officer

Yeah, I think that's right. I think it was one quarter, right? We had a really nice first quarter, and we felt it prudent to raise the guide because it certainly gives us more confidence for the rest of the year, but was one quarter and this is an unusual environment. We're coming off of a sort of hopefully once-a-lifetime pandemic and so we're trying to be balanced in the outlook and sort of what we do with the businesses.

Joe Giordano -- Cowen and Company -- Analyst

Yeah, that's fair. And Neil, maybe can you talk us through just like the structural differences between the lab software businesses in the US and in Europe, and how businesses in each region are differently positioned and why CliniSys is able to do so well here?

Neil Hunn -- President and Chief Executive Officer

Yeah. I mean, the -- in the US, the -- as we've talked about quite a bit, the lab was the first part of the hospital to become automated. And then 20 years later, due to -- with government stimulus, there was the hospitals deploy electronic medical records and then those EMRs, the hospitals as a general matter appreciated it and wanted the connectivity of the lab software to the EMR. And that's how we had sort of the competitive headwinds for four or five years at Sunquest. When you look at Europe, that dynamic does not exist. The health systems are different, first of all. There, it's country driven. They -- There is not a -- the concept of a -- the emerge of an EMR landscape on a country-by-country basis. It's very, very different. It's characterized by local providers, characterized by country-specific providers. And as a result, CliniSys lab software is not just we highlighted the UK wins and strengths in this quarter, but they have just been doing a great job pan-European, in France and Benelux, emerging a presence in Germany, bought a small business last year in Spain to be able to consolidate the laboratory infrastructure across Europe. Each of the countries in their own way are going through a laboratory consolidation and a way to save money for the health system itself and we being the -- basically the only scaled provider that -- with demonstrable success at scale to be able to win market share and meaningful clip there.

Joe Giordano -- Cowen and Company -- Analyst

And just so I understand, what gives you the confidence that sort of like integration of lab with the broader hospital systems is not something that's a near-term threat to the business?

Neil Hunn -- President and Chief Executive Officer

Yeah. I think it's essentially -- The way that, for instance, the primary competitor in the US that we -- is Epiq. Epiq, for instance, is -- basically doesn't have a presence in Europe and when they do, it's a country-specific presence. They might be in a very small country or small region of a country and sort of isolated there, given that it's a country-specific decision process. And also, there just isn't -- that competitive activity just isn't there.

Operator

Our next question comes from Blake Gendron from Wolfe Research. Please go ahead.

Blake Gendron -- Wolfe Research -- Analyst

Thanks, good morning. First question on free cash flow. The conversion from EBITDA has been extreme -- exceedingly strong over the last several quarters. On top of already strong margins, how should we think about conversion moving forward through the year relative to what you accomplished in 4Q and 1Q? I'd imagine the recovery in nonrecurring software is helping the working capital profile. So really, just wondering how sustainable that trend is as the recovery kind of moderates through the year.

Robert Crisci -- Executive Vice President, Chief Financial Officer

Sure. So, I think -- So in the first quarter, right, there is no federal tax payments. So, that's always a high cash conversion quarter. So, that normalizes more when we make -- start making federal payments in Q2. But really, as I mentioned a little bit earlier, I mean, it's great growth from the software businesses. They have negative working capital. Therefore, the cash performance is very strong. The more software growth you have, you drive working capital further negative. It's very structural part of the model. High conversion is embedded in everything that we do. So, we expect that free cash flow conversion to continue to get better over time, as we've improved the quality of our portfolio. So, we feel good about the rest of the year and continue to have high cash conversion and continue that double-digit cash flow compounding that we all expect to achieve.

Blake Gendron -- Wolfe Research -- Analyst

Excellent. Just wanted to circle back on M&A. So, plenty of puts and takes with potential US tax increases and yields moving higher. I'm wondering if you could help us, I think, about these inputs in the context of historical private software pricing in the pipeline? Some of these changes come through taxes rise, yields rise. How would you expect asset pricing to evolve, or how has it evolved in the past? I think we've discussed this before, it being a net positive for Roper.

Neil Hunn -- President and Chief Executive Officer

Yeah. We certainly believe on balance. That's the case. So, well, obviously when taxes went down, rates are sort of -- private prices went up a touch. I think the -- it was 14 times, 15 times for Deltek and 16 times for PowerPlan and really, the only difference in the market there was the tax change. So, that gives you a sense of the order magnitude. Maybe a couple of turns, but it depends on what the magnitude of the tax change is. Relative to interest rates going up, we think that does greatly benefit us in the compounding model. If you think as just rates go up, we're competing against private equity firms who have a levered acquisition model. So as interest rates go up, the amount of leverage they can put on a transaction goes down and subsequently, the total equity that they put into a deal goes down in [Indecipherable] compress. More so with interest rates going up, I think, than what you see conversely with taxes. And then in our case, the majority of our acquisition proceeds come from our cash that we generate. And so, we're relatively insensitive to interest rate where competitors for acquisitions are. So in the long arc of time, that's a good thing for us.

Operator

The next question comes from Steve Tusa from J.P. Morgan. Please go ahead.

Stephen Tusa -- J.P. Morgan -- Analyst

Hey, guys, good morning.

Robert Crisci -- Executive Vice President, Chief Financial Officer

Good morning.

Neil Hunn -- President and Chief Executive Officer

Good morning, Steve. Thanks for joining us.

Stephen Tusa -- J.P. Morgan -- Analyst

Thanks for having me. Just to clarify on the answer before, on kind of the degree of leverage you're comfortable with before doing a new deal. Is kind of three times a bit of a line in the sand there where you would get back down to below that before doing another deal, or maybe just talk about kind of that three times level and how that kind of plays into your thoughts.

Robert Crisci -- Executive Vice President, Chief Financial Officer

Yeah, sure. I wouldn't say a line in the sand. I think once you get into the low threes, that certainly is more reasonable. I think we spent a lot of time with the rating agencies when we did our last couple of acquisitions. I think they understand the high quality of the cash flow that we have and our incredibly high cash conversion. And so it's really about how good our business model is, how fast we can pay down any leverage that we put on the business. I think we've demonstrated that time and time again, we can do it pretty quickly. So once we get into the low threes, then I think we have the ability to deploy capital.

Stephen Tusa -- J.P. Morgan -- Analyst

Okay, great. And then just lastly, when you kind of look out to next year, are there any -- you're obviously not going to have any deals here at least in the near term, but are there any moving parts and items from a headwinds perspective, whether it's the Vertafore tax benefit or some of these Sunquest deals around COVID? How does this play out for next year? Do they generally offset -- Are they offset by growth at some of the other businesses, maybe if there is anything mechanical that kind of happens next year that you want to call out?

Robert Crisci -- Executive Vice President, Chief Financial Officer

So, let me just hit a couple of things and then, I think, Neil wants to add on. But, yeah, you're right, there is this $100 million plus tax benefit around Vertafore that we talked about. That will hit throughout Q2 through Q4. We did not benefit from that in the first quarter. And then there is about $60 million or so of this payroll tax deferral, which is a bad guy this year for the rest of the year, given that was part of the COVID rules that you can defer some of those payments and there is always going to be pluses and minuses in sort of that part of the world. But I'll let Neil talk about some of the growth.

Neil Hunn -- President and Chief Executive Officer

Well, I think it's always appreciated in a quarter that we have here you highlight the headwinds going into next year, Steve. So, we appreciate that. But as a general matter, a year or two out of a pandemic should be pretty good.

Operator

The next question comes from Alex Blanton from Clear Harbor Asset Management. Please go ahead.

Alex Blanton -- Clear Harbor Asset Management -- Analyst

Hi, good morning. Congratulations. That's a great quarter, and it looks like you're going to have a very good year. I just wanted to comment that so far, there have been seven analysts and every one of them has been cut off before they finished with their second question. None of them said thank you. And I'd like to ask the moderator to please stop doing that because that is really not a very good way to conduct a call. You need to allow dialog with the management on the second question. Don't cut people off before they say thank you. Let them finish, please.

I wanted to ask about the backlog of opportunities that you mentioned that you might get back to accessing at the end of the year as you start to deploy capital. Could you say a little more on the nature of that pipeline, the size of the companies that are in there? Because as you get bigger, it's obviously important to find bigger and bigger companies in order to keep the growth rate constant. So, could you just give us a little bit on that and perhaps characterize the kinds of markets those companies are in that you're looking at in the pipeline?

Neil Hunn -- President and Chief Executive Officer

Alex, it's Neil here, appreciate the question and appreciate your opening comments. The -- Let me give you a broader view to the -- to your question. First, why we're active now with our M&A pipeline is that we are -- and we're meeting with companies is that every company of size that we bought from 2016 forward, we've met with roughly nine to 12 months at the earliest -- at a minimum before buying the company. So, we're establishing relationships, getting to know the management team, getting to know the business and then sort of, if you will, have a running start when the business actually comes for sale. So, we're active and the work we're doing now is going to pay dividends nine, 12, 18 months from now in terms of deploying capital and our ability to do that in companies that we have high level of conviction in.

To your question about doing bigger and bigger deals, I would beg to differ with that a little bit. When you look at our model over the next seven years, we have to deploy somewhere on a run rate basis $2 billion to $2.5 billion a year based on our cash flow and the leverage profile that we just talked about. And in doing so, when you're looking at the types of businesses that we look to buy, small market, vertically focused leading software type or software type business models. I think the sweet spot in that is going to be somewhere in the $750 million to $1.5 billion range. And so, we're talking about doing a couple-ish deals a year and then, we'll always do a small number of tuck-ins or bolt-ons to the existing portfolio. So, I think we can -- at least for the next seven years on a per-year basis, we don't have to do bigger and bigger deals to keep the growth rate at the sustained double-digit rate.

Alex Blanton -- Clear Harbor Asset Management -- Analyst

Would you say that these companies, the margins and the cash flow and the EBITDA and so on are such that you can keep increasing? Those metrics, like EBITDA margin and operating margin and gross margin, the way you've done for many, many years by buying companies that have margins that are above the corporate average. Can you keep doing that?

Robert Crisci -- Executive Vice President, Chief Financial Officer

I think the answer to that is yes, Alex. So, it's really about the target -- the businesses that we target. Right? Businesses that have higher organic growth and Roper has historically businesses that have very good margins often better than Roper or at least at the same level now that we've improved ours over many, many years. And then we buy those businesses. They grow. We hope, we believe we can make them better. They accelerate growth. They generate more cash and you get this compounding effect. And so, it's really the same strategy that, I appreciate you follow us for a long time, we've had for over a decade now. And it's -- the good news is as you get more and more into software and these types of opportunities, we find more and more companies that fit that model that will allow us to continue to improve all those metrics for many, many more years to come.

Alex Blanton -- Clear Harbor Asset Management -- Analyst

Right. Well, this has been the company's strategy since I started following in 1992 when you went public. It's been a great ride. Thank you very much.

Neil Hunn -- President and Chief Executive Officer

Thank you.

Robert Crisci -- Executive Vice President, Chief Financial Officer

Thank you, Alex.

Operator

Next question comes from Richard Eastman from Robert W. Baird. Please go ahead.

Richard Eastman -- Robert W. Baird -- Analyst

Yes, good morning and thank you.

Robert Crisci -- Executive Vice President, Chief Financial Officer

Hi, Richard.

Richard Eastman -- Robert W. Baird -- Analyst

Yes, good morning. Just a question or two around the application software business. When we look at the lab software business as part of that in aggregate around CliniSys and Sunquest, you've spoken nicely about CliniSys's share gains in Europe and the rationale for that. Could you just talk a little bit and maybe characterize the US business around Sunquest? Has Sunquest's share stabilized and maybe post COVID, what does the recovery environment look like for Sunquest domestically?

Neil Hunn -- President and Chief Executive Officer

Yeah. So, Sunquest did -- I mean, they were benefited. Let's also -- Let me back up. Let's not -- you cemented two companies; CliniSys and Sunquest. We are to include a third, which is Data Innovations, which is a middleware business. They are a very global business, but they are domiciled in the US. But specific to your question about Sunquest, the US laboratory business, they were benefited last year and in this quarter with the COVID tailwind standing up COVID testing. They continue to invest in their public health offering and their molecular offering. The leadership team has done a nice job in that. So, that's good news. The unfortunate part of that news is it just delayed the bottoming of this business, which we thought was going to be this year-ish if it weren't for COVID. Now, it's going to be pushed out a year or two before that business sort of gets through all the known attrition and then its baselines from which it can grow from.

Richard Eastman -- Robert W. Baird -- Analyst

Okay. And how much of that lab software business now is domestic? When you put those three businesses together, CliniSys, Sunquest and Data Innovation, how much is domestic versus international? Is it...

Neil Hunn -- President and Chief Executive Officer

I'm going to let Rob take a look at this. We might have to get back.

Robert Crisci -- Executive Vice President, Chief Financial Officer

Yeah, I would like to circle back. I mean, it's approaching probably 50-50, given the growth in the CliniSys business backed with DI businesses very global and the Sunquest businesses mostly US. So as a group, it's probably about half.

Richard Eastman -- Robert W. Baird -- Analyst

I understand. And then just a follow-up question around Measurement Analytical in the process businesses. Could you just talk about pricing there? I know you usually allow your GMs to price according to margin targets and things, but can you talk about price and how proactive you've been able to be on the M&A business as well? M&A an in Measurement Analytical in the process side.

Neil Hunn -- President and Chief Executive Officer

Yeah. I think the characteristics of these businesses is they -- of all Roper businesses is they price based on the values created. A great example there is in our Hansen business, where they -- a couple of innovations in their refrigeration valve business product line with coatings and some sensors to allow to identify clearly when it's been triggered, very low cost increase to bill materials but massive increase of value. So, we've seen very nice price increases on situations like that. On a like-for-like basis, it's -- the business generally had been very good, being able to push through, any increase to bill materials go to the supply chain and otherwise taking normal price.

Richard Eastman -- Robert W. Baird -- Analyst

Okay. Alright, well, thank you.

Neil Hunn -- President and Chief Executive Officer

Thank you.

Robert Crisci -- Executive Vice President, Chief Financial Officer

Thank you.

Operator

This concludes our question-and-answer session. We will now turn -- return back 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 Closing Remarks]

Duration: 48 minutes

Call participants:

Zack Moxcey -- Vice President, Investor Relations

Neil Hunn -- President and Chief Executive Officer

Robert Crisci -- Executive Vice President, Chief Financial Officer

Christopher D. Glynn -- Oppenheimer -- Analyst

Deane M. Dray -- RBC Capital Markets LLC -- Analyst

Julian Mitchell -- Barclays -- Analyst

Allison Poliniak -- Wells Fargo Securities, LLC -- Analyst

Joe Giordano -- Cowen and Company -- Analyst

Blake Gendron -- Wolfe Research -- Analyst

Stephen Tusa -- J.P. Morgan -- Analyst

Alex Blanton -- Clear Harbor Asset Management -- Analyst

Richard Eastman -- Robert W. Baird -- Analyst

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