Roper Technologies, Inc.

Good morning. The Roper Technologies conference call will now begin. Today's call is being recorded. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. I would like now to turn the call over to Zach Moxie, Vice President of Investor Relations. Please go ahead.

Good morning, and thank you all for joining us as we discuss the third quarter financial results for Roper Technologies. We hope everyone's doing well. Joining me on the call this morning are Neil Hunn, President and Chief Executive Officer, Rob Cresci, Executive Vice President and Chief Financial Officer, Jason Conley, Vice President and Controller, and Shannon O'Callaghan, Vice President of Finance. Earlier this morning, we issued a press release announcing our financial results. The press release also includes replay information for today's call. We have prepared slides to accompany today's call, which are available through the webcast and are also available on our website. Now, if you'll please turn to slide 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 slide three. Today we will discuss our results for the quarter primarily on an adjusted non-GAAP basis. Reconciliations between GAAP and adjusted measures can be found in our press release and in the appendix of this presentation on our website. For the third 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 acquire deferred revenue and related commission expense, transaction-related expenses for completed acquisitions, and lastly, we've adjusted our cash flow results to exclude income tax payments deferred from Q2 to Q3 due to COVID-19 and cash taxes paid for the Catan divestiture. As a reminder, GAAP requires tax payments for a gain on sale to be classified as an operating cash flow item, even though it is related to a divestiture. And now, if you please turn to slide four, I'll hand the call over to Neil. After our prepared remarks, we'll take questions from our telephone participants.

Neil? Thanks, Zach, and good morning, everyone. Thanks for joining us. Let's go ahead and get into this morning's content, and as we always do, we'll start by reviewing our agenda. I'll begin discussing our enterprise highlights for the quarter, which was a very busy and very productive quarter for us. To that end, I'll briefly review our acquisition activity. Rob will then discuss our financial performance and capital market activity. Afterwards, I'll walk through our detailed segment review and associate outlook, followed by our enterprise fourth quarter and raised full-year guidance. We will then look forward to your questions. Now, with that, let's turn to a brief run-through of our Q3 enterprise highlights. Next slide, please. Third quarter demonstrated the strength of our execution capabilities, first on an operating basis, second on a capital deployment basis, and finally, from a capital markets perspective. Operationally, our revenues need to continue to grow, albeit modestly, despite the well-documented economic challenges resulting from the pandemic situation we're all facing. At a summary level, our software recurring revenues continue to grow. Recurring revenue growth is very important for us. This indicates high levels of retention, demonstrates our ongoing and increasing relevance we have with our customers, and provides for a more stable and predictable forward financial model. However, as anticipated, We experienced modest declines in our perpetual license revenue tied to lower levels of market activity across a few of our softer end markets and a difficult comp from a year ago. We discussed this on each of our last two calls. COVID is absolutely driving faster adoption of our SaaS or cloud-based recurring revenue solutions. This is a very healthy and positive trend. Separately, we continue to see very nice momentum for our products and software used in the fight against COVID. Most notably, our laboratory software businesses continue to see strong demand as we're helping stand up and maintain health system and country-level COVID testing capability. In addition, Verathon, our largest medical product business, continues to drive meaningful market adoption across their video intubation product line. The final operating item I'll point out here is at the onset is the fact that Neptune and our short cycle industrial businesses started to rebound in the quarter from which we draw encouragement. From a financial point of view, our organic revenues declined 3%. Our gross margin were 64% and our operating profitability remained very strong with 37% EBITDA margins. Most importantly, we grew our cashflow double digits again. Turning to our acquisition activities, we completed four acquisitions for a total of $5.8 billion of capital deployment, certainly led by our $5.35 billion acquisition of Vertifor. More on these when we turn to our next slide. Finally, the team was successful in the debt capital markets, completing a $2.7 billion bond offering with a blended rate of 1.3% and increasing our revolver capacity to $3 billion that has an extended maturity date. I'm super proud of our execution in this quarter with all three phases of our offense on full display. Solid operating performance across the enterprise, 5.8 billion of CRI accrued of capital deployment, and successfully executing a capital market transaction at extremely favorable interest rates. Now, let's turn to our next slide and talk to our recent acquisitions. Okay, this was a very strong quarter for us relative to our capital deployment strategy. As we have mentioned for several calls, the quality and quantity of ideas in our M&A pipeline has been robust for quite some time. We were very selective in our approach before landing on these acquisitions highlighted on this page. First, we completed the acquisition of Vertifor for $5.35 billion. I refer you to the call we did just after announcing this transaction for all the relevant details. But to highlight, VertiFOR is a business that delivers cloud-based software to the property and casualty insurance industry, principally in the United States. VertiFOR's focus is straightforward, to simplify, automate, and drive productivity across the complex and highly regulated processes in the PNC space. Today, the business serves over 20,000 independent agencies. 1,000 insurance carriers, and touches over $140 billion of premiums per year. And high-quality management teams motivated to build their businesses are super important for us. And to that end, Amy and her team have done a tremendous job building this business over the last several years. We expect Vertifor will deliver about $590 million of revenue and $290 million of EBITDA next year. Separately, we announced and closed three strategic add-ons, one for Strata and two for iPipeline. Relative to Strata, we acquired EPSI. As a reminder, both Strata and EPSI deliver decision support, financial planning, and analytic software solutions that help hospitals manage their cost structure and identify opportunities for operational improvements. Strata, when combined with EPSI, will serve over 400 health systems and 2,000 hospitals. The aggregate spending power of this combined customer base is approximately $1 trillion, or about 25% of the total healthcare spend in the U.S. The combination of STRAT and EPSI will be a powerful one for the market and our customers. Relative to iPipeline, we acquired both Wellis and IFS. Wellis is a nice product token that enhances iPipeline's life insurance and annuity illustration capability. For those who do not know, the illustration is the modeled value calculation that permanent insurance carriers are required to provide to their insured. IFS enhances iPipeline's capabilities to better serve the financial planning channel relative to life insurance account management. We expect these three bolt-ons will deliver about $75 million of revenue and $30 million of EBITDA next year. When looking at each of these deals, either individually or together, they are right down the middle for us. Each business has very strong cash flow capability, which is punctuated by being super asset light. Also, these businesses are, as are most roper businesses, market leaders in their niche. Over the years, when we refer to niche, we mean smaller markets. We like small markets. Small TAMs provide deterrence for new potential entrants. On top of this, these and other Roper businesses provide deeply verticalized solutions. By this, we mean solutions that are specifically developed to address unique industry workflows or challenges. It is at the cross-section of one, being the market leader, two, operating in smaller markets, and three, delivering vertical solutions that enable our businesses to have intense customer intimacy. This intimacy enables our businesses to invest at the pace our customers require. Importantly, these four businesses have very high levels of recurring revenue. For instance, Vertifor has over 90% returns. Finally, these businesses grow nicely on an organic basis. Their growth drivers are diversified and are multiple. We expect these businesses to grow mid-single digits over a long arc of time. Taken together, the $5.8 billion in capital deployment should deliver about $665 million in revenue and $320 million that you've got to your enterprise in 2021. In a few pages, Rob will discuss our financing package for these deals, which, as you likely know by now, was quite good. So now I'm going to hand it over to Rob, but look forward to discussing your activities here more during your Q&A. Rob, your ball.

Thanks, Neil. Good morning, everyone. We appreciate your interest, as always, in Roper Technologies. Turning to page 7, looking at our Q3 income statement performance, total revenue increased 1% to $1.369 billion. Organic revenue for the enterprise declined 3% versus prior year, similar to what we saw in Q2 and about what we would expect for Q4 as the pandemic continues. We had positive organic revenue growth in both network software and systems and measurement and analytical solutions. We had a slight organic decline in application software due to the difficult perpetual license comp we discussed last quarter. Lastly, and similar to Q2, we experienced a 25% decline in our smallest segment, process technologies. Margin performance was once again quite strong, with gross margin of 64.2% and EBITDA margin down 10 basis points versus prior year, but up quite a bit sequentially to 36.6%. EBITDA grew in the quarter, despite the pandemic, to a Q3 record of $501 million. Tax rate came in at 22.2%, which was a couple points higher than last year. So that all results in adjusted diluted earnings per share of $3.17, which was well above our guidance range, aided by both better organic performance and some accretion from our vertical acquisition. So once again, strong execution by our business leaders in a very challenging environment. Next slide. Turn to page 8 on net working capital. Here, we look at the three-year trend on working capital, which continues to improve. You may recall we exited the last quarter with negative working capital of minus 5.4%, and now we further improve working capital as a percent of revenue down to minus 6.3%. Continuing to improve on these important working capital metrics, despite the challenging macro environment, really is a testament to the excellent work of our finance organizations across the Roper enterprise. Our people do a really good job of focusing on what matters. We will see more evidence of this as we move forward to look at cash flow and cash conversion on the next two slides. Next slide. Turning to page nine on compounding cash flow. Really amazing, as Neil had mentioned, to have our third straight quarter of double-digit cash flow growth in 2020. As we discussed last quarter, For better comparability and clarity, we adjusted our results for the $124 million of cash tax payments that were deferred from Q2 to Q3 due to COVID-19. So that adjustment hurt our numbers in Q2 and helps us in Q3 but has no net impact on our year-to-date results. Next year, we expect the IRS to return back to their normal schedule. We do have one additional adjustment this quarter, as Zach mentioned, for the $192 million of cash taxes deferred. that we paid in the quarter that were due from the 2019 Catan divestiture. So none of those adjustments, Q3 operating cash flow grew 12% to $454 million, which represented 33% of revenue. Q3 free cash flow grew 14% to $442 million, which represented 32% of revenue. And you can see on the right-hand side, on a year-to-date basis, our adjusted free cash flow is up 13% to $1.1 billion. So as the takeaway reads, really consistent cash flow performance in a very challenging environment. Next slide. On page 10, turning to Roper's strong cash conversion. So through three-quarters of 2020, 28% of our revenue and 78% of our EBITDA has converted to free cash flow. So comparing our 2020 year-to-date to our full-year cash conversion over the past few years, we actually see that we are trending ahead of where we've been historically on cash conversions. Even better, Q4 is typically a seasonally strong quarter for cash conversion driven by annual billing cycles and lower tax payments, so we are quite confident we are heading for a very strong cash result in 2020. Our consistently high cash conversion is important because it further demonstrates the high quality of our EBITDA, which allows us to quickly and predictably reduce leverage after large acquisitions. Next slide. Turning to page 11 and updating on our balance sheets. So you can see here where we stand after the completion of the VertiFOR acquisition in September. Our cash balance is reduced to a normal level of about $300 million, down from $1.8 billion at the end of the second quarter. That excess cash was used to partially fund the acquisitions. Net debt to trailing EBITDA ended the quarter at 4.8 times. Importantly, this calculation does not include the pro forma impact of the VertiFOR acquisition. including a full year of reverted force EBITDA would push this ratio down into the low force. We expect our leverage to decline quickly over the next year as the EBITDA flows through and we use our generated cash flow to reduce our debt. Next slide. So on page 12, we'll talk about the financing activities that occurred in the third quarter. Including the EPSI deal that closed in October, we recently deployed a little over $5.8 billion of capital, financed by our excess cash on hand, a meaningful amount of which was generated from last year's Catanda Pessager, new investment-grade debt, and a draw on our credit facility. We launched a bond offering in August and benefited from strong demand from Roper's debt investors, consistent with what we had experienced when we accessed the high-grade bond market in June. So we ended up spreading this $2.7 billion of principal over four tranches, which resulted in a very good blended interest rate of 1.3%, and duration of a little over seven years. Notably, and importantly, no changes to ROFA credit ratings. We remain BBB plus at S&P and BAA2 at Moody's, and we remain committed to maintaining solid investment grade ratings moving forward. We also successfully extended our revolving credit facility out three years and also upsized it from $2.5 billion to $3 billion. The current floating borrowing rate on the revolver is about 1.2%. So we like to strike a balance between fixed-rate debt and prepayable floating debt to enable us to deliver quickly. So in summary, these financing activities are consistent with our long-term strategy of augmenting our internally generated cash flow with investment-grade debt. Then we use our consistent and durable cash flow generation to rapidly reduce leverage, which we plan to do over the next 12 to 18 months. So with that, I'll pass it back over to Neil.

Thanks, Rob. Let's turn to our application software segment. Revenues here were $451 million, down 1% on an organic basis. EBITDA was $201 million, or 44.6% of revenue. Similar to the way we started our commentary about this segment during our last call, our retention rates and thus our recurring revenues remain strong in the quarter. In addition, we are continuing to see an acceleration of our software as a service or cloud solutions across this segment. This trend will provide a long-term benefit for both our customers and for our business. Our customers outsource the operations of their software applications to us and gain the benefit of being on the most recent software release at all times. Our businesses are improved by having higher levels of recurring revenue and customer intimacy. Importantly, we believe this migration to the cloud will be a net growth driver for us. So based on this SaaS migration trend and our continued high levels of customer retention, we saw recurring revenues grow mid-single digits in the quarter. We expect this strength to continue into next year. As an offset, and as expected, we saw declines in our perpetual revenue stream for two reasons. First, a difficult prior year license comp, and second, a slowing of new logo licenses associated with the current macro headwinds. Things remained solid at Dell Tech. We saw normalized bookings increase double digits in the quarter, coming off very large perpetual bookings a quarter ago. They were seeing particular strength across their GovCon offerings and with their subscription content solutions. Recurring revenues are up double digits versus this time last year. And as you'll note towards the bottom of this page, a business that is being negatively impacted in this segment is Seaboard. To remind everyone, Seaboard designs and delivers K-12 and university campus integrated security and nutrition management solutions. Given the fact that many educational campuses are deferring in-person attendance, this business is negatively impacted in the short run. As soon as in-person classes resume, we expect Seaboard to return to normal levels of growth. Our laboratory software businesses, SunQuest, Data Innovations, and Klinasys all perform nicely, aided by global demand to deploy laboratory software associated with combating COVID-19. A good example we're talking about here is the activity Klinicis is helping drive. Specifically, Klinicis is the IT backbone for the French and Belgian national COVID testing programs. You'll also note from the page that Data Innovations, our diagnostic middleware business, had record orders in the quarter. Congrats to the team in Vermont. With this being said, we do expect some of this COVID strength to moderate going forward. Also, we continue to see strength in Strata. One of the nice perks of having Strata in the family of businesses is learning from their hospital analytics. From Strata's research, we know that hospital volumes are normalizing in the 90% to 95% pre-COVID level. In addition, most hospitals have enacted cost measures to right-size their operating structures for this level of patient activity. Given our healthcare IT and medical product businesses primarily serve the hospital market, we take confidence that patient volumes are coming back, and hope to see the associated hospital capital spending come back online next year. Finally, we will be reporting Vertifor and the EPSI Stratabolton in this segment. As we return to the outlook for the fourth quarter, we expect this segment to be flat on our organic basis principally for the reasons just discussed. We expect to see continued high levels of recurring revenue retention. As a reminder, the vast majority of our customers in this segment are enterprise or larger companies. That said, we do anticipate some continued pressure on our upfront software license sales. We encourage by seeing our sales pipeline activity being higher than this time a year ago, but we continue to expect our new logo prospects decision timeframes to extend longer than our historical experience, which leads deals likely moving into next year. All in all, we expect flat organic growth, but with a higher quality revenue mix towards recurring versus perpetual. With that, next slide, please. Now let's turn to our network segment. Revenues here increased 1% organically to $430 million. EBITDA was $180 million, or 41.8% of revenue. I like to start, and as a reminder, that our software businesses in this segment principally share highly recurring SaaS revenue models, which are further aided by strong network effects that drive high retention rates, which was certainly the case in this quarter. The entire segment, similar to that of the application software segment, we saw mid-single-digit organic increases in recurring revenue. Construct Connect continues to perform well. Their network expanded in the quarter and was driven by strong customer ads and network utilizations. DAT continues to post record quarters. This quarter is highlighted by record net addition of carriers to the network and enterprise brokerage seats fully recovering to pre-COVID levels. In addition, iPipeline, SHP, and SoftRiders all continue to be strong. A couple of our software businesses in this segment are facing modest headwinds, each of which are short-term and tied to COVID-related economic activity. iTrade is being negatively impacted as food volumes in institutional settings such as restaurants and sporting events are down. As these activities come back online, so will iTrade's growth. Also, MHA was down a bit in the third quarter as well, directly resulting from patient volumes and long-term care being down. We expect MHA to recover starting in the fourth quarter. Of note during the quarter, Foundry was awarded their first Engineering Emmy Award for visual effects innovation used in television. The team at Foundry are super excited as they should be for this recognition. Congrats. Finally, the Transcor New York City congestion pricing infrastructure project continues. However, the project at the election of our customer continues to slow and be pushed into 2021. Execution of the project remains quite strong, but the timing continues to elongate. In addition, A few other projects are slightly delayed as we near go-live, causing some revenue and margin pressure in this segment. Now let's turn to our outlook for this segment. We see low single-digit organic growth for the final quarter of the year. We continue to see growth and resiliency in our network software businesses driven by high recurring revenue mix, strong retention rates, and expanding networks and network participation. Relative to Transcorps, we continue to see the New York City project pushing to the right, a few other projects being delayed, and lower tag shipments due to the lower levels of vehicle traffic in 2020. All in all, again, we expect low single-digit organic growth for the final quarter of the year. Next slide, please. Turning to our measurement and analytical segment. Revenues grew 2% organically to $368 million. EBITDA was $131 million, or 35.7% of revenue. With the current pandemic backdrop, this segment's activities continue to be best broken into four boxes. One, Verifon and IPA. Two, other medical product businesses. Three, Neptune. And four, our industrial businesses. First, Verifon continues to experience high levels of demand for their Glidescope video intubation solutions. In this quarter, orders remain strong, and the company is able to clear much of the backlog that entered the quarter. As a result of COVID-19, the percentage of all intubations, not just COVID-related, that are being done using video assistance has meaningfully increased. We expect video-assisted intubation market share to remain above pre-COVID levels going forward, which is a great long-term and recurring benefit for Verathon's business model. IPA continues to be strong as well. Second, and relative to our other medical product businesses, we did see revenue headwinds tied directly to lower patient volumes within acute care hospitals. We also note this group of companies normally grow mid-single digits, but this growth is conditioned on normalized hospital activity. As hospital capital budgets begin to free up in 2021, we expect these businesses to return to a more normal state at some point next year. Third, Neptune improved sequentially, but the pace of recovery was hampered a bit by continued restricted access to indoor meters, in particular in the Northeast United States and Canada. Finally, and as expected, we did see recovery across our shorter cycle industrial businesses. As we turn to the fourth quarter outlook, this will be the last quarter we have to attend results in our prior period, given its divestiture was in the fourth quarter of last year. For the fourth quarter, We expect to see low single-digit growth for this segment, led by continued strong but moderating demand at Verathon. Given the strength in 2020, Verathon continues to accelerate investments in both products and go-to-market areas. In addition, we do expect to see our other medical product businesses improve from historic lows, but as discussed, hospital spending continues to be somewhat uncertain for the near term. We expect to see continued improvements in Neptune as they gain more access to indoor meters. And finally, we expect to see continued but likely modest short-cycle industrial improvement. Next slide, please. Now turning to the segment that represents 9% of our revenue, process technologies. Revenues were $120 million in the quarter, down 25% on an organic basis. EBITDA was $34 million, or 28.4% of revenue. While these businesses are facing incredible market headwinds, they continue to demonstrate their resiliency with their 28% plus EBITDA margins. As we said for the last couple quarters, this too was a difficult quarter for these businesses, and we expect the outlook to remain poor for the balance of the year. We saw our upstream businesses decline approximately 40%. CCC was weak based on their inability to perform field service work, again, related to COVID, Cornell declined on weakness in their rental markets, but did grow in many of their other end markets. And a bright spot in the quarter was ZTECH, which experienced growth based on the strength in their new non-destructive testing products. The outlook for the fourth quarter continues to be an extremely challenging one, as we expect to see approximately 20% organic declines. Specifically, we do not anticipate any recovery in upstream oil and gas markets, but do anticipate sequential and seasonal improvement for many of the other businesses in this segment. Next slide, please. As we turn to our guidance, we are raising our full-year adjusted depth guidance to be in the range of $12.55 and $12.65 per share. The increase is principally attributed to the acquisitions closed since our last call. full-year revenue and EBITDA are expected to increase in the range of 2% to 3%. Our organic revenue outlook for the full year now leans to be flat to slightly down, perhaps 1% or so. Back in April, we guided revenues to be plus or minus flat, now flat to down a percent. While there are several puts and takes, the primary assumption that changed is the substantial amount of revenue tied to the TransCorp New York City project pushing into 2021. The majority of other businesses have improved versus our April outlook. For the fourth quarter, we are establishing adjusted depth guidance to be in the range of $339 and $349 per share. We expect consolidated organic growth to be similar to that of the third quarter. Our tax rate for the quarter is expected to be about 20%. Now let's turn to our summary and get to your questions. In closing, I'll recap with what we started. Strong execution across the three parts of our offense, operational, capital deployment, and capital markets. Operationally, revenue grew 1% overall and declined 3% on an organic basis. EBITDA grew and margins remained strong. Most importantly, free cash flow grew 14% in the quarter. Throughout this year, our asset-light niche and market-leading businesses remain focused on investing for higher levels of long-term and sustainable organic growth. As such, this year, we're seeing increased levels of R&D across many of our businesses. Also, and it's worth repeating, we meaningfully enhanced our portfolio by successfully deploying $5.8 billion. Following these acquisitions, two-thirds of Roper's EBITDA will be generated from our software group of businesses. These acquisitions further add to our recurring revenue profile and our ability to compound our cash flows moving forward. Given our recent capital deployment and our commitment to investment grade ratings, we are focusing our efforts for the next few quarters on operating our businesses and generating our durable cash flow, which will allow us to de-lever just as we did following our Dell Tech acquisition in 2016. So, with all of this, we continue to be bullish about the coming quarter, about 2021, and about our longer-term future. And finally, and relative to our long-term strategy and model, I'll conclude by highlighting, we compound cash flow. That's our job. Our cash flows are remarkably durable, as demonstrated this year. We do this by operating a portfolio of businesses that have leading positions in small niche and growing markets. Also, our businesses, whether product or software, deliver highly application-specific or vertical solutions. Taken together, our businesses are awarded with intense customer intimacy. This intimacy allows us to innovate at the pace required by our customers. Our businesses have high margin and asset light economic models that naturally generate high levels of operating cash flow as they grow. To this end, we incent our management teams based on growth. And finally, we take the excess free cash flow generated by our businesses. And by this, we mean the cash flow that the businesses generate beyond investments required to drive organic growth. Combine it with investment grade leverage and acquire businesses that have better cash returns than our existing company, that in turn improve ROPR and further accelerate our cash flow compounding. This very model, this very strategy are the simple ideas that deliver our powerful results. So with that, let's get to your questions.

We will now go to our question and answer portion of the call. We request that our callers limit their questions to one main question and one follow-up. If you'd like to ask a question, you may do so by pressing the star key followed by the digit 1 on your touchtone telephone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your questions, please press star then the digit 2. Again, we request that callers limit their questions to one main question and one follow-up. Our first question will come from Dean Dre with RBC Capital Markets. Please go ahead.

Thank you. Good morning, everyone. Good morning, Dean. Good morning, Dean. I was hoping you could quantify the revenue pushout for the New York City congestion tolling project. We've been thinking $30 million in the fourth quarter, so that's obviously lower, but hopefully you can quantify that. And can you clarify whether there's been any change in scope? or are these pushouts more as a result of COVID kind of logistics?

Yeah, Dean, it's Neil. I'll take the second half of your question and give the first half to Rob. So the scope is completely unchanged. The project continues. It's just slower. pushing a little bit, as we've discussed in the prepared remarks, into next year. But, yeah, the scope is fully intact.

Yeah. So, you know, it's continuing, as Neil mentioned. And so there's now we've got about $100 million for the project this year, right? So maybe that's down $10 million or so versus what we said last quarter.

Got it. And then I don't know if it would be Neil or Rob, but could you expand the point on fourth quarter seasonality? Maybe you can start with the free cash flow expectations because, you know, given the macro, you're concerned about what might be seasonally normal, what might not happen or play out the same. And then within the businesses, just remind us on where and how you would expect a seasonal impact in the fourth quarter.

Sure. So on cash flow, as I mentioned earlier, you know, we feel great about where the conversion is year to date, and Q4 is generally a high cash conversion quarter because of the annual billing of the software businesses and the fact that we don't have, you know, most of the tax payments are usually in the first half of the year, so the tax payments are less in the fourth quarter. On the seasonality, so, yeah, I think it's a good point. I mean, normally if you go back historically right when Roper was more of the cyclical businesses of a percent, you'd get the Q4 bump in what used to be our energy segment. So there's some of that I think sequentially we still have. It's just a very, you know, small part of Roper. What's happening this year, as Neil mentioned, is our medical product businesses, really specifically Verathon, had an enormous second and third quarter driven by the COVID surge. And so their fourth quarter versus the third quarter is down about $30 million of revenue. And they're still up quite a bit year over year. And we're hopeful that happens, right? If the COVID surge gets worse, then Verathon will sell more products. But we're hoping that doesn't happen. So that's what's all included in our guidance for Q4.

Our next question will come from Allison Poliniak with Wells Fargo. Please go ahead.

Hi, guys. Good morning.

Good morning, Allison.

I just want to go to your comments around iTrade and Boundary. You know, understanding COVID certainly having disruption, but, you know, obviously those markets are quite a bit more challenged than maybe others. Are you, you know, seeing any sort of longer-term impairment to some of those customers?

I don't think so at all. You know, take iTrade, as I mentioned in your prepared remarks. I mean, that business is partially indexed to sort of the institutional food, and it's also partially indexed to retail. So institutional down, retail up, it just balances a little bit towards the negative. You know, the renewal rates for the more institutional side have been fine. They're not dropping off. Obviously, the contract sizes have gotten a little smaller, but the retention rates of the actual customers are the same. On Foundry, Foundry's had a good year. Recurring revenues are up. You know, the EBITDA is up in that business. It's just there's the way that the flow of work happens in converting live production into post and to releasing content, either film or television. There was a fair amount of backlog being worked on in the first half of the year. Then there was this pause in Q2 of live action, came back on slowly in Q3. It's fully ramped up right now across the globe. That creates more content for posts. And so there's a couple quarters inside the middle of this year where the number of net new software sales to new customers paused or waned a bit, but the recurrence was high there. and we expect that to fully bounce back as the pipeline is filling back up with content.

Understood. And then just kind of going back to TransCorp and some of the other projects, you know, anything tied to municipal in your portfolio that you're starting to see incremental challenges or delays there?

I would say no. I mean, if you're on the municipal side, on TransCorp, no. I mean, the bidding activity, the sort of the sales pipeline to TransCorp, are quite good. There are a number of projects that are sort of in the process of being awarded now, so that's a good leading indicator. The municipal budgets at Neptune are largely intact and then renewed and sort of dollars are being spent against them on that municipal side. So, no, I mean, I think we feel pretty good about the spending that's – the budgets that are out there to be spent across the municipal parts of our business.

Yeah, it's really just project slowing, which is probably mostly due to COVID, right? It's just things are just taking longer to get going to transport for the most part.

Our next question will come from Christopher Glenn with Oppenheimer. Please go ahead.

Yeah, thanks. Good morning. I was curious about SunQuest. Sounds like you have some fresh momentum going there. Are you moving past the kind of net attrition modest slide that that business has been seeing?

So I characterize Sunquit, hey, they've had just a great year. They're actually going to be up a little bit in EBITDA this year versus last year based on all the activities going on around COVID and a little bit of strength we're seeing in the diagnostic, the molecular part of their business, a new product offering and some public health offerings they have as well. That said, I think we still got, I sort of view this year as a pause in the longer-term trend. You know, I would expect that business to have face a little bit, maybe a year or so, maybe a, it's hard to pinpoint it precisely, but call it a year to two of headwinds, and it'll normalize, stabilize, and get back into sort of maybe a low single-digit organic growth sort of business.

Okay. And as you're focused on debt reduction the next year, year and a half, would you still anticipate some you know, FCs or Welles type of additions to existing platforms?

It was going to be – the bar is very high for those. You know, it wouldn't surprise me, that said, if there was a little bit, you know, a little bit of bolt-on activity, but our principal focus here is to be leveraged for the next year or so.

Our next question will come from Steve Tusa with J.P. Morgan. Please go ahead.

Hey, guys. Good morning. Good morning, Steve. Can you just give us some color on how, with a little more precision, your revenue performed in license, maintenance, and recurring? I mean, you guys are definitely giving a lot more really solid color directionally on this stuff, but just love to understand. You can talk about it enterprise-wise if you want, just a little more precision on kind of how those three buckets performed in the quarter.

Yeah, so I think overall recurring revenue, which, right, is maintenance plus subscription, as I think Neil mentioned earlier, was up mid-single digits. The license and the services piece is impacted by COVID, as we talked about all throughout the year. So there's some declines there, and that's what gets you to that. Basically, overall, the software businesses were in line a tad better than we had coming in really since the pandemic began. I think overall our software revenue is about 80% recurring, and that's the maintenance and the subscription piece, which continues to grow. Our retention rates continue to be very, very high, so it all bodes well for next year when the services and the perpetual stuff should start to come back.

I guess, shouldn't that be dilutive to margins? Yes. for you guys aren't licensed higher margin than, you know, the recurring side?

Yeah, I mean, perpetual licenses or high margin services is the lowest margin part of a software business, and recurring revenue is quite high, as you know. Also, these, you know, not just us, pretty much every business on the planet, their cost structure is lower this year because of the COVID. You know, they just couldn't spend money on travel and customer meetings and things like that. So that became a natural offset to some of the perpetual headwinds.

Our next question will come from Julian Mitchell with Barclays. Please go ahead.

Hey, good morning, everyone. This is Jack. I'm all on for Julian. Good morning. Maybe just, you know, asking on, you guys mentioned the short cycle businesses, seeing a bit of recovery here. Is there any color you can give on sort of how the cadence of that has looked? You know, was there some sense of demand earlier in the quarter, or are we still seeing kind of more gradual, sequential improvement that, you know, should continue ahead?

Yeah, appreciate the questions. You know, it's such a small part of our business. You know, we reported and talked about last quarter's, as the consumable piece was starting to pick up, that continued, the strength of that continued through the quarter. And then we saw some pickup of the capital spending, particularly in our stewards' business. I think the pace throughout the quarter was, you know, just improving a little bit sequentially through the quarter. I mean, it was pretty straightforward for us.

Yeah, very gradual sequential improvement. That's a good way of stating it.

Thanks, guys. And then, you know, Rob, you touched on it earlier, but obviously we're seeing, you know, COVID cases and hospitalization rates kind of going up over the past week or two. How does this kind of line up with the Q4 outlook and sort of the expectations for, you know, the medical businesses that are benefiting from COVID, the ones that are sort of, you know, would benefit from more normalization?

Yeah. So, you know, we've really had five businesses this year, right, that have benefited from COVID financially. Verathon, IPA, we've talked a lot about, and then our three businesses and our laboratory software platform, and they're all at the, you know, at the front lines of fighting this thing. And so, you know, there would be some give and take if COVID surged and you had more hospitalizations, but I don't think it's happened yet. If that started to happen, then those businesses would probably do more, and then, you know, that could hurt other areas. So it's great having this big diversified portfolio of businesses, but Whereas, you know, we'll do great in a post-COVID world. We can't wait for it to happen. But you get a little bit of financial benefit, you know, in the short term. Yeah, I think of that, Neil.

Nope.

Okay. Our next question will come from Scott Davis with Malleus Research. Please go ahead.

Hey, good morning, guys. Good morning. I'm sure you guys have seen the news with all these new stacks coming out. It seems to be literally hundreds of them, or many of them, I should say. Is there any concern that that's going to provide a new competitor for you guys, or do you think you're too niche for really that type of a vehicle?

Yeah. So we spent a little bit of time on this. We've got some – we studied it with some advisors on this very question, Scott, is there a new competitor emerging for a capital deployment vehicle. And our conclusion to that is no. And the reason is that, you know, a SPAC, the seller is, you know, obviously doing a backdoor IPO. The seller is getting a percentage of their proceeds at closing, not the whole thing. And then also there's other factors around the business dynamic and the leadership team and the ability for it to be a you know, a public company that investors have appetite for. And so principally, no. Could there be one or two on the fringe? Maybe, but it's not like a full-on competitor relative to our capital deployment. And, oh, by the way, SPACs have been around, you know, in big volume for the last three or four years. It's obviously increased a bit here. There'll be a lot of this SPAC money that doesn't get deployed or recycled. just because you're raised, it doesn't mean that a deal is going to happen. And so it's not a totally new phenomenon. It's just catching some, obviously, mainstream media right now.

Yeah, makes sense. I'm glad you studied it. But a question about Vertifor. The fast versus perpetual, you know, I'm seeing higher than most of the other software businesses you have. Is there a particular reason why that, product sells better into a SaaS versus perpetual, or is it how you go to market and how you price it? Is it the product or is it the pricing? I guess it's kind of a hard question.

Well, I think it's that they started the journey to migrating to SaaS earlier than many of our other businesses. So they just got to the point where they have about 80% deployed in SaaS and a little over 90% return to their revenue stream. where, for instance, the Dell Tech is midstream in that conversion, going that way, by the way. I mean, Dell Tech is 75% recurring, pushing to 80% this year. It'll get, you know, fast forward five years, it'll look more like Dell Tech. And then companies like, you know, Seaboard, Adderant, PowerPlan are just beginning that migration. Again, all of this paced by our customers. Our customers decide when they're ready to go to the cloud and when the value and when the timing's right for them. And because of that pacing, it elongates over multiple years. We don't run sort of any of this Adobe risk where you have a, you know, the J curve and go backwards before you go forwards. And as we've said many, many times, this is all a net growth driver for us. As you migrate the maintenance part up to the cloud, you get an uplift on that, and then obviously you're selling, you know, net new SaaS licenses, which drive your current revenue base up. I think it's just that Vertiforce started earlier in this process than some of our other companies.

Our next question comes from Joe Giordano with Cowan. Please go ahead.

Hey, guys. Good morning. Good morning, Joe. I just wanted to understand the puts and takes on the guy here. So, like, you know, you beat the midpoint of your prior guy by 22 cents. You're raising the full year by 45. How much of that incremental is from the deals, and how would we think about, like, the – the core guidance X to M&A versus what it was three months ago?

Yeah, so think of the deals as 45 to 50 cents to the second half. Some of that we got in Q3, about 12 cents, and the rest in Q4. And then everything else is pretty much a wash. There's four or five cents from tax. there's the Verathon and Transcore sort of push to the right, and then, quite frankly, a lot of investment that we're doing in the fourth quarter with businesses like Verathon to continue to position ourselves well for next year. So think of all the operational stuff as sort of Washington, like that, and then it's a midpoint change.

Okay, fair enough. And then just curious on Deltek, like, have you – what are your guys – they're saying about, like, the potential for that business and the Biden administration, given the spending plans that they have, things like that.

Yeah, it's a frequent question around elections for Deltac that goes back, you know, a lot of years, many elections. And the short answer is either administration, either way is fine for Deltek. The principal reason for that is these government subcontractors just gravitate towards the rapid or fast currents of government spending. And so, you know, for instance, with Obama, it was health care. You know, if Biden wins as infrastructure, they'll just migrate into, you know, where that spending is. There might be a few incremental sort of subcontractors, government, you know, government subcontractors that might show up in an infrastructure bill, which might be a little bit incrementally beneficial for Dell Tech, but not a meaningful, you know, growth driver. The great thing about this business is it does well in almost any government spending environment because, as you know, government spending always increases.

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

Thanks. Good morning. So we've been focused on the better than expected recovery in non-emergent hospital activity. You mentioned and you've been very descriptive with the Verifon and IPA impacts of COVID. So wondering if this health care recovery is driving somewhat of a subdued, you know, non-emergent health care exposed businesses versus the Verifon and IPA tailwinds. I'm just wondering how we, in aggregate, maybe frame the improvement in the non-emergent side of the health care business.

Yeah, so the other medical products businesses that aren't Verathon, right, have been down this year quite a bit, so really double digits. And that's starting to moderate a little bit in the fourth quarter, where they're going to be probably more flattish year over year. And then they would grow quite a bit coming out of that, right? These are the businesses that Neil mentioned that grow mid-single digit organically, like clockwork, literally going back 10 years. And so as you get more procedures happening, then those businesses become, you know, get back to normal and probably have some catch-up as well.

Yeah, and just a little more color on that. I mean, hospitals, like a lot of businesses, right, when things got economically really challenging, patient volumes were down quite a bit in Q2 and coming into Q3, hospitals, you know, may took dramatic cost actions on the operating side, but also basically froze all capital spendings. and hospital budgets as they cycle back in next year, you know, there will be some level of capital spending, and that's likely going to be on things that are more akin to what we do. I mean, we're like mainstream procedure type things, not esoteric or sort of super high technology that is, you know, super high dollar and sometimes questionable at the hospital level. Understood.

And just to follow up here, so the question was asked last quarter, businesses like that and Construct Connect getting more sign-on just given the sheer dynamism in the market, the sugar cycle industrial recovery broadly seems to be plateauing or stabilizing. How do you expect this to impact new logos in some of these businesses versus the opportunity to expand existing customer touches through things like product enhancement, perhaps R&D maybe is folded in here?

Yeah, so a couple things on Construct Connect. You know, the business has spent, the team there has spent really three years building the software capability that's part of the workflow of both general contractors and subcontractors and building product manufacturers. It's no longer just a content business essentially identifying leads for new projects. Really working to drive a habituation of the software and the daily workflow of all the users. And so when you get into an environment like the one we're in, the environment opens up, meaning there's more people that are looking for work, so they come to Construct Connect and buy the first product. The cross-sell into some of the workflow products, now we actually have the ability to do it, and we're seeing better than decent attach rates of multiple products. And importantly, then, we're seeing what we hope to see, which is the increase of the daily use. And so we think the long-term retention rates will be higher. We think this is going to continue for quite some time. I mean, Construct Connect services, you know, sub-10% of the market, and there's 90% of the market that's unvended. And that market, the one that's – that unvended market is the one that is coming to Construct Connect in an environment like this.

This concludes our question and answer session. We will now return back to Zach Moxie for any closing remarks.

Thank you, everyone, for joining us today. We look forward to speaking with you during our next earnings call.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.