Roper Technologies (NYSE:ROP) delivered yet another solid quarter, but in common with a slew of other companies during the current earnings season, its management discussed a weakening in short-cycle industrial conditions. That said, Roper's industrial exposure is relatively limited, and in fairness, it was the only blemish in the quarter.

Let's look at the earnings report and why the guidance might have left some investors feeling there is some upside potential.

Roper Technologies second-quarter earnings: The raw numbers

Starting with the headline numbers from the quarter:

  • Adjusted revenue rose 3% in the quarter to $1.33 billion.
  • Earnings before interest, taxes, depreciation and amortization (EBITDA) rose 5% in the quarter to $471 million, and EBITDA margin expanded to 35.3% from 34.6% in the same quarter a year ago.
  • Adjusted diluted EPS increased 6% to $3.07 versus the guidance range of $3 to $3.04.

As you can see above, earnings actually came in above the guidance given on the last earnings call, but the impact of the slowdown in the industrial businesses can be seen in the updated full-year guidance.

A chart trending upwards.

Image source: Getty Images

Roper Technologies guidance

CEO Laurence Hunn said that the company's industrial businesses only represent around 8% of its revenue (25% of the measurement and analytical solutions segment revenue), but slowing end-market conditions were enough to cause a cut in the full-year organic revenue growth outlook to 4% from a range of 4% to 5% previously.

Moreover, management actually raised its full-year diluted EPS guidance to a range of $12.94 to $13.06, versus a range of $12.70 to $13 previously. The reason: Roper had previously agreed to sell Gatan, a manufacturer of filters and cameras in microscopes, to Thermo Fisher Scientific, but the deal was terminated due to regulatory challenges in the U.K. Consequently, now that Gatan will still be part of Roper, the company is obliged to add back its anticipated earnings into full-year guidance -- a figure of around $0.20 per share.

The matter came up on the earnings call, with CFO Robert Crisci telling analysts that all things being equal, "this $0.10 on industrial is the big change." In other words, the change in industrial conditions caused a reduction in earnings guidance by $0.10. To put it into context, it's a figure representing less than 1% of the midpoint of initial full-year guidance.

What happened in the quarter

A breakout of segment performance in the quarter, plus a look at revenue guidance for the rest of the year, outlines a lot about the quarter. The two software segments are on track for 2019 and are delivering pretty consistent growth. The decline in process technologies revenue was expected due to challenging conditions in the oil and gas upstream businesses.

Turning to the measurement and analytical solutions segment -- where the bulk of the industrial slowdown was felt -- management's guidance implies an ongoing slowdown in end-market conditions. Discussing the second quarter, Hunn said, "all of our industrial businesses saw a slowdown in the second half of the quarter due to project pushouts and consumable destocking. As such, bookings for this group were down high single digits in the quarter."

Segment

Q2 Organic Revenue Change (YOY)

EBITDA 

EBITDA Change (YOY)

Q3-Q4 Revenue Growth Outlook

Previous Q2-Q4 Revenue Growth Outlook

Application software

2%

$155 million

3%

4% to 6%

4% to 6%

Network software and systems

6%

$159 million

14%

4% to 6%

4% to 6%

Measurement and analytical solutions

2%

$140 million

1%

1% to 3%

4% to 6%

Process technologies

(5%)

$60 million

(1%)

(1% to 3%)

(1% to 3%)

Data source: Roper Technologies. YOY = year-over-year.

Looking ahead

The reduction in underlying guidance isn't really that much of a big deal. And given the conservatism of management's outlook, there's arguably some potential for a positive surprise. For example, Hunn outlined that the outlook for the industrial businesses "assumes the late second-quarter industrial slowdown continues for the balance of the year."

Moreover, any upside in the price of oil and/or an increase in takeaway capacity in the Permian Basin (where pipelines are being built) could lead to the process technologies segment outperforming.