Earnings Call: Q2 2020

Jul 28, 2020

Good morning. The Roper Technologies Second Quarter 2020 Financial Results Conference Call will now begin. All participants will be in listen only mode. Please note this conference is being recorded. I would now like to turn the conference over to Zach Moxie, Vice President, Investor Relations. Please go ahead. Good morning, and thank you all for joining us as we discuss the Q2 financial results for Roper Technologies. We hope everyone is doing well. Joining me on the call this morning are Neil Hahn, President and Chief Executive Officer Rob Crisci, Executive Vice President and Chief Financial Officer Jason. 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 you 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, 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 Q2, the difference between our GAAP results and adjusted results consists of the following items: amortization of acquisition related intangible assets purchase accounting adjustments to acquired deferred revenue a restructuring charge associated with certain businesses and are populated in our prior guidance, transaction related expenses for completed acquisitions. And lastly, we have adjusted our cash flow results to exclude income tax payments deferred from Q2 to Q3 due to COVID-nineteen. And now if you please turn to Slide 4, I will hand the call over to Neil. After our prepared remarks, we will take questions from our telephone participants. Neil? Good morning, everyone, and thanks for joining us. We hope that everybody listening or reading are doing well and enjoying the summer. With that, let's go ahead and start with our agenda. As usual, we'll start with the enterprise highlights from the quarter, which are quite good given the health and economic challenges associated with the current pandemic. I'll then walk through our key financial and operational levers on a segment basis and compare how we did versus what we thought heading into the quarter. Rob will then discuss our P and L, our balance sheet, our cash position. We find ourselves in a very fortunate position to have well over $1,500,000,000 of cash on the balance sheet and a completely undrawn $2,500,000,000 revolver. Following Rob's remarks, I'll walk through our detailed segment review and outlook, followed by our Q3 and full year guidance. And finally, I'll conclude with the highlights for the quarter and discuss our outlook for continued capital deployment. We'll then look forward to your questions. Now let's turn to a brief run through of our Q2 results. Next slide please. To start, I'm very proud of how Roper performed in the quarter both on an operating basis and a balance sheet basis. On an operational basis, our revenues declined 2% in the quarter and 3% on an organic basis. We saw organic growth in each of our 2 software segments. In addition, and as we foreshadowed last quarter, we saw very strong demand for our medical product businesses and laboratory software, mostly used in global fight against COVID-nineteen. Worth noting and broadly, our businesses did not experience much, if any, supply chain disruption in the quarter, which contributed to our revenue performance. We also saw gross margins increase 70 basis points to 64.7 percent 5.3 percent and DEPS was strong and came in at $2 and increased 10% to 315,000,000 dollars Specific to our balance sheet, 2 items of importance. First, we successfully completed a $600,000,000 10 year 2% bond offering in the quarter. Also, we are able to deploy $150,000,000 for 2 bolt ons, indicating the window for capital deployment is reopening. More on these deals as we turn to the segment pages. So while 3% organic revenue declines are certainly below normal, given the macroeconomic backdrop heading into the quarter, I am very pleased with this performance, especially as it relates to our margin performance and cash flow. To this end, this quarter's performance serves as a great example that illustrates the intimate knowledge each of our teams have with their business, their customers, their supply chains and their employees. As we said for many years, nimble execution yields great results and that is certainly the case for this quarter and so far this year. As we'll discuss later in the call, we are maintaining our full year organic revenue outlook to be plus or minus flat, which we believe is a testament to our decade long business model transformation. In addition, our greater than $1,500,000,000 cash position and our undrawn $2,500,000,000 revolver allows us to be offensive relative to capital deployment. Our M and A pipeline remains full of high quality opportunities. And prior to turning to the next slide, I want to thank our entire leadership team and our 16,000 employees for your tremendous work this quarter. Thank you. Next slide please. Turning to the 2nd quarter segment results summary. This page summarizes our key business model levers and how they performed in the quarter. Starting with application software, we expected revenues to be down mid single digits in the quarter, but actually grew 1%. As we did expect, renewal rates remained high and recurring revenues remained strong. Also, we did see strong demand across our laboratory software businesses as they worked aggressively to enable scores of COVID-nineteen related testing capability on a global basis. A good guide for the quarter was our software license sales. We saw up sales pipelines. A further positive variance was the success our teams had in implementing our software remotely, which led to higher service utilization rates and revenues. So this segment performed better than expected based on these two factors, better license sales and higher service utilization rates. For our network segment, we expect it to grow low single digits and did coming in at 2%. For the software businesses in this segment, just about what we expected. High levels of recurring revenues and renewal rates and decent network expansions at ConstructConnect and DAT. More on this later, but the TransCore New York City congestion pricing infrastructure project continues to push Jitterite, impacting more the second half versus this quarter. As for the MAS segment, we expect it to decline mid single digits, but did modestly better, only declining 1% in the quarter. Verathon and IPA outperformed our expectations and was driven by exceptional demand for their products and solutions throughout the quarter. As expected, our other medical product businesses were negatively impacted and continue to be negatively impacted by reduced elective hospital procedures. Neptune performed in line with expectations and was down given they had limited access to meters installed inside residences. Finally, in this segment, we saw sharp declines as expected in our industrial businesses. Finally, the better than expected revenues levered very well to EPS with debts coming in at 2.94 dollars versus our guidance range of $2.50 to $2.70 After Rob's comments, I'll come back and discuss in more detail our segment by segment performance. Rob, I'll turn it over to Rob. Revenue declined 3% versus prior year with total revenue coming in at 1,306,000,000 dollars We had positive organic revenue growth in both application software and network software and systems, while sharp declines in our smallest segment, Process Technologies, pulled our overall organic growth into low single digit negative territory for the quarter. Margin performance, as Neil mentioned, was a standout in the quarter as our businesses expanded gross margin by 70 basis points to 64.7% and held EBITDA margins flat at 35.3%. As a result, EBITDA declined only 2% to $461,000,000 Our tax rate came in at 22.3%, a little higher than last year, resulting in adjusted diluted earnings per share of $2.94 which was well above our guidance range of $2.50 to 2.70 dollars So in summary, really good execution by our business leaders in a very challenging environment. Next slide. Turning to Page 8 and looking at cash flow. Cash flow performance for the quarter was very strong. On a GAAP basis, our operating cash flow was 449,000,000 dollars which represented a 49% increase over last year. However, for better comparability and clarity, we are adjusting our results the $124,000,000 of income tax payments that were deferred from Q2 to Q3 due to COVID-nineteen and those taxes were subsequently paid in July. So after adjusting for the timing of the $124,000,000 of tax payments that pushed to July, our Q2 operating cash flow grew 8% to finance teams at each of our businesses for continuing to make cash flow and cash collections a high priority. It truly was outstanding cash flow performance in a challenging environment. Next slide. Turning to Page 9 and our asset light business model and negative working capital slide. We exited the Q1 with working capital of minus 4.4 percent and in Q2 we further improved this metric with working capital as a percent of revenue moving to minus 5.4%. While we're certainly happy as always to see our income statement hold up well in Q2, we believe it's just as important, if not more important, that our cash flow and working capital metrics also remain strong. In fact, as we continue to improve on these important working capital metrics despite the challenging macro environment, this bodes very well for our ability to compound cash flow at higher levels as the economy does eventually rebound from the pandemic. Next slide. Turning to Page 10, our strong financial position. So it's really a continuation here of the same story we discussed last quarter. Roper's liquidity position and balance sheet remained very strong. We ended June with over $1,800,000,000 of cash on the balance sheet. To date in July, as mentioned, we have made some tax payments. About $316,000,000 of tax payments have been paid to date in July. That's the previously mentioned taxes due on the gain from last year's Gatan sale. So after making these payments, our cash balance today is approximately $1,600,000,000 and our $2,500,000,000 revolving credit facility remains fully undrawn. In June, we took advantage of historically favorable conditions in the bond market to issue $600,000,000 dollars of 10 year notes at a coupon of 2.0%. At the time, we tied the record for the lowest coupon ever issued by a BBB issuer. Really great execution by our team and nice to once again see very strong demand for Roper Bonds, driven by our consistent ability to generate cash flow, high levels of recurring revenue and our diversified portfolio of Asset Light businesses. At the end of the quarter, our net debt to EBITDA stood at 2.1 times with our large cash balance and fully undrawn revolver, we remain very well positioned with significant financial capacity to take advantage of our large pipeline of acquisition opportunities. So with that, I'll turn it back over to Neil. Thanks, Rob. Let's go ahead and turn to our Application Software segment. Revenues here were $398,000,000 up 1% on an organic basis, and EBITDA was 172,000,000 dollars or 43.1 percent of revenue. In addition, we saw better than expected software license sales in the quarter, broadly across Deltek, Adderant and Power Plant. Of note, sales pipeline build and revenues than expected. Our laboratory software businesses, Sunquest, Data Innovations and Clinicsys all grew and performed nicely, aided by the global demand to deploy diagnostic testing software interfaces and laboratory software associated with combating COVID-nineteen. Specific to Sunquest, we received the termination fee payment for the Queensland product in the quarter. As a reminder, last quarter we noted that the customer opted to terminate this implementation in the face of COVID-nineteen related challenges. Seaboard, which is our software business that sells nutrition and food management software as well as campus access solutions to hospitals and universities did decline given their very limited access to both hospital and university clients. Broadly across the segment and of note, we are absolutely seeing an increased desire from our customers to migrate to our cloud or SaaS offerings, one of several trends that COVID appears to be accelerating. This should be a long term growth driver for our business as we have a large installed base of customers who will over time migrate to the cloud. Turning to the outlook for the segment, we expect to be roughly flat on an organic basis for the second half of the year with the 3rd quarter facing a challenging prior year comp specific to perpetual license revenues. We continue to expect high levels of recurring revenue retention. As a reminder, the vast majority of our customers in this segment are enterprise or larger companies. Furthermore, we serve a diversified and durable set of end markets, most notably government contractors, marketing services firms, law firms, utilities and hospitals. That said, we do anticipate some continued pressure on our new logo software license sales. This quarter's license revenues were aided by sales pipelines that were built pre COVID and converted better than expected in the quarter. The second half funnel is increasingly comprised of post COVID shutdown activity. As a result, we expect our historical experience. That said, we are encouraged by the fact that the top of the funnel activity looks good and we like the MQL to SQL conversion rates, but again expect decision timing could be more elongated than normal. With that, next slide please. Turning to our Network segment. Revenues grew 2% organically to $423,000,000 and EBITDA was $176,000,000 or 41.5 percent of revenue. As a reminder, most of our software businesses in this segment share highly recurring SaaS revenue models, which are further aided by strong network effects that drive high retention rates and network ads, which were certainly the case in this quarter. To this end, our ConstructConnect network expanded in the quarter and was driven by strong customer adds and network utilization. As a reminder, our ConstructConnect business' primary product provides building contractors with all available commercial building projects that are in the planning phase and enables them to bid and win work. In an economic environment like this one, the value of this product further increases. Our DAT business grew high single digits in the quarter, led by large number of carrier additions to the network and strong growth in our rate data offering. To add to our rate data product capabilities, we acquired FMIC in the quarter. FMIC is the leading benchmarking and rate analysis firm focused on the contract freight market. When combined with DAT, the FMIC datasets will be a unique product offering that benchmarks both the contract and spot truck freight markets in the U. S. In addition to SMIC, we also acquired Team TSI. We are integrating Team TSI with our SHP business. When complete, the combined business will have a comprehensive operating, financial and quality benchmarks that span the continuum of post acute care, namely skilled nursing and home health. In addition to helping the post acute providers operate their businesses more efficiently, SHP will help improve patient outcomes through innovative real time data and evidence based collaboration among acute care providers and their post acute partners. We're excited to see this strategy unfold. As mentioned earlier, these bolt on acquisitions have a combined purchase price of $150,000,000 Turning to last year's acquisitions, and it's worth noting that foundry and I Pipeline continue to perform well and are proving to have quite resilient business models as we expect. As we look to our RFIDAS and NOVONIX businesses, they were challenged in the quarter directly resulting from having limited access to customers. And finally, the TransCore New York City congestion pricing infrastructure projects continues and is deemed essential. However, the project at the election of our customer has slowed and continues to push into 2021. Execution of the project remains strong, but the time is elongating. Turning to the outlook for the segment. We see mid single digit organic growth in the second half. Relative to TransCore and the New York project, as mentioned, we see this project pushing to the right, notably about $0.20 of depth is being pushed in the next year as compared to what we thought a quarter ago. That said, we continue to see growth and resiliency in our network software businesses driven by high recurring revenues, strong retention rates, expanding networks and solid network participation. Next slide please. Turning to our Measurement and Analytical segment. Revenues declined 1% organically to $364,000,000 and EBITDA was 132,000,000 dollars or 36.2 percent of revenue. In the current environment, this segment's activities are best broken into 4 boxes: 1, Verathon and IPA 2, other medical product businesses 3, Neptune and 4, our industrial businesses. First, Verathon IPA, both experiencing tremendous demand for their products directly attributable to hospital demand resulting from COVID-nineteen. Verathon experienced strong demand for their GlideScope video intubation products. As a result of COVID-nineteen, the percentage of all intubations, not just COVID related that are being done using video assistance has meaningfully increased. Verathon's demand is both for capital systems, which means an expanding customer base and the pull through consumables. We have to give hearty congratulations to Earl, Tracy, Tim, Jeff and the entire team at Verathon. It's one thing to have unprecedented demand. A completely different thing to be able to flex the supply chain to fulfill the demand within a single quarter. Congrats and thanks to the Verathon team. A similar story to IPA, hospitals rapidly adopted their automated scrub distribution systems to help deploy scrubs more broadly to staff within the hospital setting. 2nd, and relative to our other medical product businesses, we did see revenue headwinds tied directly to government mandated lower patient volumes within acute care hospitals on a global basis. We also want to note that this group of companies consistently grows mid single digits, but this growth is conditioned on regular hospital admissions patterns. 3rd, Neptune was negatively impacted by restricted access to indoor meters, in particular, in Canada and the Northeast United States. And finally, and as expected, we did experience a sharp decline in our short cycle industrial businesses. However, in the second half of the quarter, we did see modest improvements in consumable demand. As we turn to the second half outlook, we expect to see mid single digit growth in this segment led by continued strong demand at Verathon for the reasons just discussed. In addition, we expect to see reduced levels of non emergent capital procedures providing continued headwinds for our non Verathon and non IPA medical product businesses. We do expect to see improvements in Neptune on easing lockdowns, especially in the Northeast United States, which will provide better access to indoor meters. Also, we are cautiously optimistic given that July municipal budgets appear to be largely intact. And finally, we expect to see gradual improvements in our short cycle industrial end markets. Next slide please. Turning to our Process Technologies segment. Revenues were $121,000,000 in the down 26% on an organic basis, and EBITDA was $33,000,000 or 27.4 percent of revenue. This was certainly a difficult quarter for these businesses and we expect the outlook to remain poor for the balance of 2020. Despite a uniquely challenging environment for these businesses, they still had high 20% EBITDA margins in the quarter and our leadership teams have done a great job of navigating these end markets and continuing to make no regrets investments. We saw our upstream businesses decline approximately 40% in the quarter. Our PAC business also declined and it was related to weak fuel demand in the quarter. As a reminder, PAC is our laboratory fuel analysis business. Also CCC was weak based on the inability to perform field service work all related to COVID-nineteen. One bright spot in the quarter was ZTECH, which experienced growth based on the strength of their new non destructive testing products. Also in the quarter, we initiated targeted restructuring actions across a few of our businesses in this segment, which resulted in a $13,600,000 charge. None of these structural changes were considered in our guidance from a quarter ago. These actions will position these businesses to better serve its customers and realize longer term While the oil and gas markets and customer commitments remain more muted, we believe this is the right time to execute these restructuring activities. The outlook for the balance of the year continues to be an extremely challenging one as we expect to see approximately 25% organic declines for the second half. Specifically, we do not anticipate any recovery in upstream oil and gas markets and expect upstream to account for less than $40,000,000 of revenues in the second half. In addition, we expect to continue to have limited customer access, which hampers our ability to perform field service work. Next slide please. As we turn to our guidance, we are narrowing and modestly raising the midpoint of our full year adjusted DEPS guidance to be in the range of $11.90 $12.40 per share. We continue to guide full year organic revenues to be plus or minus flat. In addition, we are initiating DEPS guidance for 3Q in the range of $2.90 to $3 Now let's turn to our summary and get to your questions. Next slide please. Given the global pandemic and associated shutdowns in the quarter, we are pleased with our performance with revenue only being down 3% organically, EBITDA margins holding flat versus the prior year at 35.3 percent and cash flow growing 10% to $315,000,000 From an operating point of view, our businesses remain focused on employee health and safety, continue to improve the efficiency of remote work, remain super intimate with our customers and continue to focus on long term durable growth. To this end, our businesses continue to invest in growth oriented operating initiatives. Our leaders, all of whom are long term builders, are masterful at maintaining product investments during down cycles, which oftentimes lead to market share gains upon recovery. As a leadership team, we remain steadfastly committed to this concept. For the full year, we expect to have plus or minus flat organic revenue growth. We believe our portfolio of businesses and our governance processes continue to be well suited to navigate these difficult times. Our balance sheet is stronger than at any point in history with over $1,500,000,000 of cash and $2,500,000,000 of revolver capacity. And specific to capital deployment, we do have a high quality and active pipeline of opportunities as private equity sellers have recently reentered the market. That said, and as always, our CRI based strategy focuses on long term cash flow compounding and we will continue to patiently evaluate and pursue capital deployment opportunities that are consistent with this strategy. And as we turn to your questions, I'll remind everybody that what we do is very simple. We compound cash flow We provide our business leaders with Socratic coaching about what great looks like relative to driving long term CRI accretive organic growth with particular emphasis focused on strategy, operations, innovation and talent development. Our business leaders understand that success in our culture is based on their ability to compete and win for talent and to compete and win for customers that in turn allow us to compete and win for shareholders. To this end, we incent our management teams based on growth. And based on these factors and perhaps most importantly, we have a culture that is rooted in the principles of mutual respect, trust and transparency. And finally, we take the excess free cash flow that is generated by our businesses and deploy it to buy businesses that have better cash returns than our existing company that in turn helps accelerate our cash flow compounding. It is these simple ideas that deliver powerful results. And with that, now let's turn to your questions. We will now go to our question and answer portion of the call. The first question comes from Deane Dray of RBC Capital Markets. Please go ahead. Thank you. Good morning, everyone. Good morning, Dean. Hey, could we start with the congestion tolling project and just give us some context of this latest push out? It would be fair to assume that just logistically COVID is presenting issues in terms of be able to work on the project. But has there been any change in scope that's being considered? No, Dean. No change whatsoever in the scope. The contract value that we talked about a few quarters ago remains the exact same. And so the only thing that is happening here is the project is pushing a bit to the right end of 2021 for the reasons you said, a little bit access to personnel related to COVID and a little bit just at the election of the customer wanting to pace the project a little bit. And I think also we highlighted last quarter, I mean the motivation of the client has never been higher. I think it was just around this time last quarter, The proceeds from the project for 2021 2022 could be used in MTA's operating budget, where the initial project, it was going to be used for capital only. So there is a clear motivation to get the by the customer to get the project up and running. It's just slipping to the right a little bit. Just to clarify, there was a discussion of push outs in the Q1. So this $0.20 of EPS push out, this is new and incremental, correct? That's correct. Yes. That's correct, Dean. So the project was originally around $200,000,000 for this year and now we've got about $110,000,000 or so in for 2020. And as Neil mentioned, the rest just pushes to the right and we expect to be complete in 2021. Got it. And then, second topic would be the net COVID impact across your businesses. And I'm sure this is a fair question to ask, but you listed a number of ways that Roper is positioned to help systems, those would be the positives. But the negative, is it all related to just the deferrals of non emergency procedures? So how do those 2 net out? If your question is relegated to the medical product businesses versus a broad, is it related to that or is it broader to Roper? I want to make sure I answer your question. No, no, no. Just the medical related, sorry. Okay. Yes. So it's a net a meaningful net grower, right? When you look at the benefit of those of Verathon and IPA good guy against the bad guys of the other 4 or 5 medical product businesses. Aggregated together, it's a very meaningful positive good guy. It's worth noting though, the Verathon demand, while it certainly surged in the quarter, the team worked really well to work down the backlog and got a little bit more to go in the second half of the year. The team that Verathon believes that the demand is will endure a bit, right? It's about the number, the percentage or the market share of global intubations that are being done with video assistance versus not. Going into the pandemic, it was somewhere in the 15% of all intubations were done with video assistance and 85 direct. And that market share of video is going it's meaningfully higher now and it will stay it will be meaningfully above 15% on the backside of this. So the market just grew, we believe, for these products that Verathon has. That's real helpful. Thank you. Thank you. The next question comes from Scott Davis of Melius Research. Please go ahead. Hi, good morning guys. Hey, Scott. Good morning. Hey, Scott. I was trying to get a sense and a little bit of follow-up on Dean's question, but trying to get a sense of ConstructConnect. You commented how the pandemic perhaps helped is helping catalyze some growth there. I mean, very few of us are experts in many of these businesses. I'm certainly not an expert in ConstructConnect by any stretch of the imagination. But can you give us a sense of how that business grows in this type of environment? Is it well, I'll just leave it at that, just open ended. How does it grow and how much does it impact? Is there any way to the magnitude, the pandemic really helping get word-of-mouth or otherwise out there on the product? Yes, happy to talk through that. So just to remind you and everyone, ConstructConnect, the primary part of the business, all for non residential or commercial construction in the United States and Canada that's in the planning phase. So once a shovel goes in the ground, other constituents in the value chain pick up that. This is about planning. It allows general contractors, subcontractors, building product manufacturers to be aware of the projects that are being planned, so they can bid for and win those projects and we have software that organizes all of that activity. So when the market is raging hot, right, all the subcontractors have more work than they can possibly do, the value of leads or what new projects is lower, right? And so we've always sort of said if there's 5 market conditions, 5 is white hot and one is there's basically 0 construction. The construction at value proposition is best in positions 2, 3 and 4, right, where there's work and activity going on, but not so much work that contractors have so much to do, right? And so what's essentially happened here and ConstructConnect reports on this and Zach can get it to you is non res construction activity is down 20 ish percent versus prior year. It was up a little bit in June versus May, but that's the exact environment where the value proposition of leads and project awareness sort of thrives. And that's why you saw more contractors come into the ConstructConnect market and grow in the quarter. I would just add to that. It's a SaaS business, Scott. So there's not huge swings in the revenue like you get with a perpetual license business. We're seeing increased activity in the network and that leads to a little bit of more subscriptions, more customers and then over time that drives additional growth with the business. Right. And those customers, Really appreciate the question Really appreciate the question. So history, if you go way back in the arc of ConstructConnect, some of them will stay and some of them will leave. But since our ownership in 2016, the ConstructConnect team has worked really hard to build habituation into the product, if you will. So now there's integrated takeoff, which is the estimation process and directly linked. And so we believe the customers when we look at their utilization of the product, they're in the product on a multi time a day basis now, where 5, 6, 7 years ago, they'd be in the product only when they needed to look for a new project. And so we believe based on that, the sort of the long term retention rates of the business go up. Okay. Okay. Super helpful. Okay. Congrats, guys. Good luck this quarter. Yes. Congrats on the book as well. Thank you. Mr. Tusa. Are you still there? Please go ahead, sir. Hey, can you hear me okay? We can, Steve. Hey, I think it's Steve, right? Right. Yes, okay. Yes, sorry guys. Just managing some things here like 8 different calls. Just on the acquisitions you recently did, can you just give us some color on the revenues and what you paid for those just general multiples for some of the ones you've done? Yes, sure, Steve. So there's the 2 acquisitions in the quarter combined purchase price about $150,000,000 and we've got about $25,000,000 or so revenue in the model for 2021 and EBITDA margins there in the mid to high 40s. So pretty good cash flow. But each business is being integrated into a business. So there was not a lot added for the second half because there's some integration going on, but both are real good strategic adds to the Rover businesses. Got it. And then just one on the on some of the I think you guys had expected a bit weaker performance in some of the software businesses. I know you went through some of this in the prepared remarks. But is there anything that kind of gives back a little bit in the second half that's notable and that's material in any of those software businesses? Just perhaps some deferred downside relative to what you would have expected in the Q2, some timing items? So in the Q2, I mean, yes, I think the Q2 software is for the reasons we said on application software, I mean, it was the better utilization rates on the service side and we expected more deferral or push outs of the license activity and that proved to be a little conservative. And so that that was broad, that license activity was broad across Deltek, Aderant, PowerPlan. We saw good performance across the diagnostic businesses that we just talked about. Excuse me, some of that a lot of that was COVID related. Right. Yes, there's a lot of good things that happened in acute care software in the quarter, which is driven by the demand around COVID, So that some of that stuff happened in the Q2 that we didn't expect. And we'll see what continues into the second half, but that's difficult to predict. And was there a follow-up? Sounds like he went on. Okay. Understood. The next question comes from Julian Mitchell of Barclays. Please go ahead. Hey, good morning, everyone. This is Jeff Hovalo on for Julian. Hey, Jeff. Maybe just to start, application software margins came in pretty strong for the quarter. Can you just give some color on what contributed there? And maybe as part of that, just your thoughts on how margins look there and at other segments for the second half? I'll take the first part of that and let Rob take the second. Hey, it's directly the application software margin performance in the quarter is directly tied to better license activity. As you know, perpetual licenses in quarter are super high margin, 90% plus, 85%, ninety percent. So when you outperform an expectation on license and you tend to have better margin performance. And then we also received the Queensland payment for Sunquest, which put revenue and large high margin on that revenue in the second quarter as well, which helped. And then as we look at the second half, the margins don't move around a lot in the software segments, which is a great thing, right? It's high recurring revenue, very stable business models. You don't get this sort of swing. So we certainly expect EBITDA margins to be sort of flat or a little bit better year over year in software segments. Perfect. And then some interesting comments you guys mentioned, municipal budgets seem to be intact so far. Any thoughts on how much this holds in the second half? And then maybe thoughts on what level of potential cuts you guys are dialing in for kind of your outlook next year? I know that's a bit early. And then maybe just as part of that, can you just remind us kind of what percentage of sales within M and AS is kind of tied to municipal budgets? Very little as percent of revenue. I mean, it's going to be the part of Neptune that swings around with budgets. And Neptune is a pretty stable high recurring revenue business. So it's a real small percentage of the segment. I mean, single digits, it's going to really be driven by swings and budgets. Yes. And more broadly, coming this time last quarter in the height of the shutdown, a risk item that we were flagged was our Neptune's customers budgets going to be intact as they rolled into their New Year's because a large percentage of these customers have a July 1 fiscal year, just given the broader economic challenges that municipalities and cities are experiencing. The good news is the budgets appear to be largely intact. So that high the first risk item appears to be mostly retired. Remaining risk item is now the spend against the budget, right? And that's a to be determined, but the first step is a check mark and we'll see how things unfold the rest of the year. Got it. Thank you, guys. Yes. Thank you. The next question comes from Joe Ritchie of Goldman Sachs. Please go ahead. Thanks. Good morning, everyone. Hey, good morning. Hey, Joe. Hey, Neil, maybe just some commentary on the elective procedure impact in the quarter and obviously like things are still incredibly fluid with the virus. But I'm just trying to understand maybe how much of this pushes out into 2021 and whether there's like a revenue boost in 2021 once hopefully elective procedures come back? Yes. So the products the companies that we have that are somewhat indexed to procedure volume, it's one derivative behind it, right. So very little of our businesses are a consumable and a procedure, but our capital and products are used by other companies who are used in a procedure. And so we're buffered a little bit by what our customers are seeing. We did see a little bit in the second, maybe the June time period, some of the true consumables sort of pick back up, and that's just going to be volatile for the balance of the year. We would expect, as I mentioned in the prepared remarks, I mean this group of businesses going back for many, many years grows like clockwork at mid single digits and that assumes a patient volume that are normalized. And so to the extent volumes are normal in 2021, then we would see a pickup in that group of businesses. Just to give you a sense, Joe. So the sort of other medical products businesses, which exclude Verathon IPA, which have a huge COVID benefit, so everything else, those businesses were down double digits in the quarter and they would normally be mid single growers. And so I think we will catch up some of that at some point, but it's very difficult to predict when. Got it. That's helpful, Rob. And then and just maybe my quick follow-up. Thought your commentary around like the acceleration into cloud based solutions was interesting. I guess, Neil, if you could maybe just provide some context for what that opportunity could be for you guys, either qualitative or quantitative, that would be helpful. Yes, I'll leave it at sort of on the qualitative basis, right. So as we've said for a long time, we as a guiding principle, we allow our customers to pace the transition to the cloud. We don't force it or have a forced product migration. We're just there waiting for that to occur. We have some businesses like Strata that are born in the cloud. We have other businesses like Adderant PowerPlan that are still vast, vast majority on premise. And then we have companies like Deltek that are somewhere in between, right, sort of in the middle and their journey of the migration. What we've seen at Deltek is that, that migration is a net growth driver. And we can talk about that in more detail later to the extent you're interested. But you basically are taking a large installed base of customers who pay you annual maintenance and you're uplifting them to the cloud. So you're providing all the backbone and IT sort of management services, but also you're doing all the release management, getting them on the most recent release. They're more micro releases and so the customers get to take advantage of what you're actually developing and that has real value associated with it in the mind's eye of the customer. And so for that reason, as they migrate from on premise to cloud, there's an uplift in recurring, a pretty meaningful one. And that's a multi year growth driver for our enterprise on application software or in application software. Got it. That's super helpful. Thanks guys. Thank you. The next question comes from Joe Giordano of Cowen. Please go ahead. Hey guys, good morning. Good morning. Good morning. Can you talk about maybe some of the implications of a potential infrastructure build, what that might have maybe on I'm guessing Deltek would be the most, maybe power plant, I'm not sure, but how that might impact overall the portfolio? It's not I think it would have a slight impact. And the reason I say that I'm looking at Rob and Shannon, it's not something we talk about, right? And so about an infrastructure build, we're not rooting for 1. Yes. The government contractors are always spending money on whatever there is to spend money on. Rob's point there is a very good one, right? So the contractors go to what fast flow is of government spend. And so maybe you get a few more government contractors that could be Deltek customers, but that's probably it. Okay. Fair enough. Can you kind of just set a range kind of for us? I assume like within your software businesses did better than expected obviously, but I'm guessing there's huge differences between businesses like Seaboard where you couldn't go, like people were on-site. Like can you kind of scale what were the even if you don't want to into the specific business names, so like how big were some of the biggest declines and how big were some of the biggest gainers in the end of quarter? Well, I'll set it up. I'll give you some context and let Rob sort of give you his view. So as we mentioned last quarter in this segment, about 70% of revenues are recurring, 20% are tied to services and that's generally coming working off some sort of 6 to 18 month backlog and then 10% of the revenue was that perpetual license. So the most short term impact it is that 10%. So that tends to mute the magnitude of the swing in any given period of time, assuming that the in flight implementation projects don't stall. We do not see a lot of that lot, if any of that activity in the quarter. So with that, Rob? Yes. They are just very stable businesses. So I'm just looking through all the software businesses and sort of they were all kind of between a low single digit gain and a low single digit decline with the exception of Seaboard, which is a little bit worse than that. So again, that a little bit better than expected because you know a huge part of the businesses are stable. The question is, are you going to get any of these license wins in the quarter? Are you able to deliver services? And we were. And so to the extent that continues, that certainly helps us. There just aren't big swings in these businesses, which of course we had huge swings in the product businesses where there's more issues with not being able to access customers, etcetera. Fair enough. Thanks guys. Thank you. The next question comes from Alex Blanton of Clear Harbor Asset Management. Please go ahead. Hi, good morning. I wanted to ask about the push out in the TransCore business in New York City. You mentioned $0.20 going into 2021 from 'twenty, a new $0.20 And then I think you said, I wanted to confirm this, dollars 110,000,000 now in this year versus $200,000,000 before. So that's a $90,000,000 push up. Is that are those the right numbers? They are, Alex. There was an interim step in there that last quarter with the $200,000,000 became $175,000,000 and now it's $110,000,000 So the move from $175,000,000 to $110,000,000 is your $0.20 Okay. That's what I wanted to know. So that's a $65,000,000 push out generated $0.20 per share push out. So we can calculate the incremental margin there. That's what I'm getting at. These are all rough numbers, but yes, sorry. Yes, I know. Yes. We don't need precision. The second thing is, we haven't really I don't think anyone asked about the acquisition pipeline. You've got max $4,100,000,000 of spending power for acquisitions. What does that look like? What are you working on big, small? What's the timing? Is some of it getting pushed out because of COVID? What's the situation there? Alex, appreciate the question. So I'll give you a little bit of context and color. So we had a pretty the activity coming into COVID, I mean, it was as busy as we have been that I can recall since being here in 2011 in terms of what the funnel activity looked like. Obviously, everything shut down. I mean, when the credit market shut down, everything shut down in April May. It was there was really no activity anywhere. No sellers are selling anything for obvious reasons. At the end of May, 1st part of June, we saw some green shoots. We obviously got these 2 bolt ons complete, which were sort of in the pipeline pre COVID. And really here since the middle of June until now, it's almost as if we're back to January, February in terms of private equity seller interest and activity. The private credit markets aren't fully back, but they're back enough to give sponsors confidence that they can run a process or processes. And so we're encouraged by all of that because we're sitting here with what you just said, a large amount of cash and borrowing capacity to sort of continue this our long term CRI driven compounding strategy. I will note the things that we see obviously the things that come out of the chute first after a slowdown are the very best assets, right? The ones that have the best niches, the best competitive position, the best highest level of recurring revenue durability, things like that. And those tend to be fairly valued, right? There's not a lot of bargains that we would say we see in the software space, but valuation is consistent with what we saw coming into the pandemic. What accounts for the pickup? The COVID situation is actually worse than it was in April. There's spikes all over the place and the government doesn't have control over it at all. They're not even trying. So what accounts for the opening up of acquisition activity? We can only speculate what's in the mind's eye of the sellers, right, but a couple of things. First is the types of everything I just said, I should have qualified by saying, our M and A pipeline is 100% software focused, right? So these are businesses even in the public markets that are proving to be resilient sort of the comparables, if you will. And so that is colors my comments on what our funnel activity looks like. The other thing is private equity sellers, which is where we buy 100% of our assets from, have to return capital. They have limited sort of pressures. That's a constant drumbeat. And then finally, and this is me certainly speculating about private equities view of what might happen in election and taxes, but that certainly may be a motivating factor to get some things done by the end of this year. Taxes, okay. Yes, I had another question, but now it slipped my mind. Happens to me all the time. Yes. You said 100% software focused. Oh, I know what it was. Your sister company, Dover Corp, used to say that one of the favorite things they said was that during recessions, they always gain market share because they had the dominant positions in their companies, in their markets. And so weaker competitors would lose out some business and even go out of business during recession. So Dover actually benefited from a market share standpoint during economic downturns. How would you characterize Roper in that regard? And what is happening now? Are you gaining share overall from people having a lot worse time than you are? So we would echo those comments that companies like Roper in our history is we continue to invest in product through cycle, especially in the down cycle because your competitors oftentimes are not able to. And we also stay super close to our customers. The vast majority of what we our companies have direct channel access or just have to work through distributors. So you stay super close to the customers. And almost certainly on the back end, you gain share either because of customer intimacy or because you develop or launch some new product or product capabilities. So 100% that is the case for Roper in this current environment. Okay. And this is a tough one, but what percentage of this 4,100,000,000 dollars do you think you might deploy this year? That's real hard. Yes, that's really impossible to predict. We're going to do the work we always do and we certainly have the capacity, but we only do the best deals and we never feel pressured. But certainly, the balance sheet has never been stronger. So we feel good about our ability to deploy capital this year. As our my predecessor said many years ago, our discipline is only outmatched by our patients. Okay. Thank you very much. Thanks, Alex. Thank you. This concludes our question and answer session. We will now return back to Zack Moxie for any closing remarks. Thank you everyone for joining us today. We look forward to speaking with you during our next earnings call.