Roper Technologies (ROP) Q3 2026 earnings call transcript

Good morning, and thank you all for joining us as we discuss the third quarter 2026 financial results for Roper Technologies. Joining me on the call this morning are Neil Hun, President and Chief Executive Officer, Jason Conley, Executive Vice President and Chief Financial Officer, Brandon Cross, Vice President and Chief Accounting Officer, and Shannon O'Callaghan, Senior 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'll please turn to page two. 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 three. Today, we will discuss our results primarily on an adjusted, non-GAAP basis. For the third quarter, the difference between our gap results and adjusted results consists of the following items. Amortization of acquisition-related intangible assets, transaction-related expenses associated with completed acquisitions, financial impacts associated with our minority investment in Indicor, and lastly, cash collected on Outgo's beneficial interest, which is the residual amount owed to Outgo after it sells receivables to a third party and is classified within cash flows from investing activities. Reconciliations can be found in our press release and in the appendix of its presentation on our website.

And now, if you please turn to page four, I'll hand the call over to Neil. After our prepared remarks, we'll take questions from our telephone participants. Neil?

Thank you, Zach, and thanks to everyone for joining us this morning. You can see our agenda on page four, so let's get into it. Next slide, please.

As we turn to page five, I want to highlight three takeaways. First, we delivered solid third quarter results, including 7% organic revenue growth and increased depth guidance for the year.

Second, AI momentum continues to build, and we're pleased with the progress in the quarter. Our businesses are bringing new products to market, and we're increasingly encouraged by the breadth of that progress and what these products will do for our customers. And third, we're active again on the acquisition front, completing three bolt-ons with our longstanding capital allocation discipline. Starting with our results, total revenue grew 8%, for gain of revenue grew 7%, EBITDA grew 7%, and DEBTS grew 15%. At a high level, we had a strong quarter, and to spike out a few of our larger businesses, we had another encouraging quarter for Deltec, although we continue to take a wait-and-see approach. We continue to see nice supply-side recovery at DAT, and unfortunately, Neptune continues to face subdued meter market conditions.

Based on these results, we're also increasing our full-year desk guidance. It was a solid quarter, and Jason will walk you through the financial details in a moment.

Turning to AI, since our last call, our businesses have introduced a broad range of products that apply AI to the specialized tasks and workflows our customers manage every day. Let me share a few examples.

First, VertiFOR launched agents for submission processing, benefit plans, and document research, and has now added two agents that automate policy processing for independent agencies. Since the beginning of the year, VertiFOR has developed and launched 12 workflow automation agents, with many, many more in development.

At Adderant, seven AI agents are now in early access to help law firms bill more accurately and collect cash faster. The appeals agent helps draft billing appeals, the collection agent prioritizes overdue accounts, and the time agent improves billing descriptions. These are practical uses of AI to reduce administrative work and help law firms run more efficiently. Another example is PowerPlan, where a new intelligent unitization product tackles a significant industry challenge, more than $180 billion of capital investments awaiting detailed asset classification across the U. S. electric utilities. Our purpose-built AI capability analyzes project and accounting data and recommends how costs should be allocated to individual assets. By accelerating that process, it helps utilities recover their capital investments and earn returns sooner, bringing forward revenue, earnings, and cash flow, and the productivity gains are substantial.

Customers are completing this work in minutes that previous of days or weeks. This is another powerful example of our focus across Roper. Putting AI to work to help our customers grow, perform better, and operate more efficiently. Great work by Rafi and the team at PowerPlan. At Strata, financial decision intelligence helps healthcare finance teams identify what needs attention and understand what is driving performance. In a few minutes, I'm gonna double click on this specifically. At Central Reach, Report Draft AI is designed to improve provider productivity and economics.

Clinical reauthorization reports typically take 9 to 12 hours per learner, much of which is non-billable. By automating data gathering and preparing a draft for clinician input and review, the product frees up substantial capacity for billable care, creating opportunities for providers to serve more learners, supporting revenue growth, in improving operational efficiency with their existing clinical teams. And Foundry introduced new AI capabilities for visual effects, while Subsplash launched work management products that bring AI and automation into church operations.

What is encouraging is both the breadth of this activity and how specific these products are to the markets we serve. They address work our customers know well, work that takes time, requires specialized knowledge, and matters how their organizations operate. We continue to see a substantial opportunity to help customers do work more efficiently and effectively and are excited to partner with their customers from across the enterprise to realize the promise of AI.

Our confidence in that opportunity is grounded in the same advantages that have always made our vertical market software businesses strong. Deep domain expertise, embedded workflows, unique data assets, trusted customer relationships, and scaled distribution. Our businesses know their customers' workflows and where AI can save time and improve decisions. Each business develops products close to its customers, while our AI accelerator team helps speed development and share reusable approaches across the portfolio.

We're still early in commercialization and are starting to see adoption and monetization of our AI solutions. Importantly, our products change how customers do work, so adoption will develop over time. As customers use our products, that experience will help our businesses refine the products and expand their capability remit. There's more work ahead, but we love the progress. We have new products reaching customers across a broad range of markets and a meaningful opportunity to build from here.

And third, we continue to execute our disciplined capital allocation strategy and are encouraged that we're able to execute three bolt-on acquisitions during the quarter. Specifically, we deployed $436 million towards bolt-on acquisitions for iPipeline, ProCare, and Strata. The common theme is expanding the capabilities and reach of our existing businesses, and in complementary products, expertise, and customer relationships in markets we know well.

Each acquisition builds on our existing domain expertise and distribution, creating more opportunities to serve customers and drive long-term organic growth. Our approach remains consistent. Evaluate each opportunity carefully and deploy capital where we see attractive long-term returns. So, a solid quarter with another impactful step on our AI journey.

With that, let me turn the call over to Jason to walk through our financial results, capital allocation activity, and balance sheet position. Jason?

Thanks, Neil, and good morning, everyone. Please turn with me to slide six to review our financial performance. Our third quarter was highlighted by solid organic revenue growth and strong depth growth. We delivered revenue of $2.2 billion, which is up 8% over prior year, underpinned by organic growth of 7%. Digging deeper here, organic recurring revenue grew 8% across our two software segments.

Our enterprise software gross retention remains very high, consistently in the mid-90s. And further, core enterprise bookings were up mid-single digits on a TTM basis.

EBITDA of $864 million was up 7% and converted to EBITDA margin of 39.8%. Core EBITDA margin was down 30 basis points, with our software segments in aggregate slightly expanding, while our TEP segment was down 90 basis points.

Our Neptune business delivered more mechanical meters in the quarter, which has a dilutive impact on revenue dollars and margin. Over a longer arc, we expect a continued migration to ultrasonic meters, which drives higher lifetime value for customers and Neptune.

Depths of $5.89 was up 15% over prior year and above our guided range of $5.75 to $5.80 on better margin performance. Free cash flow at $805 million represents 37% of revenue, but was down 4% versus prior year given. We had timing of interest coupon payments on bonds issued in 2025, and we had a temporary lag in collections at our Illumia business as they moved through an ERP implementation.

For the year, we expect free cash flow to be 30% or more revenue, and with our share repurchase activity, free cash flow per share is expected to grow in the double digits area.

Now, if you turn with me to slide seven, I'll walk through our financial position at capital employment. Enabled by seasonally strong free cash flow and proceeds from the divestiture of Indicor's instrumentation businesses, we reduced our net debt to EBITDA by half a turn within the quarter to land at 2.9 times, all while simultaneously deploying $436 million towards acquisitions.

We finished with over $300 million of cash and $1.3 billion drawn on our $3.5 billion revolver. In the quarter, Indicor announced the sale of the remaining flow controls businesses to Xylem, We expect around $600 million of pre-tax proceeds sometime in Q4 as the transaction moves through regulatory clearance.

Also in the quarter, we acquired three tuck-in businesses for iPipeline, ProCare, and Strata. Consistent with our acquisition criteria, these tuck-ins play directly into the strategy of increasing organic growth where we have the highest right to win. All three track-ins are growing faster than their acquiring platforms and, coupled with synergies, are expected to generate very attractive returns.

Looking ahead, we now have more than $6 billion of capacity for capital deployment over the next 12 months, given strong free cash flow, which will be enhanced by proceeds from Indecor sale of its flow controls businesses.

In summary, we will remain well positioned to deploy capital towards the highest risk-adjusted return opportunities through a disciplined and analytical process and approach. Neil, with that, I'll turn the call back over to you.

Thanks, Jason. As we turn to page nine, let's review our application software segment. Revenue grew 7% total with organic growth of 6%. EBITDA margins were 43.7%, up 30 basis points year over year. Looking across the segment, AI momentum continues to build with more of our businesses bringing new solutions to market. We also continue to see solid progress on cloud conversions, including encouraging signals at Dell Tech.

Turning to the business highlights, Adder had another excellent quarter. The team continued to expand its AI agent platform, as previously mentioned, with capabilities across rates, compliance, and general ledger forecasting. VertiFort delivered growth across its agency, MGA, and carrier businesses and launched six new AI agents, along with its value-based credit model. This value-based pricing model is a key enabler of product-led growth as customers will utilize credits towards any current and future agendistic solutions on the Velocity platform.

As we discussed last quarter, VertiFore's strategy starts with high-volume, labor-intensive work, embedding agents directly into the systems customers already use. The latest launches expand the work those agents can do and build on the foundation established with Velocity. Deltec had another encouraging quarter with continued strength in its private sector solutions. Government contracting bookings have been solid over the last couple quarters, although the broader market remains uncertainty.

Against that backdrop, customers are showing increased interest in moving from perpetual license to our cloud-based offerings. As we discussed earlier, we also saw new AI solution launches at Central Reach with Report Draft AI and PowerPlan with intelligent unitization.

Finally, we've completed two bolt-on acquisitions. At ProCare, we added Playground, which helps child care centers manage enrollment, billing, and daily operations.

Playground has exceptional product market fit and is highly complementary to the existing ProCare product stack. We're excited about the growth opportunity from pairing that product with ProCare's distribution and payments infrastructure. And at Strata, we added C-Meyers, which helps banks and credit unions plan for growth and manage financial risk. This quarter, I spent a full day with the Strata team and finance leaders from nine of our health system customers at a co-designed workshop for Financial Decision Intelligence, or FDI, Strata's new AI capability for healthcare finance. FDI became generally available on September 1st FDI helps finance teams diagnose what is changing in their business and where to intervene to improve performance For example when joint replacement margins decline despite rising procedure volumes FDI automatically explores the underlying drivers from pair mix and reimbursement to labor and implant costs to identify the source of margin pressure and focus management's response.

FDI brings together three advantages we see from across the portfolio. First, proprietary data and ontologies. Every health system has its own accounting procedures and definitions. Two hospitals can both report their margin on joint replacements and mean very different things. STRATA has spent decades mapping thousands of provider general ledgers into a specific common structure supported by healthcare costs accounting down to the individual patient encounter. That makes meaningful benchmarking possible and gives FDI its foundation. Its calculations use the same governed measures customers rely on to close their books with consistent repeatable results that are traceable to the source. You cannot prompt your way to that. It is earned one customer implementation at a time over years.

Second, turning insight into action. FDI operates inside this data platform delivering answers in seconds and connecting those insights directly to the workflows where customers manage costs, improve margins, and allocate resources. And third, real customer trust. Healthcare finance leaders need confidence in the tools they use to make consequential decisions. Strata has earned that confidence through long customer relationships.

Trust is critical to AI adoption and is very hard to replicate. Throughout the workshop, the customer request was simple and consistent, productivity. less time assembling and reconciling analysis, and more time working with operating leaders to improve performance. One CFO described analysis that took several people hours to being nearly instant and FDI dealing in more comprehensive and grounded analysis.

This frees finance teams to focus on improving profitability and supporting higher-quality care. Strata is selling FDI as an add-on subscription, creating an opportunity to grow recurring revenue. This is just the beginning for FDI, and am excited about the roadmap ahead. I'm proud of the Strata team's development speed and close customer collaboration and pleased with its partnership with our Roper AI accelerator team.

Deep vertical data and domain expertise within each business paired with central AI capabilities. That is the model we're scaling across Roper.

Now turning to our outlook, we expect to see application software organic growth in the fourth quarter to be similar to that of the third quarter in the mid-single-digit plus range. Please turn this to page 10.

Total revenue under the network software segment grew 8% with organic growth of 5%. EBITDA margins were 52.4% down 130 basis points year over year. Core margins were essentially flat the prior year.

Turning to the business highlights. DAT was strong in the quarter and accelerated growth, supported by expansion of its network, higher average revenue per user, and continued adoption of its digital freight marketplace solutions. We continue to see encouraging signs in the freight market, with the supply-side recovery progressing. As we've discussed, we would still like to see a stronger load volume before calling it broader recovery.

We also completed the Orego bolt-on acquisition for iPipeline. Orego connects UK pension providers, investment platforms, and financial advisors, automating wealth transfers, enabling secure data exchange. It complements iPipeline's solutions for selling and administering financial products and expands its presence in the U. K. wealth and retirement market.

Foundry also continued to grow and reached a record level of ARR. SoftWriters grew as adoption of its AI order entry solution continued to expand.

As I shared last quarter following my visit to LA Script, this solution addresses a meaningful customer need, reducing the time spent on manual order entry so pharmacy teams can focus more of their capacity on clinical review, customer service, and patient care.

Order entry is a starting point, and the team now has additional AI products in beta. Subsplash is tracking in line with our year one target and continues to advance the AI offerings, including enhanced workflow automation.

Turning to our outlook, we expect network software organic growth in the fourth quarter to be a touch higher than Q3 and be in a mid-single-digit plus range is based on strength at DAT and sub-slash becoming organic in Q4.

Now, please turn to page 11, and let's review our TEP segment. Total revenue and organic revenue both grew 10% in the quarter, with exceptional growth at NDI and strong performance at Arathon. Even our margins were 34.3%, down 90 basis points year over year. Starting with NDI, the business had another excellent quarter delivering exceptional growth driven by continued demand for its precision measurement solutions.

Verathon also delivered a very solid quarter with strength across its BFlex, Glidescope, and BladderScan product families. In addition, we're encouraged by the positive customer response to the C-Flex single-use Sysscope launch, which further expands Verathon's single-use portfolio. Neptune had a softer Q3 following a better than expected first half. We now see second half revenue slightly down versus our prior outlook for modest growth.

Q3 mix skewed towards mechanical meters, putting pressure on both revenue and margins. That mix is likely to continue into Q4. We view this as temporary as a long-term secular demand for static meters remains fully intact.

Finally, I want to recognize the teams at Civco, FMI, Innovonics, and RF Ideas each delivered strong execution and growth in the quarter.

Turning to our TEP outlook, we expect organic growth in the fourth quarter to be in the mid-single-digit range. With that, please turn with us to page 13.

On this page, let's walk through our increased full-year adjusted depth guidance, as well as our Q4 outlook. For the full year, we're raising and narrowing adjusted depth guidance to a range of $22.35 to $22.40. That represents a $0.15 increase at the midpoint from our prior guide and a $0.95 increase from our original guide. Our full year revenue expectations continue to have total revenue growth north of 8% and again, a revenue growth in the 6% area. For Q4, we're establishing our depth guidance, adjusted depth guidance, of $5.95 to $6.00 and expect our tax rate to be in the 20% to 21% zip code. Now please turn to page 14 and then we'll open it up to your questions.

We conclude with the same three points with which we started. First, we delivered solid third quarter results. Revenue grew 8%, organic revenue grew 7%, EBITDA grew 7%, and adjusted depth grew 15%. We're raising a four-year earnings outlook again, reflecting the strength of our year-to-date performance.

Second, AI momentum continues to build across Roper. Our businesses launched several new agentic solutions this quarter, expanding the work we can help our customers accomplish. The Strata Workshop brought that opportunity to life. Our ability to deliver that kind of value rests on advantages built over many years, deep domain expertise, proprietary data, embedded workflows, and customer trust. Those advantages are unique to our businesses and central to how our businesses are developing and deploying AI.

We're still early, but the opportunity is substantial. As our software takes on more valuable customer work, we have the opportunity to expand our addressable markets and earn a greater share of the value we create.

Finally, our capital allocation discipline remains unchanged. This quarter, we deployed $436 million into bolt-on acquisitions for iPipeline, ProCare, and Strata, adding capabilities to established businesses in markets we know well. As you heard Jason mention, our leverage now sits at 2.9 times, and we have over $6 billion of capital deployment capacity over the next 12 months.

With that, we're pleased to be putting capital back to work through M&A, and we looked at 2027 with cautious optimism about compelling opportunities to deploy capital and accelerate long-term cash flow-for-share compounding. As always, our standard for deploying capital remains the same. We'll pursue the opportunities that offer the most attractive, durable, and long-term cash flow-for-share compounding, whether through acquisitions or opportunistic shared purchases.

Looking ahead, our focus is straightforward. Help our customers accomplish more. expand the work our businesses can do for them, and invest the cash we generate where we can compound it most effectively. That is how we will build an even stronger roper and deliver durable, long-term growth in cash flow per share.

As we wrap up, I'd also like to welcome Abhijit Dubé to our board of directors, who is the CEO and Chief AI Officer at NTT Data. We're delighted to have him join us and look forward to his perspective and contributions as we continue to execute our strategy, broadly deploy AI across our product sacks and our enterprise, and create long-term value for shareholders.

So with that, let's open up to your questions. Thank you.

Good morning. Hey, maybe one just, like, on a specific company, but, like, I'm sure you saw, like, the journal article the other day on autism care hours, particularly at, you know, at PEO and facilities. And I'm just – maybe it's for the wrong reasons that these hours are going up at some of these places, but I'm just curious, like, what that means for the rollout of stuff like Central Reach. Like, it seems like almost requirement to have technology like that if you're going to push the hours to the extent that this seems to be happening.

Well, I appreciate the question. So I think the thing that is great about Central Reach solutions is that it's all about appropriate care that is auditable, that's to the standards.

And there was an article or there's a flare-up on this about a year ago, and we looked across the Central Reach customer base, and it was like the most compliant set of customers. I think this was in Minnesota. I forget where it was, a year or so ago. on some fraud claims. And it was the automation with Century Reach was the cleanest set of providers in the jurisdiction. So same thing here. I mean, it's just a good audit sort of backbone when you sort of use the Century Reach or automated systems here.

If I think about the fourth quarter guidance, I'm just curious, like, I know it's early for 27, but, like, are these exit rates fair starting points for us to think about moving forward? Like I'm curious, like something like Neptune, right? Like that's a project-centric business. It's hard for us to kind of contextualize. So like if that's – what are the prospects like kind of into next year?

Yeah, I would say for the 27 sort of setup, first it's super important that, you know, we're just starting basically next week the planning process. So this is – we have to go through all the process with all 29 companies and understand the puts and takes and all the nuances, so we always have to caveat that. But we'd say it's generally a constructive setup.

The recurring sort of revenue, sort of exit run rate is encouraging. Certainly the velocity of the product development on the AI side is encouraging. Now, caveat there is we're now in the commercialization phase, and we've got to try the bookings and adoption and consumption. That's sort of where we are in that. I'm sure there'll be questions on that today's call.

And then if you sort of go segment by segment, Dell Tech has had a couple good quarters. As I mentioned, we're still in a wait and see. We want to see that continue. And then the other thing about Dell Tech is the business is definitively turning more recurring, more SaaS. So we have to overlap the perpetual in that business. And then just a reminder, Central Reach, we get a full year of organic. In network, certainly what we're seeing at DAT is encouraging, but it's supply driven. So it'd be healthier if it was demand driven, but it's definitely a better setup coming into next year versus coming into this year at DAT. And then, remind you, subsplash is fully organic or organic for the full year.

And then TEP, NetTune's really the to-be-determined. And it has a wider range of outcomes. It had a wider range of outcomes this year that we anticipated that we're experiencing. And so that's a to be determined. We'll have to really sort of spend a lot of time with the management team and understand the industry trends heading in next year. And then NDI, which has just been awesome for us this year, will be more normalized next year. But the setup is generally constructive. Thanks, guys.

This quarter gives you that, and I recognize it early but maybe just to elaborate on that last question how are you thinking about for 2027 Yeah I think it was a very good quarter for Dell Tech What we are seeing thankfully is that more customers are starting to move to the cloud so the bookings were quite strong.

That doesn't, you know, obviously materialize in revenue immediately like Perpetual. You know, it's an uncertain market. I think what Dell Tech's doing is, and we mentioned this last quarter, has announced the end of support for the cost point on-prem solution in the first quarter of 28. So that's creating a catalyst for them to go back to the base and start to do that migration. So, you know, despite a sort of uncertain market, they're sort of making growth happen. So we'll see. It's one more quarter before we move into next year, but momentum is good there.

Yeah, I would say, as I mentioned, the prepared remarks, we looked at next year with sort of cautious optimism.

Janet and her team continues to be very busy. I would say the pipeline tilts more proprietary and proactive outreaches than large-scale processes, so very bespoke. We just had a couple weeks ago our second annual CEO conference where we had 20 or so target CEOs together for a day, day and a half, going through Roper and getting to know the businesses. So that was well-attended and very high-quality targets at that summit. and we're cautiously optimistic. I mean, all the pressures that have been on the private equity firms for now going on three years continue to exist, LP credit, DPI pressure, and sort of just coming to grips with where public companies are valued.

There's a lot of bit of psychology in that, and that psychology appears to be coming into reality.

Yep, you bet. Thanks for the questions.

Oh, Brian, we lost you. Maybe he hit star one accidentally. We'll come back. Operator, if we come back to him, that'd be great.

Yeah, I'll take the value-based credit. I want Jason to take the first one.

Yeah, Terry, so they're in line with the segment in terms of AAR growth. And on the value-based credits, just remind everybody, these contracts are being structured as recurring. So you're buying a fixed amount. Those have to be consumed in a specific period of time. As a result, their revenue recognition treatment is recurring, not reoccurring. So it will look and feel like subscription revenue. Now, obviously, it's very important for the VertiFOR sort of, if you will, for deployed teams, the customer support implementation teams, to make sure there's wide-scale adoption and utilization so you get the upgrades, the uplifts, the additional sort of credit purchases, and the renewals.

And that's where we are right now. It's where I think the Velocity platform was GA'd within the last 60 or 90 days. I mean, the full GA release has been very recent, and we're in the early adoption phase.

Yeah, and, you know, I think, as you can appreciate, Terry, the timing of getting to the cloud is a little harder because it's a different value prop. So there's, you know, that's sort of what we're managing through. But certainly it's our biggest maintenance base at Roper. And so the timing of getting that to the cloud is certainly would outstrip perpetual.

It's just kind of how that phases over the next few years is a question. But we do feel good about the momentum as we sit here today.

So the – I'll try to be comprehensive in my answer. If I don't, we can certainly take this offline as well. So let me just – we'll follow the bouncing ball of this. So it was really a year ago the models and the capability of AI, we really could do agentic work. So the first question is, can we think of the ideas, the customer magic, if you will, to sort of put into the products? That question is absolutely, without question, yes.

I think it's 17 or 18 of the 21 software businesses have agentic solutions in the market. So that's the first question. So first, can we think of the idea? The second one, can we build them? So that's yes, and that's led us to where we have the vast majority of companies having these products in the market. Now the question is, can we drive early adoption, convert sort of, if you will, the beta customers to early adopters? The answer to that has been yes.

You know, just go back to the remarks I said in the call about Stratinth and FDI, or last quarter of a soft writers with pharmacy automation. The answer to that has been yes. Now it's about can we get, we need to get to broad scale, you know, across, you know, into the go-to-market teams across all these businesses and get it broadly distributed into our customer bases and drive adoption. So the customer interest has been very, very positive. It was probably the most positive I've seen in my career in tech because we're literally delivering a butt that does magic things.

So that's the good part. Now what I think all companies, and we're not alone in this, is now you're facing budget cycles, AI committees, you know, all the safeguards and governance of data. And so we're just going through the go-to-market processes. You know, the early indications are positive, but we've said this year was going to be largely your commercialization learning and adaptations. and, again, progressing well, but it's still to be proven.

And then I think the first part of the question, you know, where are some of the better customer reactions, certainly Century, certainly Adderant, certainly SoftWriters and Pharmacy Automation, the early adopters at Vertifor, the early adopters at Strata. I mean, there's really not – I'm just going through the list in my mind. There's not really been really a flat launch. I mean, again, it's early days, and we will not bet 1,000 across all these products, across all the companies, but we haven't had any abject, out-of-the-box failures, if you will. I think one of the interesting changes with AI, obviously, is when you launch a product, you can iterate, continue to iterate, so you'll have immediate customer feedback.

So we've seen some times when something wasn't quite right, but then we've been able to iterate quickly based on feedback from the customer. So that's been helpful.

Yeah, the punchline is our gross margins on these authentic tools are very positive, sort of at our software gross margins. Our philosophy on this at the moment, and this is obviously subject to change, and this is well informed by our leadership team and our central accelerator, AI accelerator team, is we are 100% optimizing speed of development and deployment. And so we're working with a lot of the models that are on the frontier. We don't need the most frontier model. Let's be very clear about that. We don't need 5.6 Astra or Fable 5.1 or 2 or whatever the current release is. But we're used sort of the cheaper, Florida, downscaled models from the Frontier, but the harnesses that come with them, you can just get moving much, much faster on the product side.

Now, over time, every one of the products, 100% of the products have the model routers, and so we can sort of, we have multiple sort of models underneath each product in case when you call Anthropoc or OpenAI, if they're not answering the phone and with the latency you need, you immediately flip over to our model.

Because there still is strong demand for, if you will, the legacy software stack. So how we make sure this is on top of and addition to. And then it's like, like I said, like in healthcare in particular, acute care hospitals have sort of an AI governance overlay. And that was a new learning from the strata team, for instance.

It's like it's going, it has a traditional sales cycle and then another piece of it. So it's not a barrier. It's just maybe it slows things down a little bit. And those are the sorts of things that we're learning right now.

For sure. So the first thing, and we've been doing this since over the last couple, three years, since the chat GPT moment, if you will, we need to certainly make sure and do the diligence that the end customer of the software company we're looking at is a viable long-term customer. The customer is viable. So look at what we did last year. It was autism therapy, so people providing therapy to youth and then people going to church. So the end customer is highly viable and will not be sort of disintermediated by AI, if you will. Then it comes down to what we see in our portfolio. Do you have sort of the defensive moats and offensive moats to be a winner in the AI world, right?

So do you have sort of the right amount of data, the data rights, proprietary nature of the data? Do you have network effects? Do you have sort of configuration lock-in? So et cetera, et cetera. I won't go through the full framework here. So then do you have the preconditions to be successful in AI? That's where we are now. Fast forward, you know, a year or two or three from now, it becomes, I think, the discernment becomes even easier because you'll have taken, targets will have taken those advantages and will either have proven or not proven that they're winning in the AI, would be able to develop products, bring them to the market, monetize the products, drive additional customer value.

And so the companies that we're looking at now are in the earlier stages of that.

You bet.

Yeah, thanks, George. I think it's the same as, you know, we've always talked about, which is the relative sort of risk-adjusted returns for us. And for us, obviously the buyback is attractive, but the option value on the M&A, given all the dynamics we've talked about in GE and that everybody really knows about, is worth the D leverage and preparing our balance sheet for that event. Now if we fast forward a couple quarters from now we still have that option available to us We still have quite a bit on the authorization So that still a viable alternative if you know M markets don cooperate Okay.

Yeah, certainly a lot of focus by the team there, and I know they're going to do a good job. They're just powering through some order-to-cash challenges. They actually went live in January, but the big renewal season is in summer and fall. So we expect to see some improvement in the fourth quarter. Some of that might spill into the first quarter of next year.

But, you know, when you kind of take a step back for the year, you know, we expect free cash flow per share to be in line with depth growth, maybe even a little bit better. We'll see how it plays out. So that should all sort of normalize as we close out the year.

You bet.

Yeah, I appreciate the question. So when you look at the portfolio, sort of there's basically three companies that don't have an AI tool. One's not a true software company. It's a group purchasing organization, so they don't really have, like, an agentic software front that's reported. MHA is reported in the network segment. They're using all sorts of AI inside the business to drive productivity, so that one, set that aside. Then you have two businesses that are in clinical diagnostics, DI and Clinisys. They have early AI tools, but this is a – what laboratory software does and this remit is it's nearly a fully solved technical problem. There's not like this is how you run laboratories and route samples to analyzers and take results off analyzers and report that.

And so it's basically an already fully automated process. And so there's not a large agentic remit to do here. Now, they're adding some AI tools around it, but it's not like these processes are already fully automated. So essentially a long-winded way of saying the companies that have AI remit, 100% of those companies have AI tools today.

Happy to do it. All right. So on the diversity of pricing models and AI, it comes in three general flavors. The first flavor we already talked about, I'll call it like this, this tokenized fixed budget, use it over a period of time where you take it as recurring, that appears to be the predominant, the majority of what Vertifor, Adderant, Central Reach, I mean, that's the predominant chunk, maybe less Central Reach, but that's the predominant way that our companies are going to monetize early. So it's a consumption-based thing, but you buy a fixed amount of consumption, It's easier to lose it. As you consume that, you buy additional sort of chunks.

The other model is straight consumption. It's a minority of what we're doing, but we have straight consumption. It's where our customers already buy from us largely on a consumption basis. So in pharmacy automation, a lot of the tools are already paid on a per-script basis. So we monetize on a per-script basis with AI tools there. Or at DAT, we monetize what we do at Convoy and DAT on a per-load basis, so AI there will be on a per load basis.

The third way is going to, and this is like, for example, at Dell Tech, where their software remit is ERP for government contractors, and so how do you automate the accounting close is one of the product features they're delivering right now. That's going to be basically delivered in the cloud as an add-on, so you're going to see, if you will, accelerate its move from ground to cloud at a higher price point once you get to the cloud. So those are the three models. To your point about which ones will show up first, I think it will sort of go in sort of the first two models, the consumption, if you will, sorry, the subscription model where you have consumption embedded that and the straight consumption.

Those will be the ones that show up earlier, and then the lifted shift to the cloud will take a little bit more time. I would anticipate anything.

Yeah, hey, Ken. So second half, you know, we said it was going to be high single digits and it being a little bit higher in the third quarter. And so that did play out. And so we've got mid singles for the fourth. I would just say broadly, it has been the Neptune softness. And that's, it's really a market sort of dynamic. And it's specifically for us, you know, volume is okay, but we actually had more mechanical meters, has a lower ASP and lower margin. So that was sort of the driver of the second half.

And we didn't have our divestation. We did divest the industrial businesses a few years ago. We're getting the proceeds from that, but there's no sort of near-term divestiture activity in that segment.

No, I mean, the impact for us will be more next year. The current quarter, it's actually a little bit dilutive as we've got some synergies that will roll through next year. But it's actually, you know, for the fourth quarter, it's a little bit dilutive, a few pennies.

Yeah, appreciate the question, Josh. So yeah, I mean, this is, I think the question is more on the how do we scale this? And obviously, this is new, not just for us, but for the the economy at large. And so we're all trying to figure that out. Where we're seeing early AI sort of monetization is where the product stacks were first to market. So central reach. For instance, central reach, I'll have Jason have to make sure I sort of keep me honest here. But 75% of their bookings are either AI-related, AI-specific or AI-related bookings in that range, for instance. Adderant, the number is like 25% of their bookings are either AI or AI related.

The anticipation for what's now back behind sort of the, they were, I don't know, a year ahead of the portfolio. Now the portfolio is catching up. 75, 25 to 75% is a wide range, but, you know, it'd be nice to see that as we sort of scale across, you know, a dozen of our companies. but it's too early to sort of say it's going to be 10, 25, 50% of bookings over time are going to be AI related.

Fast forward three or four years, like everything's AI. Like this whole thing, what's AI, what's not AI, it's going to be indistinguishable. So I think we're in a moment in time in that regard.

Yeah, I appreciate the question. I mean, I think it's the static pipeline from Neptune, you know, customer by customer is strong. So there is definitely a market demand for it. It's just, we just had pushes on the pipeline. So we do think coming into next year it's going to be more favorable for us. Timing is going to be uncertain in terms of kind of the quarterly cadence.

But, yeah, that secular demand is there. So, you know, we feel good about that.

Yeah, I'll take another crack at this. So just to remind everybody, the macro, what's happening in the water meter, the North American water meter in market, just to set that first, then we'll get into like the specific quarter and our best look at the outlook. So what's happening is during COVID, you know, especially in the Northeast where the water meters in people's basements, they could not be sort of maintained or replaced. So then post COVID 22, 23, there is a surge. There's a catch-up.

Now on the backside of this, you know, last year, this year for sure, we're having to sort of comp over that surge. And so there's a, in the industry, there are fewer meters that are being installed last year and this year versus the years before. You're kind of going from peak to trough. This isn't like a macroeconomic cycle. It's still like a COVID super cycle dynamic that the industry at large is digesting. We talked about that in the past, but just sort of level set you and the team and everybody on that.

So inside, so we're just sort of on the, we believe we're on the tail end of sort of that sort of reset, getting into more a normalized sort of meter market. Now what's also happened inside of that is this mix from mechanical to static. Static meters are, it's a better technology. They last longer. They measure, they perfectly measure the flow of water over the life of the meter where mechanical degrades slowly over time, so it's a better value proposition to the customer. That's why the market is generally going there. Because it's higher value, it carries a higher price, and so you've had this positive mix that's happened in the industry, in particular Neptune, that's helped offset some of the meter declines, macro meter declines in the market.

In the quarter, as Jason just said, there are projects, large projects, static meter projects that pushed, which had the total number of meters that Neptune sold in the quarter is actually pretty close to the expectation, but it was a dramatic mix towards mechanical, which had both a revenue implication and a margin implication. As you just said, that likely sort of has a chance, the probability that normalizes in the next year. But that's sort of the setup of the mixed dynamic, both the macro and the mixed dynamic. We believe over the long arc, you know, this is not a call for next year. It's like this has been over our ownership like a mid-single-digit growth business, and we think those dynamics are intact over the long arc.

Thanks, everyone, for joining us today, and we look forward to speaking with you during our next earnings call.