Roper Technologies (ROP) Q2 2022 Earnings Call Transcript

Roper Technologies (ROP 0.15%)
Q2 2022 Earnings Call
Jul 22, 2022, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning. The Roper Technologies conference call will now begin. Today's call is being recorded, [Operator instructions] And now I'd 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 second 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 prepared slides to accompany today's call, which are available through the webcast and are also available on our website. Now if you please turn to Page 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 Page 3. Today, we will discuss our results for the quarter primarily on an adjusted non-GAAP basis. During the quarter, Roper announced an agreement to sell a majority stake in our industrial 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 second 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; income tax restructuring expense associated with the pending sale of our industrial businesses. And lastly, we have adjusted our cash flow statement to exclude the cash taxes paid related to our 2021 divestitures.

GAAP requires these payments to be classified as operating cash flow items even though they are related to the divestitures. Reconciliations can be found in our press release and in the appendix of this presentation on our website. And now if you please turn to Page 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. This morning, we'll start by reviewing our second quarter highlights and financial results, then we'll review our segment detail and our increase out for the year, then get to your questions. Next slide, please.

As we turn to Page 5, the main takeaways for today's call are: first, we had another great quarter of operational and financial performance, and we're increasing our outlook for the year; second, during the quarter, we entered into an agreement to divest the majority stake of our industrial businesses; and third, we have north of $7 billion of available M&A firepower. Looking at the second quarter, we continue to be pleased with the quality of execution across our enterprise. This quarter is characterized by having very strong order activity and solid organic growth of 11%. Of particular importance, our growth was quite broad-based across our three segments.

Consistent with our commentary during the last several quarters, not only did we grow nicely within the quarter, but the quality of the underlying businesses also improved as we saw our software recurring revenue base grow 12% on an organic basis. In addition to our strong software growth, our product businesses performed very well in the quarter, experiencing very high levels of demand and record levels of backlog. Once we complete the divestiture of the majority interest of our industrial businesses, the quality of our portfolio will be significantly improved across several dimensions. First, we will be meaningfully less cyclical, with about 75% of our portfolio being software and the balance being medical and water products.

Second, we'll have higher levels of recurring revenue, with 80% of our software revenue being recurring in nature. Also, a large percentage of our product revenue is reoccurring in nature, such as Neptune's replacement demand and our medical product consumables. And third, we'll be even more asset-light given a vastly improved working capital profile, one that generates significant increasing amount of cash as we continue to grow. And finally, with the closing of our industrial divestiture, which we anticipate will occur later this year, we'll have north of $7 billion of M&A capacity.

We are very active in the M&A markets, but also remain super patient and highly disciplined to ensure optimal deployment of our available capital. We are confident in our ability to deploy this capital wisely, which in turn will further improve both the quality and scale of our enterprise. We are proud of our operating team for their execution, a very solid quarter. Now let me turn the call to Rob, who will walk through our financial summary.

Rob?

Rob Crisci -- Executive Vice President and Chief Financial Officer

Thanks, Neil. Good morning, everyone. Turning to Page 6. Here, we want to briefly cover our Q2 performance compared to our guidance, including the industrial businesses now reported as part of discontinued operations due to the pending sale.

On that apples-to-apples basis, our Q2 DEPS of $3.95 compares quite favorably to our guidance of $3.80 to $3.84, an $0.11 beat at the high end of our guidance. A very strong quarter. Next slide. Turning to Page 7 and covering the Q2 financial highlights.

Here, we will review some of the key financial metrics on a continuing operations basis, which is our reporting basis for earnings and guidance moving forward. Total revenue increased 10% to $1.31 billion. Organic revenue increased 11%, with strength across each of our three reporting segments. Application Software grew 7% organically as our two largest businesses, Deltek and Vertafore, continue to perform very well.

Network Software grew 15% led by continued exceptional performance at our freight matching businesses. Finally, our new technology-enabled products segment grew 13% organically, aided by an excellent quarter from Neptune. EBITDA margin was 39.3%, resulting in EBITDA increasing 10% to $515 million. DEPS on a continuing ops basis was $3.43, 16% higher than last year.

Net working capital is now negative 17% of Q2 annualized revenue as a result of our higher-quality portfolio. Q2 adjusted free cash flow was $252 million, which was 19% below prior year, but still represent a 17% three-year CAGR versus 2019. Notably, like many technology companies, our cash flow was negatively impacted by the Section 174 R&D capitalization change that took effect for 2022. We paid $49 million in Q2 related to Section 174, and we expect to pay an additional $50 million for Section 174 in the second half.

Importantly, this tax law change only impacts the timing of when the taxes are due, and not the overall amount of tax owed or our tax rate. Additionally, in the quarter, we made tax payments related to the gains on the 2021 divestitures of TransCore, Zetec, and CIVCO Radiotherapy. Per our normal convention, those payments have been adjusted out of our cash flow. Finally, we are very pleased to announce the completion of our new five-year $3.5 billion revolving credit facility.

We are grateful for our bank group and their continued support, and I'd personally like to thank Shannon O'Callaghan sitting next to me for the excellent work in leading the process for Roper. So in summary, with a $3 billion cash balance, our new revolver in place and the future proceeds from the closing of our industrial sale later this year, we are very well positioned for meaningful capital deployment. So with that, I'll turn it back over to Neil.

Neil Hunn -- President and Chief Executive Officer

Thanks, Rob. Congrats to you and your team for upsizing and extending our revolver, especially in these market conditions. As we turn to Page 9, we summarize for you our go-forward portfolio of 26 businesses arrayed across three segments: Application Software, Network Software and tech-enabled products. In the 8-K issued a few weeks ago, we provided historical annual and quarterly financial disclosures on this segmented basis.

Also for the first time, we're breaking down our revenues by type. As you see, 61% of our total revenue and 82% of our software revenues are recurring or reoccurring in nature. 74% of our total revenues are software related. For several quarters, we've communicated how the quality of our revenue stream continues to improve.

You can see this point well illustrated here. Our 11% organic growth is underpinned by a 12% growth in our software recurring revenue base. Further, you can see the breadth of the growth, growth in software and products. Our strategy for nearly two decades now has been to improve the quality of our enterprise, and this is clearly reflected on this page.

We cannot be more excited for our future. Let's turn to Page 10 and walk through the 2Q highlights for our Application Software segment. Revenues here were $627 million, up 7% on an organic basis and EBITDA margins were 43.1%. Across this segment, we saw recurring revenue which is about 75% of the revenue for this segment increased 8% in the quarter.

This recurring revenue growth is enabled by strong customer retention and continued migration to our SaaS delivery models. Across this group of companies, the financial strength was quite broad. As we highlight a few businesses, we'll start with Deltek. The Deltek team posted another great quarter of strength across all end market serves, with particular strength in their construction contractor end market.

In addition, Deltek continues to gain momentum, driving adoption to their cloud-based product offerings. Vertafore had an excellent quarter, which was highlighted by strong ARR bookings activity and revenue growth. Also during the quarter, we completed the acquisition of MGA Systems. This tuck-in acquisition enhances Vertafore's ability to compete and win in the managed general agent segment of the property and casualty insurance ecosystem.

CliniSys and Data Innovations continue to exhibit strong demand and operational strength. CliniSys continued its market share gains in the U.K.; DI continues to demonstrate product market fit by gaining share of wallet across large health systems and the VA. Strata continues to be super solid for us. The acquisition of EPSI has been exceedingly strong as Strata has successfully lifted and shifted many EPSI customers to the Strata cloud-based offering.

At the same time, Strata continues to improve the legacy EPSI product release and support capability. We remain committed to meeting the EPSI and Strata customers where they are. Finally, Aderant continues to be a solid performer for Roper, extending their share gains in the large law space. Aderant continues to see an acceleration of SaaS bookings activity, driving substantial increases in the recurring revenue base.

Looking to the outlook for the second half of 2022 in this segment. We expect to see mid-single-digit growth for the balance of the year, driven by continued ARR momentum. Turning to Page 11. Revenues in the quarter for our Network Software segment were $343 million, up 15% on an organic basis and EBITDA margins were strong at 52%.

The 15% organic growth in this segment is underpinned by 19% growth in recurring revenue. As we dig into business-specific performance, our U.S. and Canadian freight matching businesses continued to be exceptional. The market conditions while slowing a touch on the carrier side of the network continue to be favorable.

During the recent surge in transportation volumes, the market share of the ecosystem represented by the spot market increased as it became easier to transact volumes in the spot market compared to the contracted market. We believe this is a secular trend that DAT will benefit from over a multiyear arc. In addition, DAT continues to do a nice job of increasing revenue per user by both adding features and improving value capture. Finally, over a longer arc planning horizon, our freight matching businesses continue to be well positioned to enable the further digitization of the spot freight market.

Moving to Foundry. Our software business that enables live-action filming and computer-generated graphics to be combined in a single frame, continued their recent financial strength. Net retention is north of 110% and ARR grew double digits again. Foundry's success is rooted in their fast-paced innovation capability and favorable long-term market conditions.

iTrade, our network food supply chain business and iPipeline, our life insurance SaaS business that tech enables the quoting and underwriting processes, each had solid customer additions, which helped drive strong air of growth in the quarter. Finally, our businesses which focus on alternate site healthcare, namely skilled nursing, assisted living and home health grew nicely in the quarter despite their customers' growth being constrained by staffing shortages. Proud of the execution here. Turning to the outlook for the balance of the year.

We expect to see mid-single-digit organic growth for this segment, driven by continued recurring revenue momentum and moderating growth for our freight match businesses. As we turn to Page 12, revenues in our tech-enabled products segment were $340 million, up 13% on an organic basis despite the very challenging supply chain environment. EBITDA margins for this segment were 34.9% in the quarter. Let's start with Neptune, which had record orders, revenue and quarter ending backlog.

For a few quarters running, Neptune has been able to gain market share by being successful in keeping product lead times at industry-leading terms and releasing new products, both in terms of cellular connectivity and static meter reading technology. As a fun fact, Neptune turns 50 later this quarter and next year will mark our 20-year ownership anniversary, a great run so far with an even better forward view. Congrats, Don, to you and your team for building such a great company. Verathon, Northern Digital and each of our medical product franchises continue to see very strong ordering activity but were hampered by a variety of supply chain challenges during the quarter.

That said, the teams are executing exceptionally well, and we remain confident in our ability to execute through these challenges. Looking over the horizon, each of our medical product businesses are benefactors of secular tailwinds, namely the increased demand for single-use devices and the aging of the population. As it relates to the outlook for the balance of the year, we expect to see high single-digit growth for this segment, underpinned by strong demand and backlog levels, but somewhat constrained by the current supply chain challenges. Now please turn to Page 14, and let's review our updated and increased outlook for the balance of the year.

As a reminder, last quarter, we increased our adjusted DEPS guidance to be between $15.50 and $15.75, which included $2.30 from our industrial businesses. Given our agreement to divest our industrial businesses, we are removing the $2.30 from our guidance model going forward. So on a new continuing ops basis, our previous guidance equates to $13.20 to $13.45. Based on our strong Q2 and second half visibility, we're now increasing our continuing ops guidance to be between $13.46 and $13.62.

Embedded in this guidance is full year organic growth of 8% to 9%, again, on a continuing ops basis. As we look to the third quarter, we're establishing DEPS guidance to be in the range of $3.42 and $3.46. Now our concluding comments, and we'll get to your questions. As we turn to Page 15, we want to leave you with the same three points with which we started: first, we had a strong quarter of performance, and we're increasing the outlook for the full year; second, we took strategic actions to divest a majority stake in our industrial businesses; and third, we have a tremendous amount of M&A firepower north of $7 billion.

As it relates to our strong start, we grew revenues organically 11%; EBITDA, 10%; and DEPS, 16%; and free cash flow has grown 17% on a three-year compounded basis. We are lifting our full year organic growth in DEPS guidance based on the factors outlined during the call, specifically strong recurring revenue growth and a record demand for our product businesses. Finally, we have reloaded our balance sheet and continue to have a highly active and engaged pipeline of M&A opportunities. We have north of $7 billion of M&A available firepower.

As mentioned at the start of today's call, our high levels of activity are equally matched with our patience and discipline, and we remain confident in our ability to deploy this capital to further improve the quality and scale of our enterprise, just as we've done over the past two decades. Finally, kudos to Rob and Shannon and the finance team for increasing the size and term of our $3.5 billion revolver. As we turn to your questions, let us remind everyone that our strategy is the same: we compound cash flow by acquiring and growing niche market-leading technology businesses. This is what we've done for over 20 years and will continue to do so.

In addition, our value creation and governance model remains unchanged. We operate a portfolio of market-leading businesses and defensible niches. Each of our businesses has high levels of recurring revenue, strong margins and competes based on customer intimacy, which yields highly resilient organic growth rates. We operate a highly decentralized operational structure that focuses on long-term business building.

Our culture sets a very high bar for performance and focuses on continually improving. We are all paid to grow, which reinforces our culture of transparency, nimbleness and humility. Finally, we redeployed the vast majority of our capital to acquire the next great business. We do this with a centralized corporate resource team in a highly disciplined, thoughtful and analytical manner.

This strategy, unchanged, delivers compounded and superior long-term shareholder value. So thanks for joining us this morning. And with that, let's open it up to your questions.

Questions & Answers:

Operator

Yes. Thank you. [Operator instructions] And the first question comes from Deane Dray with RBC Capital Markets.

Deane Dray -- RBC Capital Markets -- Analyst

Thank you. Good morning, everyone.

Neil Hunn -- President and Chief Executive Officer

Morning, Deane.

Deane Dray -- RBC Capital Markets -- Analyst

Morning. Congrats on the first earnings report under the new look, Roper.

Neil Hunn -- President and Chief Executive Officer

Thank you. Thank you.

Deane Dray -- RBC Capital Markets -- Analyst

Hey. If we could start, I really like the new breakout on revenue on Page 9 as well as Page 19 in the appendix, which shows you the same information broken out by segment. How do you expect that mix to change over the next couple of years, especially in the conversion and migration to SaaS?

Neil Hunn -- President and Chief Executive Officer

Yes, Deane. So really, in the recurring line, that 54% line on Page 9, embedded in that line is both the on-premise maintenance and the SaaS. And so the migration will happen inside of that line. Now what we'll see is as that happens, we get an uplift from the on-prem maintenance to the SaaS because you're delivering more value, and so you'll see sort of a long-term multi-multiyear tailwind in that line, but it happens and the conversion happens within that singular line.

Deane Dray -- RBC Capital Markets -- Analyst

OK. That's helpful. And then for Rob, look, we're all kind of calibrating the Section 174 and the impact, and I'm glad you added that one sentence that says it doesn't change the total amount, it just changed the timing of the tax payments. Just clarify how that plays out for the course of the year and the comps for next year.

And then is there -- on the working capital, that negative 17%, is that the new run rate based upon the new earnings and mix for Roper going forward? And is there still upside to that?

Rob Crisci -- Executive Vice President and Chief Financial Officer

Yes, yes. So on working capital, yes. I mean the 17% is the run rate. I think there is upside, right? We expect to grow these software businesses.

As they continue to grow, they'll generate more cash and working capital should get more negative over time. Yes, on 174, it will be a total $100 million headwind for this year. So it's basically around $25 million a quarter we paid. As you know, we make two tax payments in the second quarter, that's why it was $49 million in the quarter.

Yes. So obviously, there's been a lot said about this. The law could change at some point, and then we'd get that money back. So it's really just -- you look at the same deductions over time, but certainly, now you have to wait for the deductions basically.

Operator

Thank you. And the next question comes from Christopher Glynn with Oppenheimer.

Christopher Glynn -- Oppenheimer and Company -- Analyst

Thank you. Good morning. So I wanted to talk about the new segment a little bit in the medical products. Talk -- seeing if you could break out some of the supply chain impacts on margins, the revenue gating aspect and any abnormal kind of levels of backlog, how you'd characterize that, how to think about it.

Rob Crisci -- Executive Vice President and Chief Financial Officer

Yes. So the performance was very good. So we're certainly, like everyone else who sells products, have some supply chain issues. I mean backlog is, I think, double if you look where we are this year versus the same time last year.

So there's plenty of opportunity to continue to grow the revenue. A little bit of margin impact. We think that gets a little bit better in the second half. I think our business has done a great job of pushing through price.

And so that takes some time to start to sell the products at a higher price versus the cost. So I think that's a little bit better over time. But everyone is managing it really, really well. So we feel really good about our operations.

Christopher Glynn -- Oppenheimer and Company -- Analyst

OK. And for a follow-up, if you look at Slide 12, the tech-enabled products, the EBITDA margins are down about 5.5 points Q2 this year versus 2020 second quarter. Just can you talk just conceptually about that bridge, what that gap represents?

Rob Crisci -- Executive Vice President and Chief Financial Officer

Yes. So 2020 was an outlier because of the big Verathon quarter with the -- in the heart of COVID. So that's when Verathon had that just extremely strong growth as we're trying to fight the virus. And so I think probably '19 is a little bit more normalized from a margin standpoint.

But we do think that those margins should tick up over time.

Operator

Thank you. And the next question comes from Scott Davis with Melius.

Scott Davis -- Melius Research -- Analyst

Hey. Good morning, guys.

Neil Hunn -- President and Chief Executive Officer

Good morning. Hey, Scott.

Scott Davis -- Melius Research -- Analyst

I wanted to talk a little bit about price. Is there -- I imagine the price escalators in the SaaS. Is there some sort of basis like CPI? Is it half a CPI? I mean can you give us just a little bit color there, how you think how price gets passed through and those things?

Neil Hunn -- President and Chief Executive Officer

Yes. So there's -- and price -- if you're -- obviously, you're specifically talking about software. I mean the way you sort of capture price and value capture in software is a little bit different than the product. So in the software, you're right, for all that subscription and maintenance is generally tied to a CPI plus a touch which is -- so we're able to see price.

The other thing that's just also just naturally embedded in the software business is price. I mean it's a part of the growth algorithm in each and every year. The customers are used to taking price. And obviously, with inflation, interest rates higher, then there'll be a little bit more price.

The offset to that is the cost structure in the software businesses increase through increasing labor wages, but it happens over a longer arc of time, and it's less spiky than what you see in the product businesses. So naturally, as the pipeline of that is you get a nice matchup of the increase of labor cost with the pricing on the software part of our business.

Scott Davis -- Melius Research -- Analyst

And is there a difference in kind of pricing when you think about recurring versus nonrecurring? It's kind of Dean's question. I was a little confused in your answer, and maybe just because I only had one cup of coffee. But is there a difference -- I mean, you mentioned you kind of add more value and you get a little bit more price, but go back and talk to me like I'm three-year old.

Neil Hunn -- President and Chief Executive Officer

OK. So apologies if I was confusing. So there's two issues we're talking about. So on price, on software; if you're a well-run software company, you're taking price on both the cost of the software in a perpetual world and the maintenance on that.

So you move them up in tandem, where you don't end up in sort of a challenging thing that some software companies do that ends up being a bad thing is they only take price up on the maintenance and not the initial software. Our companies take them up in tandem, so they stay together. So that's the pricing point. Dean's point was asking about what's the relationship between on-premise maintenance, which we get paid once we deliver the perpetual software and SaaS and the SaaS shift.

And so as we migrate or "lift and shift" a customer from on-premise to our cloud, as you're doing that, you're delivering more value, not only hosting the application and all the security, you're also delivering the most recent versions or keeping them on the most recent version so they get to take advantage of the most recent features. And you're just generally eliminating sort of the headaches of running the software for the client. Because of that value bundle of SaaS, you are able to capture more value. Oftentimes, two times on a recurring basis or a touch more.

So that's about the value proposition of moving to the cloud versus your straight question of what happens in a price increase environment for the software.

Rob Crisci -- Executive Vice President and Chief Financial Officer

And just to give you a sense, we're roughly 75% subscription and 25% in maintenance today. So we're already largely in the cloud. There's roughly $200 million of license revenue that would go away over time and convert to that subscription revenue that Neil mentioned. But as you know with us, that's a long period of time, driven by the customers.

And so it's a really good story, I think, on the recurring revenue line.

Scott Davis -- Melius Research -- Analyst

OK. That's really helpful. Thank you for that. I'll pass it on.

Good luck, guys. Appreciate it.

Operator

Thank you. And the next question comes from Joe Giordano with Cowen.

Joe Giordano -- Cowen and Company -- Analyst

Hey, guys. Good morning. So now you've gone through the GICS code change and all this. I'm just curious, Neil, Rob, what's your initial kind of conversations were with the new cohort of investors that you'll likely talk to now? And what were some of the things that maybe some initial pushback you're getting from them, some things that they like and how have those discussions kind of overall have gone so far?

Neil Hunn -- President and Chief Executive Officer

Yes. I would say the GICS code change, it's not like this light switch that's happened or all of a sudden, every conversation we're having with the buy-side is a different person. In fact, it's quite the opposite. I mean it's a slow evolutionary sort of change here.

We've been to a singular software conference where we had half a dozen conversations. They were generally the same conversation we have with our legacy shareholder base, which is what's your business model, what's your flywheel and what are the risks, what's the durability and quite similar. A little bit -- a little discussion, obviously, on growth, a little bit on the cash flow dynamics of the business, a little bit of the business model mix between recurring, nonrecurring, but they're the same questions really.

Rob Crisci -- Executive Vice President and Chief Financial Officer

Now I was just saying a lot of excitement, right? Because I think as we said at that conference, we were at intra-quarter that we're the fourth largest application software company, I think, in the S&P 500. And a lot of these analysts are just getting to know us, and I think they're really excited when they look at our past and our future prospects. So we're excited to expand to a new shareholder race while, of course, also making sure that our current shareholder base is continually happy with their investment in Roper.

Joe Giordano -- Cowen and Company -- Analyst

So when you think about M&A, does the divestment like is there a step change function that happened internally with CRI that makes finding new companies that clear the threshold harder? I'm guessing just mathematically taking out the industrial businesses, make CRI higher or more negative or however you want to look at it. And then like maybe you could have slotted in a business that previously could have improved the profile of Roper, but maybe now that business might not meet the threshold. Is that accurate? Or is it just not material enough to worry about?

Neil Hunn -- President and Chief Executive Officer

It's not material enough to worry about, but let me tell you why. I mean for essentially my entire almost 11 years I've been here, we've looked at the same cohort of targets, which are wonderful asset-light software businesses. And that's the cohort we're looking at now, right? So it's just not about becoming even more asset-light once yours is asset-light. As we are, it's about staying as asset-light as we are.

That's why the universe of targets is plentiful.

Operator

Thank you. And the next question comes from Allison Poliniak with Wells Fargo. 

Allison Poliniak -- Wells Fargo Securities -- Analyst

Hey. Good morning. On that Network Software business, understanding that freight matching sort of the growth and sort of the moderation there, could you maybe talk to the balance of the businesses in that segment in terms of the overall combined? Is it mid- to high single-digit growth? I'm just trying to understand the impact that the freight match had on it.

Rob Crisci -- Executive Vice President and Chief Financial Officer

Yes. Most of the businesses in that segment are normally sort of mid-single-digit organic businesses that occasionally do higher than that, very rarely do lower than that. And so I think as you get into the second half of the year, those are sort of doing what they do, and then you just have a little bit of moderation in the freight matching growth.

Allison Poliniak -- Wells Fargo Securities -- Analyst

Got it. And then just kind of pulling on to that last M&A question. Certainly, the software is a focus in terms of M&A. What about tech-enabled products? Is there anything you guys are kind of looking at so we may be clear that hurdle? Or is it sort of off the table there at this point?

Neil Hunn -- President and Chief Executive Officer

No. It's definitely not off the table. It has not been off the table. We just haven't actioned anything there in quite a while.

So if it's an asset-light tech-enabled product than a business that is a leader in a small market, the competitive forces are stable, sort of all of our criteria, then it's definitely something we would look at.

Operator

Thank you. And the next question comes from Julian Mitchell with Barclays.

Julian Mitchell -- Barclays -- Analyst

Hi. Good morning. Maybe I just wanted to ask a couple of questions on the software business. First off, in terms of freight match, help us understand the cyclicality of that business.

There's been a lot of scare stories about freight recessions all year long in the U.S. How should we expect that business to perform in that type of macro? And I guess NSS has enjoyed fantastic operating leverage. We see the margins going up to the low 50s in Q2. What's the risk to that sort of incremental margin, if you like, from freight match rolling? And then any color in Application Software about the license business? Again, there were some questions after the SAP update earlier this week.

Neil Hunn -- President and Chief Executive Officer

So let me take the DAT one and the Application Software license one, and I'll let Rob talk about the margins, if that's OK, in NSS. So first on DAT, DAT grew through the 2019 freight recession. There's -- but it has been just spectacular the last couple of years at DAT for two reasons. There's certainly a cyclical tailwind it's had, there's also a secular tailwind that it's enjoyed.

The secular tailwind endures. That's why the business is able to sort of grow through in '19. And principally, in summary version, that secular tailwind is that the spot freight markets are just a more liquid, less -- easier to transact end market today than it was two years, three years, five years ago. So you see that the spot market, market share of the total freight increasing over this time mark, and that's been a benefactor of DAT and its customers, and that's going to continue.

As DAT in the market, it will continue, period, but then it may accelerate over the next five-plus years as we further tech-enable the broker's business model, right? As it relates to the license -- excuse me, the perpetual license activity in application software, it's solid orders in the first half and in the quarter. I think we're maybe modestly different than like an SAP because our price points are much, much lower, right? I mean our -- something like that. So we're not -- these are -- we're important and we're sizable for our customers. But these are -- our price points, I mean, a big deal for us is a $1 million, $2 million, $3 million deal, not multiples of that.

So Rob, do you want to...

Rob Crisci -- Executive Vice President and Chief Financial Officer

Yes. And then on the margins, I would not be concerned that margins would take a step backwards as growth were to slow there. I mean these are businesses that sort of all have those structural EBITDA margins in that 50%-plus range. And so I'd expect that to continue even if growth were to slow a little.

Julian Mitchell -- Barclays -- Analyst

Fantastic. That's helpful. Thank you. And then maybe sort of following up more for Rob this line.

Just you have announced this big divestment, you've got restated numbers out there. How should we think about any changes from here around or changes in the sort of go-forward run rate for things like tax rate in the P&L? Maybe corporate costs and then kind of free cash flow conversion. Any changes in those three metrics as we look at the sort of new go-forward Roper?

Rob Crisci -- Executive Vice President and Chief Financial Officer

Yes. There shouldn't be any meaningful changes in terms of tax rate. I think in terms of conversion, I mean, clearly, there's a lot of noise around cash taxes this year as we've been talking about, and that's sort of part of the price to pay also when you do these transactions that we think are the best thing to do for the company in the long term. So I think if you look forward to next year and beyond, I mean, our free cash flow conversion should be at the levels it's been historically and probably a little bit better because we have even more negative working capital.

Just better quality portfolio, less cyclicality. And so I think the cash flow conversion should get a little bit better over time. And corporate, yes. I mean, I think the run rate that you see now sort of for continuing ops is the right run rate moving forward.

Operator

And the next question comes from Steve Tusa with J. P. Morgan.

Steve Tusa -- J.P. Morgan -- Analyst

Thank you. Hey. Good morning, guys. Just a question on the cash.

I know you guys don't guide on cash, but usually it gets on kind of an underlying basis, seasonally better in the third and the fourth. Anything changed from that perspective? And any kind of color on how you'd expect it to kind of bounce back here in the third and the fourth from second quarter levels? It's a little bit lumpy in the first and second quarter putting cash...

Rob Crisci -- Executive Vice President and Chief Financial Officer

Yes. I think that's right. So seasonally, fourth quarter is always our best working capital quarter because that's when you're getting a lot of the renewals in software. So we would expect working capital to be a pretty good guy in the second half.

And we sort of talked about the cash tax situation. And I think everything else is performing really well to generate a lot of cash.

Steve Tusa -- J.P. Morgan -- Analyst

OK. And then on the revenue side, when you think about your recurring, is there on the accounting there in 606, do you book a percentage of those deals, the three-year, five-year type of deals? Do you book a percentage of those upfront as per the 606 accounting? I know you have different businesses in there, so maybe they behave differently from an accounting perspective. But is there an element of that in the revenue there?

Jason Conley -- Vice President and Chief Accounting Officer

Yes. Steve, this is Jason Conley. A lot of the term licenses, there's a portion of that, that does get recognized upfront. So multiyear term licenses is very small for us.

Only a couple of businesses have that. And then our perpetual licenses are also booked upfront as part of 606, a portion of it.

Operator

Thank you. And the next question comes from Joe Ritchie with Goldman Sachs.

Joe Ritchie -- Goldman Sachs -- Analyst

Thanks. Good morning, everyone. Yeah. Maybe just the first question on this new portfolio going forward.

How do I think about like the right long-term organic growth rate for this business over time? I think we've historically kind of thought about your legacy businesses kind of like somewhere in that 4% to 5% type organic growth rate. I'm just wondering if this business is going to achieve healthier growth longer term.

Neil Hunn -- President and Chief Executive Officer

So it's -- when we did the -- announced the transaction with the industrial and process businesses, we showed a chart that showed the long-term growth rate -- historical long-term growth rate of the go-forward portfolio is about 6%. So that's where we would expect that's the baseline, and then obviously, we work every day to try to make that better. But right now, that we would sort of say 6% to the new norm.

Joe Ritchie -- Goldman Sachs -- Analyst

OK. Got it. That's helpful. And then I guess this whole conversion from on-prem to your SaaS business, it seems like you guys are well on your way there.

I'm just curious like how much is that kind of like added to the growth rate in recent years? And then that extra, call it, I don't know if it's an additional 20% to 25% that you are expected to convert, how do we think about that as kind of like an added benefit that you'll continue to see in the coming years?

Neil Hunn -- President and Chief Executive Officer

Yes. It's been, as we said for a while, it's been a modest growth driver. And just to go through it for a minute, there's the good guy and there's a bad guy, right? So the bad guy is if you're in a year where you're selling a perpetual deal, let's say it's a $1 million deal. You booked the vast majority of that revenue in that year.

If that deal converts to a subscription or a SaaS deal, maybe that's -- I mean, maybe that's priced at, I don't know, $300,000 a year, plus or minus. So in that end year, there's a $700,000 bad guy between the upfront license versus the SaaS, and that's assuming you booked the SaaS deal on January 1. So there's a little bit of bad guy when that happens. But what is overwhelmed to that for us to a slight net positive is the lifting and shifting of our large installed base of maintenance customers.

So as you take the -- in this same example, if you have a cohort of customers paying you $300,000 a year, you're going to lift and shift them into the cloud in the plus or minus $600,000 a year. So you get that and that nets out to be a slight good guy. We've gotten many years of that dynamic. Even if I had to guess, it's seven to 10 years of that dynamic because we're not forcing our customers to migrate.

We're very much in the posture of meeting our customers where they are relative to wanting to do this. And that's why it will take a while to do it.

Rob Crisci -- Executive Vice President and Chief Financial Officer

Yes. I'll just add that every business is on a different sort of phase of this journey, right? I mean many businesses we have been SaaS in the very beginning, and they're always 100% SaaS. Other businesses were mainly on-prem like an Aderant. That's really the one business we haven't talked about, where really their customers are really starting to move to the cloud.

Deltek has been a mix over time. Most of the rest of the businesses are really kind of already SaaS, at least several businesses that we bought the last four or five years.

Operator

Thank you. The next question comes from Jeff Sprague with Vertical Research.

Jeff Sprague -- Vertical Research Partners -- Analyst

Thanks. Good morning, everyone. Hey. I guess as we're transitioning to software, I'll just ask an annoying industrial question.

Just going back to the deal itself and the structure, there are some additional detail on that 8-K, obviously, that wasn't -- certainly wasn't clear to me at the time the deal was announced. And what's still not clear to me is what the back end might look like for you guys on this deal, right? With CD&R paying $829 million for 51% of the equity, and then with new debt on the deal of 1.950 billion, I mean, it looks like the enterprise value is $3.6 billion and 11x multiple, right? If you guys have taken 2.6 out upfront, it's very unclear how we think about the back end.

Neil Hunn -- President and Chief Executive Officer

Yes. So the way that we would think about it, I'll just -- I'll put it through the lens of our new partner, right? So by the way, the math just went through, we would say it's correct, right? And so it was that $3.5 billion, $3.6 billion is the enterprise value upfront. That's 11x this year, 13.5x last year. In terms of EBITDA, more like in that 13 range if you look over the last five years, given the cyclicality.

We, too, so the amount of capital that CD&R put in is basically equal to our amount of capital still in the business. CD&R's business model is to drive a 3x-plus money-on-money return over their investment horizon. So if we and they are successful, then you get a triple of our stub of equity, right? It's sort of a framing of how to think that. So maybe there's a couple of billion, plus or minus, of upside in addition to getting the liquidity on the $800 million or $900 million that we have there.

So call it, $2.5 billion to $3 billion on the back end if, underscore and capitalize, if things go successful over the next five-or-so years.

Jeff Sprague -- Vertical Research Partners -- Analyst

Is that based on the premise that they actively do other things with the business? For example, other M&A in the business? And wouldn't that dilute you? Or would you participate in kind of incremental investments in the business to get it ready for eventual sale?

Neil Hunn -- President and Chief Executive Officer

Yes. So we're totally aligned -- two questions in there, right? So the implied is around the growth thesis of the company. So we're completely aligned with our partner on the growth thesis. It centers on continuing to invest in the organic growth that we've been doing with these businesses for the last four-or-so years and then building it at sort of a capital deployment or M&A flywheel, a repeatable flywheel.

There's -- without getting into the details of how the company is going to execute that because it's still very much being formed, but at the highest level, this is a -- one, it's a cash-generative asset, right? So the goal for all of us is to run a levered asset and use that leverage in the cash generation as a primary source of funding so you don't have a dilutive effect. If there is a transaction where CD&R is going to kick in equity, then we have the option to consider that. And we'll make that a deal-by-deal sort of decision. We think it's in the best interest of our shareholders.

And so yes, there could be a little bit of dilution, but that dilution is sort of somewhat factored into the math that I gave you before.

Operator

Thank you. And the next question comes from Rob Mason with Baird.

Rob Mason -- Robert W. Baird and Company -- Analyst

Yes. Good morning. Just first, a technical question around the guidance. So the core growth guidance for the year is 8% to 9%.

Did that change versus where it would have been on an apples-to-apples basis three months ago?

Rob Crisci -- Executive Vice President and Chief Financial Officer

I would say slightly higher, maybe like 0.5% or so. But I mean it's -- I think we are 7% to 9% in our last guide and the businesses we divested were slightly higher. Those go away, and we've raised to 8% to 9%. So I think it's a little bit of a net raise, but not by a lot.

Rob Mason -- Robert W. Baird and Company -- Analyst

Would you -- where would you slot that increase within the segments, the three segments now?

Rob Crisci -- Executive Vice President and Chief Financial Officer

So I'd say the biggest business that has a better outlook is Neptune. They're just doing incredibly well, as we said in the prepared remarks in their second half, given their backlog, given their ability to execute and deliver to their customers. It looks really, really strong. So that's really the one I think that's gotten quite a bit better.

Everything else I'd say is about the same as we had it three months ago.

Operator

Thank you. And the next question comes from Alex Blanton with Clear Harbor Asset Management.

Alex Blanton -- Clear Harbor Asset Management -- Analyst

Hi. Good morning. Yeah. I just wanted to look at this $2.30 for a minute.

What was that in the first quarter?

Rob Crisci -- Executive Vice President and Chief Financial Officer

Yes. It was about $0.50 in the first quarter and, what, $0.52 in the second quarter.

Alex Blanton -- Clear Harbor Asset Management -- Analyst

And then what is your guidance for that for the third quarter?

Rob Crisci -- Executive Vice President and Chief Financial Officer

So we're not guiding it by quarter, right, because it's in disc ops, but it's $2.30 for the full year. So generally, the fourth quarter is the best quarter for those businesses given the cyclicality in the oil and gas markets.

Alex Blanton -- Clear Harbor Asset Management -- Analyst

Yes. Well, the thing was I was trying to work out what the total would have been with that in there for the rest of the year by quarter. But I guess I can do it with what you just said. I'd like to talk about the future, and the future is acquisitions, of course.

How does that look now? What's the pipeline like? How far are you along in putting the work to $7 billion? What are you working on? What kinds of things are you working on? Just give us some color on that because I think that really is what is going to give investors confidence.

Neil Hunn -- President and Chief Executive Officer

I appreciate the question and the opportunity to address it. So it's been a very above-average level of activity really for this year. Obviously, we've not posted anything of size, just a couple of small tuck-ins. We're being -- while we have $7 billion, we're continuing to be just ridiculously selective as we've always been.

We run this sort of -- we have our criteria. We stay committed to the criteria. There's a lot of analytics, there's a tremendous amount of discipline and a ton of patience. And the reason we have that posture is we're making decisions to put companies in the portfolio, which we view as a forever thing.

And so every deal matters, everyone's got to be right and everyone has got to meet the criteria. And so -- but we're super busy, and we'll continue to sort of keep this posture and to grow the quality and the scale of the enterprise. But there's no timetable on that. We're just going to do the right deal at the time in which it presents itself.

Alex Blanton -- Clear Harbor Asset Management -- Analyst

But do you think that you'll be able to do some this year?

Neil Hunn -- President and Chief Executive Officer

We would like to do it. But again, there's no timetable. There's no clock ticking in the back of mind or this team, or our board's head about we have to get x dollars deployed by x date. So I think that leads to bad decision-making, but it's an active market.

So the odds are we'll get something done this year, but we'll just have to see how it goes.

Rob Crisci -- Executive Vice President and Chief Financial Officer

Yes. Yes, just we're very active working on a lot of different projects like we always are. So we're certainly very active.

Alex Blanton -- Clear Harbor Asset Management -- Analyst

And just characterize the pipeline of how many businesses are available compared with the past. And what are the prices like compared with the past and so on?

Neil Hunn -- President and Chief Executive Officer

Yes. So I mentioned we never want to quantify the number of deals either by number or dollar size in a pipeline. We think it's -- for us, is it sufficient or not. And so it's clearly sufficient.

I said at the beginning of your question, it's been an above-average level of activity for this year. Valuations, hey, it's high-quality assets are still highly priced. I mean that's a bit of the reason why we're being patient. And we'll just -- we believe that market comes to us over time, and so we remain patient for the right company with the right characteristics at the right price.

Alex Blanton -- Clear Harbor Asset Management -- Analyst

OK. Thank you.

Operator

And this concludes our question-and-answer session. I would now like to turn the call back over 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 signoff]

Duration: 0 minutes

Call participants:

Zack Moxcey -- Vice President, Investor Relations

Neil Hunn -- President and Chief Executive Officer

Rob Crisci -- Executive Vice President and Chief Financial Officer

Deane Dray -- RBC Capital Markets -- Analyst

Christopher Glynn -- Oppenheimer and Company -- Analyst

Scott Davis -- Melius Research -- Analyst

Joe Giordano -- Cowen and Company -- Analyst

Allison Poliniak -- Wells Fargo Securities -- Analyst

Julian Mitchell -- Barclays -- Analyst

Steve Tusa -- J.P. Morgan -- Analyst

Jason Conley -- Vice President and Chief Accounting Officer

Joe Ritchie -- Goldman Sachs -- Analyst

Jeff Sprague -- Vertical Research Partners -- Analyst

Rob Mason -- Robert W. Baird and Company -- Analyst

Alex Blanton -- Clear Harbor Asset Management -- Analyst

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