Earnings Call: Q4 2019

Jan 30, 2020

The Roper Technologies 4th Quarter 2019 Financial Results Conference Call will now begin. Today's conference is being recorded. I will now turn the call over to Zack Moxie. Good morning, and thank you all for joining us as we discuss the Q4 and full year financial results for Roper Technologies. 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 Conley, Vice President and Controller and Shannon O'Callaghan, Vice President of Finance. Earlier this morning, we issued a press release announcing our financial results. The press release also includes replay information for today's call. We have prepared slides to accompany today's call, which are available through the webcast and are also available on our website. Now, if you will 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 lastly, a gain on sale related to the divestiture of Gatan. And now, if you'll 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? Neil? Thanks, Zach, and good morning, everyone. As usual, we'll start with our Q4 consolidated highlights. We'll then turn to discuss our Q4 results on a segment basis. I'll then turn the call over to Rob to review our full year financial results. Then I'll walk us through the full year details and next year's outlook on a segment by segment basis, followed by our consolidated full year and Q1 2020 guidance. I'll conclude with a brief summary prior to turning the call over to your question. Next slide, please. Q4 for Roper was a very solid quarter. Revenue grew 1% organically and came in at $1,400,000,000 with positive organic growth in 3 of our 4 segments and this was largely based on the strength of our software franchises, our medical product and RF product businesses and Neptune. As a partial offset to this growth, we did see our short cycle industrial and upstream oil and gas businesses decline as expected in the quarter. However, margin performance for the quarter was really fantastic. Gross margins grew 60 basis points to 64.1 percent and EBITDA grew 4% to $518,000,000 which represented an EBITDA margin of 37%, a record for Rupert. Also in the quarter, debts grew 5% and our free cash flow of $453,000,000 was 32% of revenue. That's free cash flow of 32% of revenue for the quarter. This margin performance in the face of short cycle industrial and oil and gas headwinds is a perfect proof point regarding Roper's business model, one that is comprised of niche oriented businesses with highly variable cost structures that have aligned management teams and incentive systems that enable nimble and swift execution based on the prevailing market conditions. Performance across the enterprise was excellent this year. I would like to thank each of our business leaders and all of our employees worldwide for another record performance for Roper. Thank you. Also and importantly, we successfully completed the divestiture October of last year. In combination with the sale of the camera businesses earlier in the year and this year's $2,400,000,000 of capital deployment, our portfolio has been meaningfully improved to continue our long term cash flow compounding. Also during the Q4, we spent time with each of our businesses in person discussing their long range strategy and focusing on where each business plays, how they will compete and win and discussing market trends, customer behaviors and competitive activity. Then we talk through each business' enablement and execution of strategy and conclude with a discussion regarding each of our businesses activities regarding talent development. We are all encouraged by these plan reviews and our businesses orientation towards both product and channel opportunity to drive sustained long term and CRI accretive growth. Next slide, please. Turning to our Q4 P and L, we saw revenues increase to $1,400,000,000 which was a 2% increase and 1% on an organic basis. As mentioned on the prior slide, gross margins expanded 60 basis points to 64.1% and EBITDA margins grew 100 basis points to a record 37.0 percent in the quarter. Finally, our debts grew 5%, all in all, a very solid quarter. Next slide, please. As we turn to our 4th quarter segment results, I'll start with our Application Software segment. Revenues for the segment were $411,000,000 or plus 2 percent on an organic basis. EBITDA came in at 164,000,000 dollars or a 40.0 percent margin. We continue to see strength across the group of application software companies, especially at Aderant, Data Innovations and Strap. Deltek also had a strong quarter highlighted by continued double digit, actually high teens ACV bookings growth. Revenues for Deltek were a touch light of our expectations due to a few larger GovCon prospect opting for Deltek's staff ITAR compliant solution and a handful of perpetual opportunities sliding into 2020. As we reported for several quarters, Deltek's growth is quite balanced across our GovCon and Professional Services market and the business continues to perform exceptionally well versus the competition. The segment EBITDA margin performance for this quarter was stunning, improving 190 basis points. Great job by the teams. Now turning to our Networks segment. We saw 4th quarter revenues increase to 4 $31,000,000 or an increase of 3% on an organic basis. Importantly, our software businesses in this segment grew organically 6% in the quarter and the growth was quite broad based. As a partial offset, we saw TransCore's revenue decline a bit based on project timing associated with a few non New York City projects. For the quarter, we saw segment EBITDA margins increase 80 basis points to 45.5 percent. For our Measurement and Analytical Solutions segment, revenues increased 1% organically to $388,000,000 Growth in this segment was driven with continued gains at Neptune and broadly across our medical product businesses. Neptune did a nice job clearing the majority of the backlog associated with their newer residential static water meter and our medical products businesses continued to compete and win in the marketplace. Relative to our short cycle industrial businesses, they modestly declined in the quarter, but managed margins extremely well. And finally, as we turn to our Process Technologies segment, we saw this segment decline 6% on an organic basis with revenues of 170,000,000 dollars Margin performance was quite strong with EBITDA margins coming in at 38.7%. This quarter's segment performance was expected as we saw pressure in our upstream businesses. Also expected, CCC posted continued gains in the quarter. With that, I'll now turn the call over to our CFO to walk you through our consolidated annual results. Rob? Thanks, Neil. Good morning, everyone. So turning to Page 8 and looking at our full year income statement performance. Full year organic growth for 2019 was 3%, which was at the low end of our initial organic guidance against difficult comp of 8% organic growth in 2018. Total revenue growth was also 3%. We had a 1 point FX headwind and also the impact of the acquisition as well as the divestiture of our Scientific Imaging businesses in Gatan within the year. Our 2 segments that are primarily software, application software and network software and systems, both finished in line with our initial guidance with mid single digit organic growth for the year. For our largest product segment, Measurement and Analytical Solutions, our medical product businesses and Neptune had another very strong year of organic growth, while we did have some declines in our short cycle industrial businesses, which lowered the overall organic growth of the segment to 2% for 2019. Lastly, our smallest segment, Process Technologies, declined 4% organically for the year, in line with our initial guidance, and that was primarily due to the weakness in upstream oil and gas as we had expected. As Neil mentioned, for the Q4, we really had outstanding margin execution by our business leaders throughout 2019, driving very strong operating leverage while we're continuing to invest for future growth. If you look at the margins, gross margin for the year up 70 basis points to 63.9%. EBITDA margin increased 110 basis points, up to a record 35.8%, and that drove 7% EBITDA growth for the year. Our tax rate was lower in 2019 at about 19%. So you add all that up, we had double digit adjusted DEPS growth of 10% up to $13.05 for the year. So, really overall, a very strong year for Roper. Next slide. So looking at our full year cash flow performance, as Neil mentioned, in the Q4, we did have $453,000,000 of free cash flow, which is a very strong 32% of revenue. On a full year basis, we exceeded $1,500,000,000 which was a 5% increase over prior year. And it's worth noting, many of you are probably on our call in January 2017, just 3 years ago, when we proudly announced that we had exceeded $1,000,000,000 in cash flow for the first time, well now only 3 years later, we've eclipsed $1,500,000,000 for the first time. So at Roper, cash does remain the best measure of performance. Next slide. So speaking of cash as the best measure of performance, the next slide is a look at our multi year EBITDA growth and cash flow compounding. So if you look at the period from 2016 to 2019, both EBITDA and free cash flow This seems especially relevant as investors have been moving away from PE toward metrics closer to cash such as EV to EBITDA. However, for many companies, EBITDA does not consistently convert to free cash flow at high levels. For Roper, it absolutely does. For this period 2016 to 2019, while our free cash flow conversion to adjusted net earnings has been consistently well above 100%, 76%. This is driven mainly by our asset light business model with our low capital needs and negative working capital. So as we look forward, our working capital position will continue to become more negative as you see on the next slide and that will further increase our ability to convert EBITDA to free cash flow at very high levels. Next slide. So turning to the asset light business model slide, maybe favorite slide. Aided by the Gatan divestiture that we completed in the quarter, we ended the year at negative 5.3 percent net working capital as a percentage of revenue. This record result actually includes receivables, as you can see, close to 18%, which quite honestly is a little bit higher than we would normally like to see, driven largely by the timing of collections for some TransCore projects and some product revenue that came in late in the quarter. We certainly expect those receivables to be collected here early in 2020 and that number should improve moving forward. But even with the receivables number slightly higher, that negative 5.3% represents an 800 basis point improvement over the past 3 years, really tremendous performance in terms of working capital. And of course, the big driver of that is our deferred revenue. Deferred revenue increased nearly $350,000,000 over this period, driven by organic growth in our software businesses as well as our recent software acquisitions that come in at very attractive working capital levels. So in summary, from a working capital perspective, at a record negative 5%, we exit the year better positioned than ever before for future cash flow compounding. Next slide. So looking at the balance sheet, if you look at our full year results, if I look at December 'nineteen compared to December 'eighteen, net debt is actually down $12,000,000 Now at the same time period, GTM EBITDA is up 119,000,000 and we end the year with our gross debt to EBITDA at 2.7x and our net debt to EBITDA at 2.4x, Largely due to the proceeds from our successful Gatan divestiture, we ended the year with a total cash balance of $710,000,000 with approximately $400,000,000 in the U. S. This is not the norm for us. Now $200,000,000 of this cash will go towards paying the Gatan taxes due in April. But if you look at the cash balance, if you look at our revolver, which is now $2,500,000,000 revolver fully undrawn, very attractive capital market conditions, which we took advantage of in August, and certainly that we have the capability as we move forward to access the capital market. We are incredibly well positioned to take advantage of a very high quality pipeline of acquisition opportunities in 2020. So with that, I'll turn it back over to Neil to review our 2019 segment performance and 2020 outlook. Thanks, Rob. Let's turn to the full year 2019 highlights for our Application Software segment. For the year, revenue came in at $1,589,000,000 which represented an increase of 4% on an organic basis. And EBITDA was $636,000,000 an increase of 10% versus the prior year and EBITDA margins were 40 point 0%. Deltek turned in a great year. Revenues increased mid single digits on an organic basis and this growth was balanced across both markets, GovCon and Professional Services, as well as across the perpetual and SaaS offerings. Also during the year, Deltek's product and solution portfolio was meaningfully enhanced. On an organic basis, the company released an ITAR compliant GovCon SaaS offering and started gaining meaningful traction with its VantagePoint product, the company's newer professional services SaaS ERP solution. In addition to this organic innovation, Deltek onboarded and integrated 2 acquisitions, Computerease and Avitru, both targeted to meaningfully enhance their architectural engineering and construction offer. Aderant had a stellar year. This time last year, we talked about product innovation and Aderant, specifically about 3 newer SaaS products. Based on the market traction of these products, especially their e billing and mid loss SaaS solutions and combined with Aderant's continued ability to take share in the large loss space, Aderant posted double digit organic growth in the year. Also in the Q4, we acquired Bella Field Systems for Aderant, which enhances their SaaS solutions targeting the front office of law firms, specifically focused on professional service automation, compliance and timekeeping. As we turn to PowerPlan, we saw double digit increases in their recurring revenues in the year. These recurring revenue increases were offset by expected declines in their service revenue, which were largely tied to lease accounting product implementation sold and delivered throughout 2018. Strata continues to be a star within Rover, having tremendous organic growth gains this year again. To remind everyone, Strata is our SaaS software business that helps hospitals have better visibility to their financial operations, both costing and revenue. Strata's solutions better enable hospital executives to plan and run their hospital operation. Also in the quarter, Strata launched a new product, a new data product called Stratosphere. Today, about 25% of U. S. Hospitals' operational and financial data runs through Strata's products. Stratosphere is designed to normalize this data set and provide Stratus customers with AI insights into the data and content across various customer cohorts. It is very early days for this product, but the team is very excited to partner with our customers to fully develop the product's potential. Within our lab software business, Sunquest, our U. S. Focused business, continued to face the same competitive headwind throughout the year, which we expect to persist into 2020. However, much of this headwind was mitigated by continued organic gains at Data Innovations and Clinics. Finally, before turning to the segment's 2020 outlook, we wanted to highlight that Subor had a great year with very strong organic growth and even better cash performance. As for the outlook for this segment, we expect to see mid single digit organic revenue growth with broad based growth contributions across the segment. It's worth noting Deltek's momentum entering this year based on their recent double digit bookings increases. Next slide, please. For the year, revenue for our Network Software and Systems segment came in at 1,530,000,000 dollars which represented an increase of 5% on an organic basis. And EBITDA was $681,000,000 an increase of 17% versus prior year and EBITDA margins were an amazing 44.3%. During 2019, successfully completed the acquisitions of Foundry and iPipeline. While still early, both are off to a great start and have very solid growth contributions planned for 2020. Both management teams have welcomed the Roper approach and are excited to be part of our enterprise. On an organic basis, VAT had a truly amazing year. Their growth has been multifaceted with meaningful contributions coming from expansions to their core rate match network and growth in their rate data offering. MHA had a great year as well. Their growth was a function of continued competitive strength and near 100% customer retention, combined with adding several new contracted pharmaceutical products to their portfolio. In addition to a very solid financial year, the company executed a precedent succession in a near perfect manner. ConstructionNEXT had a good year as well. Much of 2019 was focused on launching their new integrated SaaS solution, which they did quite well. ConstructConnect has seen increased ARPU or revenue per user from new customers as these contractors are seeing more value in the integrated bid management and project estimating solution. ICE Raid was fantastic in 2019. Rhonda and her team did a tremendous job driving very strong renewals, adding several new customers and positioning the product portfolio for continued long term network expansion. Finally, TransCore's year was highlighted by their high profile and large contract win with the New York City congestion pricing infrastructure project. As we turn to the outlook for next year or this year, we see mid teens organic growth for this segment. Within this outlook, we see mid single digit plus organic growth for our network software businesses and very strong organic growth for TransCore on the back of the New York City congestion pricing project. For the Q1 of this year, we expect to see mid single digit organic growth for the segment. Excluding TransCore, we expect low single digit growth for the first quarter given a very challenging Q1 comp for MHA. Specific to Transcor, now that the New York City project details are coming more into view, we expect the majority of TransCore's growth to occur in Q2 through Q4, though the timing of project revenues will be difficult to forecast with precision given that we are in the early stages of this large New York City project. Next slide, please. For the year, revenue for our Measurement and Analytical Solutions segment came in at $1,596,000,000 which represented an increase of 2% on an organic basis. And EBITDA was $541,000,000 a decrease of 4% versus the prior year, but EBITDA grew 2%, excluding divestitures. EBITDA margins were 33.9%. For the year, we saw strong execution across our medical product businesses. In total, this group grew high single digits organically for the year. Within the medical products businesses, NDI was the star for 2019. This business grew double digits on the back of very strong adoption of both their electromagnetic and optical precision measurement and guidance solutions. Verathon growth in 2019 was driven by meaningful and successful product launch of a single use bronchoscope and new product extensions across the full GlideScope product family, both of which we introduced on this call a year ago. In addition, 2019 is the year that is marked by Verathon's reoccurring consumables revenues becoming larger than their capital based product revenues. For these reasons, this business is very well positioned for continued strong growth in 2020 and for many years after. Finally, in the Medical Products Group, CILCO grew nicely again based on market adoption of their ultrasound guidance and infection control products. Neptune for the year grew mid single digits. Importantly, Neptune saw nice increases in their residential static ultrasonic water meter products. In addition, Neptune made very nice gains in our innovation lab relative to the larger gauge commercial and industrial static meters. We continue to feel very good about how Neptune is positioned to compete and win in the marketplace. Turning to our shorter cycle and industrial businesses, these businesses performed very well in 2019 amid challenging end market conditions. As we all know, the market conditions changed meaningfully in the Q2 of the year. While these businesses did decline a bit in the year, their early recognition of the changing market conditions and their corresponding expense management was well executed. Of note and of importance, we did see some moderation of their declines in the most recent quarter. Also during the year, we successfully exited our Scientific Imaging and Gatan businesses and generated $1,200,000,000 of pre tax proceeds. As we turn to 2020, we see this segment growing mid single digit organically based on continued strength in our medical product and Neptune franchises. We further expect to see continued industrial declines in the first half and return to modest growth in the second half, largely based on easing 2H comps. Next slide, please. For the year, revenue for our Process Technologies segment came in at 653,000,000 which was a 4% organic decline for the year. EBITDA was $238,000,000 a decrease of 4% versus the prior year and EBITDA margins were 36.4%. Our upstream oil and gas businesses declined high single digits in the year due to the deteriorating marketing conditions that we've discussed throughout the year. However, our CCC business continues to perform well based on the competitive strength in winning virtually all of the new LNG construction projects. In addition, CCC's strategy of increasing their intimacy with their core customers is yielding nice system replacement opportunities. Cornell executed at a very high level throughout the year. They saw very strong growth across virtually all of their end markets with particular strength in their ad market offering. In addition, Cornell saw strength across their aftermarket parts business for much of the year. These strengths were offset by declines in their rental markets. All in all, another solid year for Cornell. Finally, we saw EBITDA margins expand across this segment. These businesses increased margins in the face of very uncertain and declining market conditions. This is possible given the very high variable cost nature of the businesses, which provide our business leaders the ability to take costs out extremely fast once weakening market conditions are observed. There is no better example of nimble execution than this. Also and to this end, we discussed how PAC and CCC had new presidents onboarded in 2019. Each of these new teams performed exactly as we would have hoped, swiftly, nimbly and with conviction. As we look to 2020, we see this segment declining mid single digits based on the continued assumption of upstream oil and gas market difficulties. However, comps do ease in the second half. Next slide please. Now turning to our 2020 full year guidance. We are establishing our 2020 full year adjusted debt guidance in the range of 13.30 to 13.60 with organic revenue growth in the range of 6% to 7%. This organic revenue growth range includes the impact of TransCore's growth associated with their New York City congestion pricing project. Excluding TransCore, organic growth for the enterprise is expected to be in the 3% to 4% range. For the full year, we expect our tax rate to be approximately 22%. For Q1, we expect adjusted DEPS to be in the range of $2.94 $3 per share. To remind everyone, last year's Q1 had a $0.41 tax benefit. Further, and as discussed earlier, we expect the majority of TransCore's growth to occur in Q2 through Q4. Next slide, please. As we look back on 2019, we're very pleased with our results and our strategic process. We continue to see strength in our niche market strategy and governance model that promotes nimble local execution. EBITDA for the year increased 7% to $1,930,000,000 and EBITDA margins increased 110 basis points to 35.8%. Adjusted DEPS increased 10% to $13.05 per share. Free cash flow increased to 1,440,000,000 dollars and was an astounding 27 percent of revenue. Specific to our portfolio of businesses, we meaningfully improved our business mix. We deployed $2,400,000,000 to our software acquisitions led by Foundry and I pipeline. We also exited our imaging and Gatan businesses. Finally, I'm very pleased with the improvements we made across the enterprise relative to talent. I feel fantastic about the team in Sarasota. In addition to the existing team, during the year, we onboarded 2 group executives, Satish and Harold. This team is executing at a very high level and I'm excited for the future. Also, there are meaningful improvements across our business units in terms of the talent offense they are deploying. We're playing the long game and I fully expect our talent focus to pay dividends in the years to come. As we turn to 2020, we are super well positioned. 1st, we expect to deliver fantastic organic growth for the year that will be broad based across our software platforms, Neptune, medical products, RF products and TransCore. The growth in these parts of our businesses will meaningfully outpace market weakness across our short cycle industrial and our oil and gas related businesses. Relative to future capital deployment, we are very offensively positioned to execute our M and A strategy. The sale of Gatan, our attractive August bond issue, dollars 0 drawn on our $2,500,000,000 revolver and a building cash balance has our balance sheet wonderfully well positioned. We continue to be very active evaluating new capital deployment ideas and our pipeline is quite full with high quality opportunities. We will continue to be very disciplined and hold true to our CRI based rentals and we are optimistic for a successful year of capital deployment. Now as we turn to your questions, I want to remind everyone that what we do is very simple. We compound cash flow by operating a portfolio of businesses that have leading positions in niche markets that have the proven ability to generate increasing cash flow as their businesses expand. We provide our business leaders with Socratic coaching about what great looks like role driving long term PRI accretive 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 for and win 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 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 help accelerate our cash flow compounding. It is these simple ideas that deliver powerful results. We appreciate your time this morning. Now let's turn the call over to your questions. Thank you. We will now go to the question and answer portion of the call. Your first question will come from Deane Dray with RBC Capital Markets. Thank you. Good morning, everyone. Hey, good morning. Good morning. Good morning. Hey, because the New York City congestion tolling project is such a high profile installation for you all, Be interested in hearing some more color on how this installation compares to the others that you've done in, let's say, London and Stockholm, Just from a sense of degree of difficulty of the installation, is there any like new software, new camera systems, or is this basically similar to what you've done in these other successful installations? Sure, Deane. So let me first start by saying the congestion pricing infrastructure in those other two cities is not us. So those are not our projects. That said, the technology that's being used in the New York City project is, for the most part, the exact same technology that's been used at any of our larger tolling infrastructure projects. It's the same core hardware, it's the same core software. Certainly, there'll be some tweaks that are needed in the software for the specific application that's being used by MTA in this instance. But the scale of this project is not actually close to the largest that was deployed. So the team feels quite confident in the technical ability to do it. Further, our customer, MTA, has been is a great partner and all the sort of the process steps to be able to construct in New York City have largely already been approved. And so really it's just down to executing the project over the course of this year. Got it. And then just some more color on the expected progression the margin progression for 2020 for the project. It looks like it's starting more into the Q2. But typically, do you see lower margin early in the project on the insulation, more upfront costs and just and then higher margin in the back quarters, just what's the expectation here, the base case? Yes, Deane, I think that's right. I think you're just getting started with the project here in the Q1. So I think you'd assume you'd have a little bit less well, we know we have a little bit less revenue recognition, probably a little bit lower margin. And as we move on throughout the year, both of those will increase quite a bit. Got it. And then just last one for me on Deltek. Could you just provide some color or context around the push outs on the perpetual deals? You said it got pushed into 2020. Is this Q1, Q2? And just what are some color around the customer decisions there? Sure. So a couple of things on Deltek. We talked about how their bookings on an ACV basis were quite strong all year with strength ending the year in the high teens in Q4. So the competing and winning in the marketplace has remained robust throughout the year. Specific to the revenue recognition, it's really a combination of 2 things here in Q4. The one is the company has announced its intention to release an ITAR compliance version of their cost point product, which is the GovCon ERP product, which really essentially enables that product to be hosted in the cloud and deployed in a SaaS environment. So there are a couple of deals signed in Q4 taking advantage of that offering. And so that's a great trend for the business because the recurring revenue will increase quite meaningfully as that becomes more it gives more traction. That combined with the fact that a couple a handful of meaningfully sized perpetual deals pushed. And so if in the hypothetical world, if the ITAR compliant SaaS product was not there, likely these customers would have bought perpetual version and then Deltek's revenue would have been right in line. So it's really a combination of the SaaS offering gaining traction and a couple of deals pushing into the 1st or second quarter next year. Thank you. You're welcome. And your next question will come from Christopher Glynn with Oppenheimer. Thank you. Good morning. As you're positioning for substantial allocation, as you referenced a few times for this year. Just curious, look back at a few of the larger ones, iPipeline, Foundry, PowerPlan, around management retention, other key metrics on onboarding and anything in particular around those recent deals that's evolving, how you evaluate trade offs with new opportunities as your kind of shopping criteria evolves over time? So, the criteria for capital deployment really has not changed that much. It's always been rooted in finding businesses that have better cash returns than our existing over the arc of 20 years that's gone from industrial products to medical products to more software. The second criteria is always having a management team that is fundamentally focused on building the business versus transacting. And then finally, businesses that share the characteristics that all 45 of our businesses do, right, niche, leadership position, ability to invest in themselves to grow, high recurring revenues, high gross margins, etcetera. So those criteria have not changed at all and won't change going forward. The recent acquisitions that you referenced, certainly the ones really from Deltek and Strutconnect, Aderant PowerPlan, Foundry, iPipeline, the larger ones from 2016 forward, have met all those criteria and the businesses are performing at or maybe modestly above our initial expectations. Okay. And then just curious in the pipeline, the more actionable end of it as you see it, what's kind of the mix between bolt ons versus platform opportunities? Yes, the vast majority of our deployment will be on platform ideas. Occasionally, we'll do bolt ons or tuck ins as they strategically warrant in the business. It's not a budget. If you just look over our arc of time, about 10% of the capital deployed has been in bolt ons, but it's just been a byproduct of how it's unfolded. It's certainly not a budget or a planning number going forward. But Mike, it will be somewhere in that plus or minus ballpark. Got you. Thank you. You're welcome. And your next question will come from Robert McCarthy with Stephens. Good morning, everyone. The first question I have is free cash flow as a percentage of sales for Process Technologies. Do you happen to have that metric and that percentage? We don't. The free cash flow number is a corporate number with all the corporate interest tax, etcetera. So we don't look at it in that way. I would say the business level cash flow, so if you look at sort of the EBITDA to revenue, subtracting their CapEx is pretty darn close to their EBITDA because the CapEx is not a big number. And then from a working capital perspective, there's not huge movements there. So it's still a very high number. I can't give you an exact free cash flow number for that. Okay. But it screens very well on free cash flow by definition then. That's absolutely. That's absolutely. Okay. Fair point. And then if you look at your outlook excluding the drag from process, what do you think you would have grown this year organically? So process for the year was minus 4%. So you're talking 12% of the company. So we would add in probably a point or 2 just doing the math on top of my head. And then in 2020, probably something similar or even higher, right? That's right. Yes. Okay. And then moving on to TransCore, from that perspective, could you just remind us to level set our expectations in the out years? How you're thinking about the initial deployment revenue and then potentially the step down from there, just so we get our modeling directionally correct in the out years? Yes. So there's the 200 or so incremental revenue this year and then there will be some recurring from the project, probably in the $50,000,000 to $60,000,000 range into next year and then into the next several years. So that would then lead the rest to TransCore and a lot of other projects we're working on to pick up some of that slack, which they're working hard on already today. Right. And then last question is really around M and A. Obviously, I think Danaher announced today decent results after a pre announcement and then I think rebaseline for even more favorable financing environment for underwriting one of the deals. So clearly, a pretty attractive environment, which you alluded to on the call in terms of the capital markets and debt for funding these deals. And you talked about the Mission bolt ons. I mean, you look at Neptune, good growth, a great franchise. There is a sense that smart metering, while albeit at a low rate of growth, maybe in the low single digits, could be very sustainable for a long period of time. And there is some sense that transmission distribution spending could be entering a higher level of visible spending just given PG and E and some of the return profile at AMI. Is it possible for you guys to think about building around that more in software? Is the utility end market an attractive space? Or how would you think about that? So Neptune, as you know, is 100% focused in the water meter business and that's where they're going to be. They're not going to stray to gas or electric meters and more importantly, it's really water meters in North America where pressure rates are higher than the rest of the world. So it's a pretty complicated device metering application, both mechanical and static ultrasonic. So the company is going to stay focused there. That said, the company now for at least 3 years has been investing in its software applications and capability because now the readers are being read more frequently. And so there's more use cases that are being developed about what you do with that data around leak detection or shutoff or whatever our customers asked for, Neptune is working to build. The shutoff is a hard case, but leak detection is a good case, for instance, in terms of value to the end user. So to that end, they opened an innovation center 3 years or so ago in Atlanta to attract better talent than they could in their existing location in more rural Alabama. So it's been a part of the strategy and I suspect it will remain part of the strategy for quite some time. I don't want to wear out my welcome. Thanks for the questions. Thank you. Your next question will come from Steve Tusa with JPMorgan. Hey guys, good morning. Hey, good morning, Steve. You mentioned PowerPlan saw some solid growth in a part of its business. What did ultimately PowerPlan grow for the year in total? Yes, PowerPlan for the year was down a little bit. We think it will be up in 2020, full year including the first quarter. Okay. And then ConstructConnect as well, did that grow this year? It did. Yes, it grew in 2019. Is that like low singles or something like that or? Correct. Yes, low singles. Okay. And then lastly, just for modeling purposes, I know you have the Gatan sale headwind on revenue next year. What are the what's the carryover acquisition related tailwind that we should add to kind of that organic growth outlook on a reported basis? Yes. So I've got so from an EBITDA standpoint, there's about $70,000,000 of EBITDA from the acquisitions that's an add and then you take away about 50 of EBITDA from Gatan. So it's a net around 20 of EBITDA. And then on sales? Yes. On sales, it's going to be I don't have the exact number. I'll have to follow-up with you on that, but it's going to be nets to basically 0. Yes, it nets about 0 on revenue. 0 carryover with including Gatan? Yes, because the Gatan is lower margin. Okay. And then sorry, one last one. Just on Q1 organic, you mentioned that there is some TransCore impact, maybe you talked about Q1 growth in that segment ex TransCore. I guess ex TransCore in the Q1, is it 2% to 3%, 1% to 2% Or is it not even that like meaningful on an enterprise basis? It's not too meaningful. There's some incremental revenue from TransCore there in the Q1, but it's not a big add to the Q1. And as I think you know, Q1 last year was a 6% organic. So there really it's just a matter of the comps. If you look at the software businesses, for example, it's just the comps is the only difference as we move forward throughout the year. Got it. Okay. Thanks a lot. Appreciate it. Thanks. Your next question will come from Richard Eastman with Baird. Just could you possibly just give us some commentary around the profit associated with the MTA contract? And what might be the cadence there? I mean, is that a just an EBIT or EBITDA contribution from that contract? And is it does it scale up meaningfully, as the revenue grows there? Or is just some feel for what that could add so I can get kind of a sense per share on a quarterly basis given our revenue assumptions? Yes. So I think as you're aware, the TransCore business margin is below the Roper average. And so this business is going to be in that range. And I think the margins do improve after the Q1 moving forward. Exactly how linear that's going to be is difficult to predict, as Neil mentioned, given what goes on with the project, but it certainly will get a little bit better after the Q1 and it's probably going to be relatively consistent throughout the rest of the year as our best estimate as we sit here today. So, okay. So it comes in at TransCore's average contribution? Correct. That's correct. Okay. That's correct. And it will be a little more profitable in the back 3 quarters in the Q1, but it's not something where it's breakeven in Q1, 10% Q2 and 40% in Q4. It's not anything like that at all. And you referenced this just a couple of minutes ago, I think somebody asked a similar question around. So 200,000,000 is still the right expectation around year 1 this year. And then, I think on a previous call, it was maybe $50,000,000 dollars to finish off the project in year 2, but then the other $250,000,000 of the contract essentially was years 3 to 7 on the service contract. That's still roughly the schedule? Yes, that's correct. Yes. So it's like what we said 50 recurring after 2020 goes on for 5 years and we would hope it would go on many years after that as you get a chance to renew the maintenance part. Right. Okay. And then just a second follow-up question. Around Roper's core EBITDA, fantastic year from a margin perspective for the full 'nineteen. The puts and takes here maybe a little bit around MTA contract as well as your commentary around a minus mid single digit growth for the ProcessTech piece of the business in 2020. What might be a reasonable assumption in basis points for targeted EBITDA margin expansion for Roper in 'twenty? Would a reasonable target be 50 or? Yes. I think embedded in our initial guidance as it normally is, is that EBITDA margins will be roughly flat year over year. There is maybe a little bit of an increase, but certainly the TransCore project is a negative. And then some declines in those more cyclical businesses is generally a negative to your margin. And the flip side of that is excellent growth of the software businesses, which is a net positive. And if you add all those things together, our guidance model has the EBITDA margins about flat year over year and we'll work a little bit better than that. Okay. And then if you mind, could I just sneak one more in, please? Just the transportation business within network software, DAT, the freight matching business is just another tremendous year in a tough fairly tough trucking industry, I guess, if you will. Is that a countercyclical business as things get tough in the trucking industry? We're looking to optimize our assets there by matching freight. And just maybe explain that business a little bit and then maybe what the prospects are for 2020? Sure. I'll take that one, Rick. So first, DAT, let's define what they are. It's whole truckload, spot market, North America, freight match, right? So it is a niche industry. There's captive, there's contracted and there's spot markets. What we have observed here over the last really 2 or 3 years with DAT is their network strength, right, it's a their relative market share is 3 ish versus their competitor, right. So their network is 3 times the size of their next largest competitor. That network strength has proven to play well when the trucking markets are super hot and when they weaken. So a step back from that, why is that, right? So if you're a carrier and it is a very hot market, the carrier is going to want to be very selective in their routes. Maybe they're going from Kansas City to Chicago and they want to go right back to Kansas City. They're going to be a network participant to be able to select specifically what they want. So you see active participation and then conversely, the brokers are looking for the capacity. When things lighten up, the truckers are looking for work, right? So they become less selective. And so the value proposition of participating in the network on both sides of the network in both market conditions tends to be quite robust. Okay. And outlook for 'twenty, I mean, do we kind of sustain the current growth rate or do we settle down? It seems around the fringes, there's more competition in that space that you guys have maneuvered quite well there. Yes, there really isn't more competition in the freight matching space. That said, the company has done so well for a number of years. We do expect the growth to moderate a bit in 2020. Just based on the activity in the market is the only thing driving that. That said, we expected this business to moderate for the last few years as well and they'll take longer next week. Okay, very good. Thank you. Yes. And your next question will come from Julian Mitchell with Barclays. Thanks a lot. Maybe just trying to keep my questions a little briefer. Maybe starting with the software as a service model. You spent some time in the prepared remarks discussing that. Just wondered, with that strength in Q4, what's the overall scale of your SaaS business now within Roper? And relating to the profitability on that, I think in Q2, you had a SaaS kind of mix surge and that had hurt margins in application software. Q4, it seems like SaaS did very well again, maybe contributing positively to the margin mix. So maybe help us understand the margin dynamics as that SaaS share of sales expands? Yes. So we're still about even in between the SaaS revenue and the traditional on prem license and maintenance revenue within our software businesses. And from a margin perspective, there really isn't that large of a difference in terms of EBITDA margin between those two business models for our businesses. Where the variability happens, as Neil mentioned, is when you get a new license win in a quarter, all that revenue is recognized immediately. If you get a new SaaS win in a quarter, that revenue is recognized over the next 12 months and beyond. So that's the difference. From a margin standpoint, there isn't a lot of change within the two models. Yes, I think the 2Q point you're referencing is Zeltec had 2 very large perpetual deals in 2Q of 2018, which drove outside margin and that very specific. So it's very hard comp coming over in 2Q of 'nineteen, if my memory serves correct. Thank you. And then maybe for Neil. You mentioned talent development in your prepared remarks. Maybe expand a little bit what you're hoping to see from those group executive roles this year? And also, I think a bit more of a push on organic growth is underway at Roper. In that context, maybe just if you could highlight what the R and D spending was in 2019. I know we'll see it in the K, but maybe how you see the cadence of R and D developing. Sure. All right. These are short questions, Julian. I'd hate to hear a long one. So I'll try to hit the talent, the group, the organic and the R and D. So I'll hit the organic first. So we said that it's my intention, objective to position the company, supporting my businesses to execute our organic growth strategy that's been a little bit better in the past. That said, this is going to take time because we want to do it structurally, we want to do it, we're playing the long game and importantly, we're going to only do it to the extent that CRI accretive. And so this is going to take a long time. And success by the way is measured by 50 or 100 basis points more of organic growth, not doubling the organic growth profile, because these businesses are built for defensibility, yet we haven't met a Roper business that's optimized its organic growth algorithm. And so we believe there's long term, I'll emphasize long term potential there. Now we're going to do that through the group executives engaging with our teams principally on three things, how to develop strategy, how to execute strategy and how to run a talent offense. And so we can spend more time later sort of unpacking that because it's a passion of ours here to do that. But we believe sort of the right strategy or the right strategic enablement with putting the right field right team on the field will yield great results for our shareholders over a long market time. Specific to your R and D spend, in 2020 for the software businesses, but basically both software segments, we're planning on 70 or 80 basis points more spend in R and D. So when you multiply that through, it's $20,000,000 or $25,000,000 of incremental spend in R and D relative to revenue. And that sort of spread across where the best opportunities are in each one of the businesses. And that we'd expect that pace to I can't tell you if it's that exact number of basis points each year, but I expect that number to continue to increase over time as it naturally does in software businesses. And that is embedded in everything Rob mentioned earlier about margins being flat for the year and margins and everything he talked about. So that's my view on your question and happy to follow-up as needed later. Great. Thank you. Your next question will come from Joe Ritchie with Goldman Sachs. Thanks. Good morning, everyone. Good morning, Joe. So Neil, you mentioned the headwinds in Sunquest continuing into 2020. Can you just elaborate a little bit more on whether what kind of impact it's going to have to 2020? And specifically whether what you're doing to mitigate some of that within SoundQuest? Yes. So the headwind is the same headwind the business has experienced for quite some time. It is unfortunately like slow motion and tectonically playing out because our customers, when they make a decision to leave 3 years ago, it takes them 3 years to leave. And so there's no new information that's just taking this time to play out. The mitigating fact is we've decided is we continue to invest in the products of this business, right. So we've invested in internationalization of the product. We were investing in the molecular genetic capabilities. We're investing in the integration of the fluid tissue and genetic molecular labs, and that continues and will continue. And so we just have to let this one competitive headwind play itself out over the course of the next year. Okay, got it. And then just a real quick one. On CompuEs and iPipeline, the growth expected for 2020, is it supposed to be similar to the organic growth for the rest of the segment? Yes. Well, yes, I think when we announced iPipeline, we felt really good about that being a high single digit organic grower and nothing has changed to our opinion on that. And CapRease? Yes, that's a smaller add on to Deltek, and it's probably mid single digit organic grower, maybe better. Next question will come from Jeff Sprague with Vertical Research. Thank you. Good morning. I promise I will be brief. Just on TransCore, back to that, I just want to understand how the cash flow actually works on the project. Do you expect to receive ratable cash flow as you're doing the work? Or would this be a very back end loaded and maybe even kind of a 2021 kind of cash event for the business? That sounds like the same questions we asked our management team during this project run out. So we do feel the cash flows to be pretty well aligned with our earnings on the project. We've worked hard with that. We have a great partner that's working with us to make sure that happens. And so we do feel good about the cash coming in sort of in line with the EBITDA. Now certainly you could see some payments in 2021 after the project has ended. So we'll see what happens, but we're working hard to make sure the comes in on time. And just on Neptune, is there anything programmatic going on in 2020, big localities or anything that's driving the business or it's just kind of more steady as she goes kind of penetration push? Steady as she goes. Neptune's strategy has been actually focused on the medium and smaller municipalities. That's what their strength has been and will continue to be. Next question will come from Joe Giordano with Cowen. Good morning. Good morning. Just on TransCore, what's the risk that that deal bleeds into 'twenty one that the deployment actually takes longer or it gets started late? It's already started. It's already started, yes. So the hey, it's a big project It's got some complexity associated with it. So it certainly has the possibility of some of it bleeds into 2021. That said, let me be very clear, our customer has told us the infrastructure needs to be ready by December 31, 2020. And that's the project plan, that's the resources that are being deployed because that will then in turn enable the MTA to decide when and how they want to introduce the tolling. So our part of the project is to be completed by the end of the year for our customers' demand. Okay, fair enough. And then how should we think about absent forward M and A that I'm sure you'll do, but if we just strip that out, how do we think about the forward margin opportunity in application and network? Like how much of a drag on margins are the current new relatively new business in there? And just how should we think about floor opportunity to expand from already pretty high levels? Yes. So I wouldn't view the new businesses as a drag at all. I mean, they're all generally in line with the EBITDA margins, right? Yes. I'm always speaking in terms of EBITDA margins and Shannon is correct me, somebody correct me that the Analyst Clinic in of OP a lot of time, but from an EBITDA margin perspective, very consistent and there's no reason why they should go backwards. As Neil mentioned, I mean, we're always spending a lot in R and D. We're growing R and D and it's easy to do that when you have businesses that come in at high contribution margins. There's plenty of dollars to invest in R and D and talent and people and everything, and that's really how these businesses grow. So we're continuing to do that. So I wouldn't see any sort of a margin headwind for these businesses anytime into the future. How should we think about them expanding, like just normal kind of just capturing an incremental on the growth, is there like Yes, I think it's incremental on the growth, right. I mean, when you have EBITDA margin in that 40% range, that's a very healthy software business that continually invests to grow. So I think that if it expands, great, but it's really about growing more at current margins. Yes, fair enough. Thanks, guys. Yes. And your next question will come from Robert McCarthy with Stephens. My questions have been answered. Thank you. You're welcome. And your next question will come from Steve Tusa with JPMorgan. Hey, guys. Sorry, just a quick follow-up. Anything moving around on like cash conversion? I know that with the TransCore deal coming through, maybe it's a bit of a different cash profile early on. Anything any dynamics that you're actually aware of for cash conversion or cash margin in 2020? Yes. Thanks Steve for the question. I was preparing for it. I'm glad you got that gone and asked. Yes, no, we definitely feel free cash flow. Somebody pinged me and just wanted to ask about it. So I usually have follow ups, but here you go. You paved the day. Yes. No, I think if you look at our overall guide, free cash flow should grow double digits based on our guide in 2020. And then obviously, as we do acquisitions, that should be further accretive to that. So that's sort of how we see it as of today. So no, there's no headwinds on cash flow. I guess your free cash flow this year a little bit less than that. What is the is there anything unique kind of year to year that drives an acceleration of that? Yes. So what bounces around, right, so if you're looking at conversion to adjusted net earnings, what bounces around the most is tax payments and cash tax versus GAAP tax. And so that's been a headwind the last couple of years with a lot more cash tax payments. And also, as I mentioned in the pre in the scripted comments around TransCore, didn't have a very good cash year around some projects last year and then some of the product businesses weren't great. So I think as we sit from a WORM Capital standpoint, I think that we've got some additional room to improve. And so then that will be beneficial to cash flow next year and beyond. Everything else is very structural from a high cash conversion standpoint. Okay, great. Thanks a lot. Appreciate it. Thanks, Judy. Thank you. And that will end our question and answer session for this call. We now return back to management for closing remarks. Thank you, everyone, for joining us today. We look forward to speaking with you during our next earnings call. That does conclude our call for today. Thank you for your participation. You may now disconnect.