Earnings Call: Q4 2020

Jan 29, 2021

Good morning. The Roper Technologies conference call will now begin. Today's call is being recorded. All participants will be in listen only mode. I would now like to turn the call over to Zack Moxie, Vice President, Investor Relations. Please go ahead. Good morning. Thank you all for joining us as we discuss the Q4 and full year financial results for Roper Technologies. We hope everyone is doing well. Joining me on the call this morning are Neil Hunn, President and Chief Executive Officer Rob Crisci, Executive Vice President and Chief Financial Officer Jason Conley, Vice President and Controller and Sharon 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 please turn to Slide 2. We begin with our Safe Harbor statement. During the course of today's call, we will make forward looking statements, which are subject to risks and uncertainties as described On this page, in our press release and in our SEC filings. You should listen to today's call in the context of that information. And now please turn to Slide 3. Today, we will discuss our results for the quarter year 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 Q4, 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 and lastly, transaction related expenses for completed acquisitions. Thanks, Zach, and good morning, everyone. Thanks for joining us, and we hope everyone is doing well. For today's agenda, we'll walk through our 20 2020 financials and operational highlights. Then we'll turn to our 2020 segment detailed results and discuss our 'twenty one segment by segment outlook and end with our 'twenty one enterprise guidance prior to discussing your questions. Next slide please. As we look back on 2020, it was quite a year. Our businesses performed at a very high level during this period. Revenues grew 3% with organic revenue declining a single percent. EBITDA also grew 3% And free cash flow grew 16%. This cash flow performance, dollars 1,700,000,000 is just Astounding. This is a testament to many things, notably our asset light business model, the intimacy we have with our customers And the high level of skill and execution of our field teams. This cash flow is just simply a great result. Perhaps more important, 2020 was a year of forward progress for our company. We exit 2020 as a better company, A company with higher quality revenue streams, a company with improved future innovation prospects and a company With whose portfolio was enhanced with $6,000,000,000 of capital deployment. To this end, We saw our software recurring revenues increase mid single digits in 2020 and were benefited by high levels of retention And acceleration to the cloud. We continue to be benefited by having close intimate relationships with our customers. Most often, our software is mission critical to our customers' operations. In addition, we continue to strategically invest Throughout our portfolio during the year. Based on our historical experience, we find times of market disruption the best Time to double down on innovation and market investments, which in turn will drive market share gains in the years to come. Finally, We are able to deploy $6,000,000,000 to further enhance Roper's group of companies, headlined by our Vertivore acquisition. So when we look back on 2020, we highlight 2 key themes. 1st, we grew. Cash flow increased 16% In the middle of a pandemic. And second, the quality of our enterprise continued to improve during the year. Net net, we got bigger And better during 2020. Let's turn to the next slide. Over the past 5 years, We highlight that our revenue grew at a 9% compounded rate, EBITDA at 10% and cash flow at 13%. We continue to grow and compound through macroeconomic cycles. Also, during the time period, The quality of our enterprise meaningfully improved. We are more software focused with nearly 2 thirds of our EBITDA coming from software with higher levels of recurring revenue. Conversely, we are much less tied to cyclical end markets today, a little over 15% of our portfolio. Given our long term strategy and these factors, we are a low risk enterprise. We compound cash flow through cycle And do so with multiple growth drivers across both organic and inorganic fronts. As we look to 'twenty one, We will continue our long term string of revenue and EBITDA and cash flow compounding. So with that, let's turn to the next page and discuss the macro backdrop For 2021. As we look to 2021, we are set up for a strong year. We expect revenue and EBITDA will grow well into the double digits, likely in the mid teens range, with organic revenue growth in the mid single digit plus range. This is on top of growth in 2020. The compounding continues. Breaking it down, Our software businesses, both in our application software and network segments are well positioned heading into 2021. These businesses enter the year with momentum from strong retention and recurring revenue gains. They will be further aided by growth in perpetual license as Pipeline and customer activity are anticipated to recover to some extent. Our non Verathon medical product businesses are expected to return to A more normalized pattern of customer activity as healthcare facilities loosen restrictions, but since 2020 was well below trend, We expect above trends growth here. Of note, Marathon has a challenging comp. However, Curry revenue base will remain strong given the large volume of capital placements in 2020 and continued growth of their new Single use bronchoscope business. We expect Neptune to recover and grow nicely as our customers, Especially in the Northeast U. S. And Canada gain access to residential locations. We expect our industrial and process tech businesses to continue their quarterly improvements and return to growth after 2 years of macro headwinds. Finally, 2021 will be meaningfully aided by the contribution from our 2020 cohort of acquisitions. To this end, we continue to work with a very full and high quality M and A pipeline. We are committed to deleveraging, But we also remain active in building and maturing our pipe. So as I think back over the nearly 10 years I have been with Roper, I cannot think of a better set of tailwinds heading into a year. Clearly, lots to do and lots of execution in front of us, But we have a strong momentum heading into 'twenty one. So now let me turn the call over to Rob. Rob? Thanks, Neil. Good morning, everyone. Turning to Page 8, while looking at our Q4 income statement performance, Total revenue increased 8% as we eclipsed $1,500,000,000 of quarterly revenue for the first time. Organic revenue for the enterprise declined 2% versus prior year. EBITDA grew 7% in the quarter to $552,000,000 EBITDA margin was down 40 basis points versus prior year at 36.6%. Tax rate came in at 19.9%, a little lower than last year's 21.6%. So all in, this resulted in adjusted Diluted earnings per share of $3.56 which was above our guidance range. Next slide. Turning to Page 9, reviewing the Q4 results by Neil will discuss the full year 2020 segment performance in more detail later, so just touching on some of the Q4 highlights here by segment. Application Software grew 35% with the addition of VertiCore. Organic for the segment was minus 2% with Mid single digit recurring revenue growth continuing. Sharp declines in our Seaboard and Verizon businesses serving K-twelve and higher education impacted the segment As many schools unfortunately remain close. For Network Software and Systems, plus 2% organic growth with our software This is putting up a very solid plus 4 percent organic. TransCore was flat versus prior year. For Measurement and Analytical Solutions, Plus 1% organic growth as we start to see some sequential recovery at Neptune and our Industrial business. Segment margins were impacted a bit by the Acceleration of some product and channel investments at Verathon, as we discussed, coming into the quarter, and it's really been an exceptional year for Verathon overall. Lastly, for Process Technologies, a 21% organic decline with margins holding up well at 31.3%. And once again, here, we started to see some early signs of improvement after a couple of years of the clock. Next slide. So turning to Page 10, looking at net working capital. Honestly, the slide mostly speaks for itself, ending the quarter with negative 8% net working capital as a percentage of Q4 annualized revenue. While there are certainly some seasonal trends, primarily around timing of software renewals that do typically benefit our Q4 performance, You can see here a meaningful improvement versus 2018, improving from negative 3.4% to negative 8% in 2020. Our asset light negative net working capital model drives our sustainable high cash conversion and fuels our cash flow compound. Our people focus on what we all believe matters and our culture is built around growing the right way. Top line growth converts to cash flow and we are always mindful of Next slide. So turning to cash flow. Cash flow performance, as Neil mentioned, was really pretty spectacular no matter how you look at it. Q4 free cash flow, $558,000,000 was 23% higher than last year and represented 37% of revenue. This excellent result was driven by the great working capital performance I just discussed, which is really across the enterprise, along with meaningful cash contributions from Vertivore So for the full year of 2020, we generated $1,720,000,000 of operating cash flow And $1,670,000,000 of free cash flow. So to repeat, that's $1,700,000,000 of free cash flow in 2020, truly a great year. Full year free cash flow growth was 16% and our free cash flow conversion from EBITDA was a robust 84%. So really tremendous cash flow performance, and it was broad based and very durable. Next slide. So turning to Page 12, Abiding on our balance sheet. As Neil mentioned earlier, we ended the year with total capital deployment of approximately $6,000,000,000 Which included the EPSI acquisition that closed during the Q4 on October 15. We were able to take advantage of attractive market conditions to complete and opportunistically These acquisitions with a combination of internally generated cash flow, proceeds from our 2019 Gatan divestiture And investment grade leverage. Overall cost of financing was approximately 1%. Thanks to our excellent Q4 cash We are off to a great start on our plan to quickly reduce leverage, paying down around $500,000,000 since we closed the EPSI deal. Looking ahead, we plan to rapidly reduce leverage throughout 2021, taking advantage of our prepayable revolver, which has a current balance of approximately 1,600,000,000 Our solid investment grade balance sheet supports long term cash flow compounding, which we are well positioned to continue. So with that, I'll pass it back over to Neil for the remainder of our prepared remarks. Thanks, Rob. Let's turn to our recap for 2020. To help orient you to this page, we are comparing our full year outlook from last April to that of what actually happened. It's worth reminding everyone that we felt our businesses and our business model had the level of recurring revenue, customer intimacy and the business leadership required to guide in In the face of the COVID uncertainty, both in terms of supply and demand. In aggregate, we thought our Full year organic revenues will be plus or minus flat and we came in at down minus 1. The TransCore New York project is the primary reconciling item between being down a touch and being flat or slightly up and more on this in a minute. We guided DEPS to be between $11.60 $12.60 and came in at $12.74 Looking back on this, we are Very proud of our team's ability to look forward and operate through the uncertainty of last year. Also, there is no Better example of the durability of our model than this past year. With that, let's walk through the macro drivers across each of our 4 segments. Relative to application software, this segment played out as anticipated and was up 1% on an organic basis for the year. Specifically, we saw recurring revenue up mid single digits aided by very strong retention rates as well as an acceleration to the cloud. As a reminder, recurring revenue in this segment is about 70% of our revenue stream. Perpetual revenues, about 10% of this segment's revenue, We're under pressure as expected. We saw this revenue stream down mid teens as new logo opportunities and wins were pushed and delayed. That said, cross selling activity remained active for much of 2020. Relative to services revenue, we anticipated some Pressure tied to shifting to remote installs and having fewer new implementations, which are tied to new perpetual transactions. For 2020, we saw mid single digit declines here, principally tied to fewer new deals. Our teams did a wonderful job shifting remote installs, a trend we anticipate will continue in large part on the backside of the pandemic. As it relates to our Network segment, we expect the organic revenue for the year to be up mid singles to double digits when in fact We grew 3% for the full year. Our network software businesses performed as anticipated With recurring revenues growing low single digits, again benefited by high retention rates and high levels of recurring revenue. This segment underperformed our expectations primarily due to TransCore's New York congestion infrastructure project timing. In April, we expected approximately $75,000,000 more in revenue from this project than actually occurred in 2020. More on this when we turn to the segment overview, but we expect this $75,000,000 of pushed revenue to be recognized in 'twenty one. It's also worth noting that the number of toll pads shipped last year were at historic lows given the lower traffic volumes, but this was anticipated. For our MAS segment, we've talked all year about this being the tale of 4 situations, Verathon, other medical products, Neptune and Industrial. For the year, again, back in April, we felt this group would be flat 2 up mid single digits on an organic basis. We posted 1% growth. We feel very good about the execution across this group of companies. The primary reconciliation factor is a slower recovery ramp tied to our non Verathon Medical Product businesses And Neptune. Specifically, we anticipated unprecedented demand for Verathon's innovation product family. For the year, Verathon grew substantially as COVID accelerated the further adoption of video intubation as the preferred technology. Our other medical product businesses, which grow mid single digits like clockwork were down mid single digits for the year, Tied directly to lower elective procedure volumes and limited hospital capital spending. Interestingly for Neptune, We highlighted municipal budget uncertainty in April. This proved generally to be a non factor as municipalities budgets were approved and available. However, the impact of the lockdowns, especially in the Northeast U. S. And Canada had a prolonged impact on to do routine meter replacements. As a result, Neptune was down low double digits for the year, Slightly worse than our initial expectations. Finally, for this segment, we expected sharp industrial declines and that is what happened, With these businesses being down low double digits for the year. That said, we are seeing sequential quarterly improvements Across both Neptune and our Industrial businesses. Finally, and as it relates to our Process Tech segment, We expected to be down 20% to 25% and we were logging in at down 21%. This played out as we anticipated with much Lower energy related spending, project timing pushes and the inability to get field service resources into customer locations. So This is the play by play rewind for 2020. Now let's turn to the segment pages for a bit more detail. Next slide please. For application software, revenues here were 1,810,000,000 With EBITDA of $772,000,000 The broad macro activity for this segment has remained quite consistent for much of 2020. Specifically, we continue to see accelerating demand for our cloud solutions. This bodes well for our long term recurring revenue growth and customer intimacy. At a business unit level, Deltek's GovCon business continues to be super solid and grow very nicely, but We did see some headwinds relative to their offerings that target the consulting, marketing services and AEC space. That said, Recent customer activity and top of funnel activity suggest some market thawing is occurring. Aderant and PowerPlan delivered flat EBITDA in a year with nice recurring revenue gains. We experienced very nice growth across our lab software group, again doing our part to help fight the COVID war. Strata delivered double digit organic growth and completed a strategic acquisition in EPSI. Notably, The combined business will analyze roughly half of the U. S. Hospital spend. Finally, our 2 businesses that serve the education space, Seaboard and Horizon declined double digits in the year simply due to having a customer base that was shut down. A decent amount of revenues in these Importantly, we acquired Virtophore last year. They're off to a great Start with strong earnings and very strong cash flow in the 4th quarter. Looking to Q1, we see flat To low single digit organic growth based on continued mid single digit recurring revenue growth, offset Slightly by lower perpetual and services revenues given last year's non COVID comp. Now let's turn to our network segment. Here, revenues were $1,740,000,000 up 3% on an organic basis with EBITDA of 732,000,000 Our network software businesses performed well during last year, growing low single digits. Specifically, DAT was strong, growing double digits. DAT's network scale and innovation focus continues To enable very solid organic gains. ConstructConnect grew based on network utilization tied to a tighter construction labor market. Itrade, MHA and foundry had some headwinds tied to their end markets being disrupted due to COVID. That said, each of these businesses had high retention rates and the networks remain very strong. IPipeline also performed well during their 1st year Being with Roper and completed 2 bolt on acquisitions. Our non software businesses struggled a bit during the year. Specifically, RF Ideas, our multi protocol credential reader business, did well in their healthcare applications, That was hampered by meaningful declines in their secure print market. For the full year, TransCore pushed about $100,000,000 of revenue out of 2020 into 'twenty one associated with our New York project. In addition, EBITDA margins were pressured due to lower tax shipments And a few non New York project push outs. As we look to the Q1 of 2021, we see organic revenue, As you can see in the lower right hand box to be down 3% to 5% for the quarter. An important distinction to highlight, Our software businesses will continue to grow in the low single digit range, but our non software businesses Driven by TransCore will decline in the high teens range in the Q1 due to much lower anticipated tag shipments and timing of revenue associated As a reminder, the Q1 of this year is coming off a mid teens growth comp from a year ago. Now let's turn to our MAS segment. Revenues for the year were 1,470,000,000 Up 1% on an organic basis with EBITDA $508,000,000 Verathon was awesome in 2020. The business grew substantially based on unprecedented demand for their video intubation product line. Demand was global. Given Verathon's ability to fulfill this demand, we expect our meaningfully expanded installed base of GlideScope to generate increased levels of reoccurring consumables pull through in the years to come. In addition, the 1st year of their single use bronchoscope release Was successful. We believe we gained a substantial foothold in the market during the inaugural year of this product category. Our other med product businesses declined, but they started to see more normalized patient volumes towards the end of the year. Further, customer interactions are starting to resemble more normal levels of engagement. Neptune declined low double digits tied exclusively To our customers in the Northeastern U. S. And Canada not having access to indoor meters. Other regions were flat during 2020. Neptune's market share remains strong throughout the year. Finally, our industrial businesses were down, but have shown sequential improvements throughout the year. For Q1, we expect low single digit organic growth for this segment with similar patterns to that of the 4th quarter. Now let's turn to our final segment, ProcessTech. Revenues for the year were 519,000,000 Down 21% on organic basis with EBITDA of $156,000,000 or 30 percent of revenue. Compared versus 2 years ago, these businesses are down about $90,000,000 in EBITDA and yet maintained 30% EBITDA margins. Congrats and thanks to our leadership team for their continued exceptional execution. As a side note, Roper continued to compound That said, this segment is pretty straightforward and has been the same story all year. COVID has negatively impacted our oil and gas and short cycle businesses. Certainly, low oil prices did not help either. That said, we have seen some green shoots across this group as capital spending started to improve as we exited 2020. As we look to the Q1, we expect declines to moderate in the Q1 to be in the 10% range. Importantly, we have easing comps as we enter 2nd quarter. Also over the last couple of years, these businesses continue to make product and channel investments To be best positioned to fully capture this cyclical upswing, the next few years here should be pretty good. Now let's turn to our guidance And the associated framework. While this slide is somewhat busy, We wanted to line up for you the key macro differences between our 2021 full year outlook on a segment basis versus our actual 2020 results. In aggregate, we expect total revenue to increase in the mid teens range with organic growth being in the mid single digit plus area. As we look across the revenue streams for our Application Software segment, we expect mid singles growth. Specifically, We expect a slightly improved recurring revenue growth rate aided by last year's recurring momentum and an increased mix towards SaaS. We expect flat services revenues and mid single digit plus growth in perpetual as we expect a modest market recovery and easing second half comps. Similarly, we expect mid single digit organic growth in our network segment with our network software businesses growing mid single digit plus. We expect TransCore to complete the New York project and see recovering tag sales. When combined, TransCore should grow mid singles for the year. We expect mass to grow mid single digits as well. Our medical product businesses were exceptional last year, up 20%. Importantly, the quality of our medical product Revenue stream will continue to improve as Verathon's reoccurring revenue streams tied to GlideScope and bFlex continue to gain momentum. As we look to 2021, our medical product businesses are expected to grow low single digits as elective procedures And hospital capital spending returned to more normalized levels throughout 2021, this return being partially offset by our difficult 2020 COVID comp. Neptune should be up high single digits plus with easing restrictions and more access to indoor meter replacements. And finally, our industrial businesses should recover and grow in the high single digit plus range after 2 years of declines. Our PT businesses are expected to be up high single digits through the year based on the resumption of deferred projects and field maintenance as well as modest improvements And these end markets. So all in all, we expect organic revenues to increase mid single digits plus and total revenue to grow in the mid teens range. Let's turn to our guidance slide. Based on what we just outlined, when you roll everything together, we are establishing our 2021 Full year adjusted DEPS guidance to be in the range of $14.35 $14.75 Our tax rate should be in the 21% to 22% range. For the Q1, we're establishing adjusted debt guidance to be between $3.26 and $3.32 Of note, our guided Q1 adjusted DEPS is roughly 22% to 23% of our full year guidance And is consistent with our long term historical depth seasonality. Now let's turn to our summary and get to your questions. What a year. None of us will ever forget 2020. Our business performed so very well last year. We grew revenue 3% in aggregate And only declined a single percent on an organic basis. EBITDA margins were steady at 35.8 percent And cash flow grew 16% to $1,700,000,000 This means we had cash flow margins of 30%, just amazing. Given this performance, our business model's ability to foresee this performance, we stayed focused on executing our Capital deployment strategy, which resulted in $6,000,000,000 of deployment on high quality, niche leading vertical software companies. There is no doubt the quality of our enterprise improved during 2020, something we are incredibly proud to be able to say. Our recurring revenue grew mid single digits. We increased innovation investments and increased the quality of our portfolio with our capital deployment So as we look to 2021, we feel we are incredibly well positioned. We expect strong organic growth They'll be further augmented by contributions from our recent acquisitions. In 2021, we expect about 2 thirds of our EBITDA to come from our software businesses, Which provides us all the virtues of an increased mix towards recurring revenues. We will continue to focus on deleveraging our balance sheet, but We remain committed and focused on our long term capital deployment strategy. To this end, our pipeline of M and A candidates is active, Robust and has many high quality opportunities. So as we look back over 2020, we are proud of our business model's durability and our leaders' ability to successfully navigate last year's uncertainties. We are proud that we continue to be forward leaning and strategic. We are proud that we improved our business last year with an increasing mix of growing recurring revenue and continued innovation focus. In short, We got bigger and better during 2020. As we turn to your questions, I'll remind everyone that at Roper, We operate a low risk model whose strategy centers on acquiring fantastic businesses and then providing them with an environment Where they can get even better over a long arc of time. This was certainly the case in 2020. So with that, let's turn to our first question. We will now go to our question and answer portion of the call. We request that our The first question today comes from Deane Dray of RBC Capital Markets. Please go ahead. Thank you. Good morning, everyone. Hey, good morning, Dean. Hey, I really appreciate all the new disclosures you're providing here, especially pages 'twenty, those bridges between your original guidance, what you delivered, and then the organic bridge on 'twenty is really helpful, a lot of granularity there. And if we were to start, just because the New York City contract is such a high profile and it did have a swing factor, Can you give us a sense of how much just remind us the revenue you're expecting for the year? How much of it Could land in the Q1. And just confirm there's been no change in scope? Yes. So, Dean, good morning. It's about $100,000,000 for Full year and in the Q1, we only have about 10 to 15 in there. As we mentioned, there's a bit of a pause, but now it's started up and running again and the scope is unchanged. Got it. And if you were to highlight all the areas where you're seeing improvement in licenses And the services pipeline, what's at the high end in terms of the businesses today? Dean, maybe I can ask you to sort of rephrase the question. I want to make sure that we fully understand the question. Yes. Just In terms of the licenses revenues that you're seeing today, you've taken us through where some of the challenges So, Ben, what's on the upper end of your guidance, where you would see potentially How it would play out on the positive side? Sure. Okay. So, appreciate the question. I think we understand it now. So the total Perpetual revenue for our core businesses, the software businesses that have been in the portfolio for a while was down, Obviously, in 2020, we expect about the recovery in 2021 to be about half Of what, we are down. We're seeing strength. We're seeing continued strength all year in 2020 in the perpetual book of business and Deltek's GovCon Business. As I talked about in the prepared remarks, we're seeing thawing and some activity And their professional services end markets, that's encouraging. These are the architects, the engineers, the contractors, the marketing services firms, the consulting firms, Firms, those that book of business. In addition, the other large parts of the perpetual book are at Aderant and PowerPlan. Aderant Has its own unique set of competitive factors where the customers have to the customers that have not upgraded their software from The competitive customers have not upgraded their software, have to upgrade, and we're winning a large percentage of those. And so all that activity just got pushed to the right a bit and that's somewhat encouraging and pipeline activity is positive there. And then power plants Pipeline activity is full. It has a handful of large opportunities in it, which are obviously hard to predict the exact timing. We actually like the pipeline build across the companies that have the primary book of perpetual business. Okay. That's helpful. And just As my follow-up question would be for Rob. Do you have specific deleveraging plans for the year that you could Share with us in terms of where and how you said you'd be paying down the revolver, but just are there specific goals that you can share For 2021? Sure. So it will be, as you know, when we're in deleveraging mode, all the free cash flow goes towards deleveraging. So we pay a dividend that will continue, but essentially the rest of the free cash flow goes towards deleveraging. So that's a rough After you're paying a dividend, roughly $1,500,000,000 of deleveraging is probably a good ballpark number. The next question comes from Christopher Glynn of Oppenheimer. Please go ahead. Yes, thanks. Good morning. Good morning. So congrats on all the capital allocation last year. I'm just curious, you're getting a lot of inbounds after some of your sub segment divisions, Given you had some real emphasis on the quality and fullness of the pipeline, there's certainly liquidity in the markets. Wondering if your calculus is shifted towards any non operating cash flow to fund the deleverage and trade back into the pipeline a Sooner? Yeah, I appreciate the question. We it's very routine for us to get inbounds. Yeah, I've been here almost 10 years and There's a handful of what I would say meaningful and credible inbounds in any given year. Like we said for years though, it's just very difficult to make the math work because when we sell a business, Just look back at Gatan, you sell a business to a strategic buyer, we leak taxes, then you have to redeploy it. It's just hard with a Compounding orientation to make that math work. Certainly, the lower tax rate sort of helped in the Gatan timing. So yes, we get inbounds. I would not say the activity in the last Few quarters has ramped up more than it's been over the decade I've been here, but yes, there's always inbound inquiry. And appetite to entertain that was the other part of that question? Yes, I think it's the appetite. We've never not had the appetite. It just comes down to the math and doing what's best in our view according to our math for our shareholders. So the appetite has remained unchanged. Understood. Thanks. You're welcome. The next question is from Steve Susa of JPMorgan. Please go ahead. Hey, guys. Good morning. Hey, Steve. The free cash is pretty strong in the 4th quarter, like almost 95% of EBITDA. Last couple of 4th quarters, it's been around 80%. What was the kind of overdrive there? And then when it comes to Cash and EBITDA, how much did roughly did Vertifor add? Vertifor was around $90,000,000 or so of both Cash and EBITDA. And yes, as I mentioned earlier, Steve, just great working capital performance across the portfolio, very broad based. You're getting your software renewals, which were very strong in the Q4. There certainly is some benefit right from those more cyclical businesses being a little bit Softer, right, and that lowers working capital overall, but just great working capital performance. Our cash taxes year over year were about Flat, so it really was all on working capital. Got it. And then within the guidance, I guess you didn't really quite you don't usually guide for free cash flow For next year, I think you said $1,500,000,000 Is that is the $1,500,000,000 is after the dividend? And then Does that include any of the tax benefit that you guys bought with Virtifor, the benefit of that? Yes. So the $1,500,000,000 is a deleveraging number. So that's an estimate That's after paying dividends. So for next year, yes, you're right, we don't guide free cash flow. We always have very strong conversion. As you know, we Expect that very high conversion to continue. As I mentioned, those working capital trends are very Sustainable, right? It's the culture. It's the type of businesses that we buy. As the software businesses grow, their working capital continues to go down. So that all should continue. In terms of the tax attributes, yes, there are some tax attributes related to VERTIFOR, which we disclosed A little over $100,000,000 So there'll be some benefit from that coming in 2021. There's also like many other multi industry and really all companies, right, we Benefited some from deferral of payroll taxes. So that will go back the other way next year as you're starting to pay those payroll taxes again. So those are sort of those will sort of counter each other a little bit, but we feel great about cash flow next year, but we don't guide as you know. Next question comes from Allison Poliniak of Wells Fargo. Please go ahead. Hi, guys. Good morning. Good morning, Allison. Good morning, Allison. Just want to talk to you, obviously, the theme of reopening seems pretty pervasive in a number of your businesses. Could you help me understand maybe the progression Of some of those businesses that you're thinking about, if in fact we do start to reopen here, is it sort of an outsized bump as things start to get back to work or Is it more of a progression out of that? Any thoughts? Well, I'll give you the it's Neil. I'll give you the headline and I'll let Rob sort of add his color in the So it's not a like a step function bump up. It is a sort of sequential improvement throughout the year. Obviously, when you roll past Q1, the comps get a whole lot easier. So that's part of what The last three quarters of the year will look like as well. When you look at it on a company by company or sort of segment by segment basis, just rolling through, Basically, it's the perpetual book of business and the associated services that come with that for application software that ramps back up. In network, they're really for the network businesses, it's a little bit of ramp back at foundry. It's a little bit of ramp back At iTrade, but the other businesses were pretty steady as she goes, DAT, ConstructConnect, etcetera. TransCore It's tied principally to 2 things. 1 is the New York project completing and second, the return of traffic volumes And the associated tags that go with them. For the MAS segment, it's Neptune just sequentially coming back and importantly getting the access to the indoor meters in Northeast U. S. And Canada, I said in the prepared remarks, market share was super steady, maybe plus a little bit in that business last year. It's just access, Our customers getting access to do routine replacements. Verathon will have a difficult headwind because of the capital place we talked about, but the other medical product businesses just Rotate up in a sequential basis and then finally, the industrial businesses do the same. Process is much like industrial, just a cyclical rebound, Modestly higher oil prices help, but you have all this in the energy businesses, you have all this deferred maintenance that's got to get done. There's a lot of there's a sort of There were some restocking orders in Q4 there and then some pipeline activity like we got to get in and do the maintenance in a handful of These important customers. So that'd be sort of the color of the ramp, but no step function. But Rob, what would you add if anything? No, I think that's right. We're assuming Q1 is very much clearly still in the middle of pandemic and then things improve from there. Got it. And then in line with that, obviously, we've been under disclosure for a significant amount of time. Any concerns of the financial impact to some of your existing customers that you would anticipate that ramp from? Or Customers that you would anticipate that ramp from or not at this point? I would say no. And I think I mean, obviously, there's going to be small pockets here and there. We're very most of our customers across the portfolio, most are enterprise level, A very small percentage of our software companies would be in the small, medium size where it may be more subject to some Sort of headwinds or business uncertainty. I think the data point we point to is just the incredible cash flow. I mean, we got paid by our Customers, right, last year. And so what we do is just critical to what they do. And no, I don't think there's going to be a need. The pockets of areas that are hit, we talked about Colleges and universities, most of those customers, we tend to have larger customers there. So we're not too worried about our schools Being in financial trouble overall. And then on like the Itrade Network side, they have customers that are in the food area. So there certainly could be an impact from some smaller The The next question comes from Joe Giordano of Cowen. Please go ahead. Hey, guys. Good morning. Good morning, Joe. Hey, I'm in the market to refinance my mortgage at 1% blended. So can you guys help me out with that? I have a guy in Florida, never mind. That's right. We won't count that as Perfect question, by the way. On the net working capital, obviously, that keeps getting more and more negative and more interesting. But With the current portfolio, where is that where is like the maximum that that can get to without doing more deals into that further push it that way? Yes. So I think if you go to our working capital page, page 10, you'll see all the benefit here Q4 to Q4 was on the liability side, Right. We're basically equal to on the asset side, which is that indicates to us and we go business by business, it's structural and driven by an increasing mix So that's the first thing I'd say. 2nd is when you look at the art of the possible, if you think about a business that is 100% SaaS recurring revenue that's prepaid a year ahead. Let's say that you bill on January 1st and you take 90 days to get paid, that Company is going to have 75% of its revenue. That's negative networking capital, right? And we certainly have a couple of businesses that don't Quite get the 75%, but they approach 40% or 50%. So as we become more software and our Legacy perpetual business becomes more SaaS, you're going to see this number get higher. Will ever get to 40 or 50? No, it won't. But it will keep Inching higher it should over the next 5 to 10 years. We don't have a target. It's not that we're trying to drive the business to be X percent negative. We just Have the incentive system and a culture that we get a little bit better every year on this metric. That's definitely helpful to frame that out. Thanks. A follow-up would be on Vertifor. How is that business doing since you've been there? Have you noticed anything like What kind of initial changes have been instituted, if any? And like when we did our diligence, that was definitely a market like where That business was a leader, but there was that whole market seemed right for some change there. And how are you guys approaching that? Are there upstarts that you look at? Is it an internal change that drives the market forward? Like how are you just approaching that business now? Yes. So The most important thing that I think we can say in regard to Virta for that matter, any acquisition is that, if we had to summarize what We do is we buy these amazingly great businesses and then provide them environment to get better over a long period of time. So as a result, there is not a short Term, we've got to do these five things to improve the business. That's not in our strategic M and A strategy. That said, The business is, as in the piece of research we did, we thought was quite good and reflective of ours. It's basically a duopoly. We share a market with 1 Competitor on the agency side. Fortunately for us, just after the business we acquired the business and closed, We won the largest deal in the market, in the last 3 or 4 years in Assured Partners. There was a press release that went out a handful of weeks ago, so we're Delighted about that. It's a slow ramp over a couple of years, a couple of 3 years. I think that's just an indication of the quality of the business that Vertifor and the products they have, but also the customer in that case was reassured by being by Vertifor being owned By Roper, who is just a long term owner that's not going to look to sell the business in a handful of years and therefore you can make the right investments. If there is one thing that we're if you will doing in the short run is based on our diligence and some of the work you did is We wanted to allocate a little bit more to R and D, which we have done. That's reflected in the numbers we've given you from the very beginning. And so that's going to take a few years to play out, just Continuing to add functionality and add features and ways to monetize their customer base. Hey, and Joe, just on the obviously the company has performed very, very well since we own it. But just to clarify My last answer, the $90,000,000 of EBITDA that since we own the business, there's a month in there as well. It wasn't all in the Q4, but it was $90,000,000 of cash in the Q4. The next question comes from Blake Denburn of Wolfe Research. Please go ahead. Yes, thanks. Good morning. I want to follow-up on that R and D comment actually kind of in the broader context of your portfolio. COVID was disruptive for a number of reasons, structurally with the end markets and I would imagine competitively. In addition to Virtophore and maybe Ramping R and D there. Are there any opportunities to ramp R and D across some of the other business units simply because there's new market As a result of the pandemic moving forward, I know it's hard for us to really fully appreciate all the changes that will stick structurally across all your business units. But I'm just wondering if we should expect R and Truly across all your business units. But I'm just wondering if we should expect R and D to ramp a little bit across the portfolio, not just for the work? Yes. So a few things I'd say there to begin with. 1st is when we engage with each of our businesses Strategically, we talk to them broadly about how to grow sustainably with CRI accretive growth over a long arc of time, Answering the two questions of where to play and how to win, but then when you get into how to win, it is sometimes it's a product answer, A lot of times it's a go to market or market go to market effective sort of answer. So it's not our strategic orientation of each business doesn't narrow into innovation from the get go. That said, obviously, From the get go. That said, obviously innovation and R and D, we're mostly a D shop, mostly development Across our software and product businesses, you have seen and likely will continue to see a modest increase in R and D Spend as a percent of revenue for years to come. In 'nineteen, it was about 7.5%, last year, it was about a little over 8%. This coming year, Add about 100 basis points, be a little over 9. There's a verti4 mix in there that they have a little bit higher percentage as compared to some of our other businesses. I think you will see and are seeing an increase in innovation there. So So I'd sort of stop there. I mean, if you have any thoughts, we're happy to do it. But the short answer is yes. I guess there's one other thing. If you compare Roper's The 8% or 9% of revenue that we spend in R and D compared to other software companies, it appears When you look at our software businesses, we're right in line with the peers. We're between 10% and 15%, 17% depending on the company. The application businesses tend to be on Higher side of that, the network businesses tend to be on the lower side of that. And the reason the mix for Roper is low is because we have Quite a bit of revenue in TransCore, MHA and others that effectively don't have any R and D in their business model. So it's always important to point out when we get asked a question about R and D. That's helpful to think about the framework there. I want to shift to Deltek's. I thought it was interesting when you mentioned, GovCon stability versus maybe some Professional services being impacted by COVID. The GovCon, I would imagine you're dealing with large enterprise customers, so we should expect it to be kind of stable in addition Just general government spending being stable. On the professional side, is it just a matter of reopening? Or is there anything we can think about with respect to customer size, large versus SMB? And then maybe end market Specifically that we should be looking at for the recovery, is it just non residential construction on the AEC side? How should we think about Dell's second improvement in 2021 and beyond. I'll give you a gold star for getting like 7 questions into one So I'm going to do our best to try to come tick through these. So on Deltek, it is important to note, it is a combination of large enterprise And the smaller end of the GovCon space that's been super strong throughout the year. It's not just been at the high end. And yes, we expect that to just continue as the It's not tied to infrastructure per se. These government contractors go toward the fast currents of government spend is. It's gone from military to education to maybe infrastructure. They just go to where it is. That might drive some M and A activity by the way, which is generally good for us. On the professional services side, the book of business here is broad, but if there are pockets of concentration, it's in architects, engineers and Contractors. Obviously, the contractors, mostly non res contractors in this case, they are the ones that are a little bit worried And they've sort of tightened up a little bit more. You see architects and engineering firms that have shown some green shoots here in Q4. In addition, marketing services firms is a leading niche for Deltek and those businesses also have started to thaw. So I think that checked off your questions. If we missed 1 or 2, we're happy to follow-up with you after the call. The next question comes from Julian Mitchell of Barclays. Please go ahead. Hey, good morning, everyone. This is Zhao on for Julian. Good morning. Maybe to start with, could we get your thoughts on maybe margin expectations For the segments, obviously, a lot of movement in the software margin from 2020, kind of a lot of mix shifts you guys are calling out On that Slide 20, so I just wanted to get your thoughts there. Yes. I mean, we can go through the segments in detail Later on, but I mean overall, our margins are relatively flat year over year in the guide. I think there's a little bit of a core Decline in the margins given a lot of the costs will come back post COVID, travel and things that didn't happen, Very modest decline there and then the VERTIFOR revenue comes in at a higher margin. So overall margins are relatively flat. And then we'd expect some improvement in the bottom sort of the more cyclical type stuff and process, which you get some nice bounce back as that starts And if I could just add one thing there sort of piggybacking your question with the last one. Core EBITDA margins are going to be down a bit Because as Rob said, these costs are coming back in. It's hard to spend money on travel and customer meetings, for instance, last year, we expect some of it to come back in this year. That said, I sort of call it like a trap of leadership. We're increasing our R and D as a percent of revenue by about the same amount That we expect the core margins to come down. So there's going to be some teams and some companies may choose to hold margins And they're going to have to there's opportunity cost inside the business somewhere. In our case, we're very specifically and intentionally not doing that as they come into that trap. Then obviously, we get the benefit of the VERTIFOR mix coming in. So in aggregate, margins should be flat to up a touch. Perfect. Thanks. And then maybe on the services piece of applications software, you guys talk about Kind of rebuilding that pipeline, what does that process look like and any thoughts on some of the cadence or just kind of expectations beyond that sort of flat growth you guys guided for? Yes, I think so. What you have here is a dynamic where the most first as a precursor, most The vast majority, I should say, of our services work in the application segment are tied to new implementations, whether they're SaaS or on premise. So if you look back and think through what happened sequentially in 2020, very Quickly, in the shutdown, the license activity, the perpetual activity slowed down. So you had Low license activity, basically Q3, through Q4. The services book of business has a little bit of a backlog, right? So the services work continued in Q2, continued a little bit in Q3 We have completed the in flight projects and then it sort of slowed down a handful of months behind the license activity. So when you come back on this side, the License activity will pick up sooner, but then you got to and the services work will follow back behind it. So you potentially had a slow Our ramp down and a slower ramp up for services. That's why you see it flattish where you can see growth in the perpetual book. The next question comes from Alex Blanton of Clear Harbor Asset Management. Please go ahead. Hi, good morning. Good morning, Alex. Good morning, Alex. Good to hear you. I wanted to ask, could you characterize your Position intentions for 2021. You had said earlier that it would be primarily We'd be deleveraging for 12 to 18 months. But today, you mentioned You had a very active robust pipeline of potential acquisitions with many opportunities. So has there been a change in your intentions there in terms of deleveraging? How would you characterize the acquisition outlook for this year? Thank you, Alex for the question. So I would share 2 things with you. First Yes, we are maybe more than a couple of things. So we are active. The pipeline is active. We are spending time with learning businesses, Yes, spend time with all the sponsors that we have relationships with to understand what the cohort of opportunities looks like. Importantly, every Sizable transaction that we've completed since 2016. We have had a chance to meet the management teams At least once if not multiple times anywhere between 6 18 months before we completed the transaction. So the work that we're doing now is principally focused on that. These are getting to understand businesses well before They're ready to be transacted, right. So businesses we're meeting this month are likely going to be businesses that we may acquire at the end of this year or into the first Half of next year. So it's the early pipeline work is the first thing I would say. 2nd is we're absolutely committed to deleveraging or unwavering on that. 3rd thing, If the right deal came through, there's always a way to figure that out. But that's not our primary focus. Our primary focus is the early part of the pipeline build As well as the deleveraging. Okay. And secondly, how would you Characterize the makeup of these companies that you're getting to know. What industries, is it still primarily software, You're still going in that direction? Absolutely. It's again, we're characterized our M and A pipeline This is characterized by buying businesses that are better than us through the our quantitative cash return lens. So that yields mostly software informatics types businesses. There are a combination of a wide variety of end markets, a wide variety of SaaS versus perpetual business models. But, yes, it's essentially what the capital deployment over the last 7 to 10 years, it's what our pipeline is characterized by that same type of business. This concludes our question and answer session. We will now return back to Zaf 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.