Q1 2020 Earnings Call

[noise], So wolpert technologies first quarter 2020 financial results conference calls on that will begin.

I'll now turn the call over to Mr. Soc marks <unk> Vice President Investor Relations. Please go ahead.

But.

Turning thank you all for joining us as we discuss the first quarter financial results for Roper technologies, We hope everyone is being safe and healthy.

Joining me on the call this morning, and Johan President and Chief Executive Officer Rock Creek, Chief Executive Vice President and Chief Financial Officer, Jason Connolly, Vice President 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 are prepared slides to accompany todays call, which are available through the web casts and are also available on our website now if you'll please turn to slide to begin with our safe Harbor statement. During today's call. We will make forward looking statements, which are subject to risks and uncertainties, including the impact of the co. Good 19 pandemic a description can be found on this page in our press release.

And then or a SEC filings you said listening to today's call in the context about information.

And now please turn to slide three today, we will discuss our results for the quarter, primarily on an adjusted non-GAAP basis reconciliations between GAAP and adjusted measures can be found in our press release any appendixes. This presentation on our website.

For the first quarter the difference between our GAAP results and adjusted results consists of the following items amortization of acquisition related intangible assets and purchase accounting adjustments to acquire deferred revenue and now if you. Please turn to slide four I'll hand, the call over to Neil after our prepared remarks, we'll take questions from our telephone participants Neil.

Thanks, Zack and good morning, everyone first and most importantly, we hope that everyone that is joining me. This morning, and your families are staying safe and aren't good health.

I had in mind or first quarter was quite good 4% organic revenue growth.

Banding gross and EBITDA margins and very strong cash flow coming in at 13% above last year.

After a brief run through Q1 result.

Turning to colder wrong and he will discuss our you know our balance sheet and our cash position.

We find ourselves into very fortunate position to have $1 billion of cash on the balance sheet and a completely undrawn two and a half billion dollar revolver.

Then I'll turn to discuss our operational status and our response to the Kobin like teams situation.

This then all of our product businesses are deemed essential and all our nonproduction workforce are being productive working remotely from home.

As we turn to our second discussion the majority of her comments will focus on a detailed view that's how our business isn't business models should perform through the current situation.

The impacts were seeing across our diverse set of businesses range from a pause and new license sales for some of our high recurring revenue software businesses to a positive spike in demand for verizons critical medical products, the sharp declines in our industrial and process technology businesses.

Following this will break down our Q2 and full year organic revenue guidance.

In the midst of this global economic shutdown, we're guiding our full year organic revenues to be plus or minus flat.

This is a remarkable testament to the durability of our business model.

During the discussion of our guidance, we outline for you the assumptions that would cause our earnings to be on the low or high end of our guidance range.

I'll, then turn to discuss our outlook for continued capital deployment and with a summary of a few of the rubber company that are on the frontline responding to the Coca 19 bars. Finally, we'll turn to your questions.

Now, let's turn to a brief run through our Q1 results next slide please.

Q1 was quite good for us our businesses continue to work hard to execute strategy in town Offences and Q1 is another good data point that what we're doing is taking hold.

Revenue grew 4% organically with solid organic growth in three of our four segments.

Gross margins EBITDA margins expanded nicely and Deps came in at $3.05, a nickel above our guidance range.

And as we said for nearly 20 years Tas is the best performance measure with free cash flow being up 13% in the quarter to 353 million, which was 26% of revenue and 76% of EBITDA.

Now I'll turn the corner off to discuss our detailed financial performance.

Thanks, Neil Good morning, everyone. It's really great to have the opportunity to connect with all of you today.

Turning to page six Q1 income statement metrics as Neal mentioned organic growth was a very solid 4%, which was better than we had expected coming into the quarter. We did have positive organic growth in three of the four segments led by network software and systems at plus nine an application software at plus five.

Once again really strong margin execution by our business leaders in the quarter driving strong operating leverage while continuing to invest for future growth gross margin expanded 50 basis points to 63.5% EBITDA margin also expanded 50 basis points to a record 34.5% driving very fell 7% EBITDA growth.

For the quarter earnings before taxes increased 7% of 408 million as a reminder, last year, we had a $43 million discrete tax item in Q1, resulting in a 41 cents benefit which drove our tax rate last year below 10%. This year. Our Q1 tax rate was a more normal 21%, which resulted in depth at $3 and five.

That's which was well above our guidance range as Neal mentioned, so in summary, a really strong operational quarter for Roper and really great execution by our business leaders next slide.

Turning to cash flow Q1, operating cash flow 364 million was a 10% increase versus prior year Q1 free cash flow 353 million, a 13% increase versus prior year. So looking on the right you can see over the past few years, our Q1 free cash flows compound in a very strong 14%.

So as Roper at Roper at Neal said and and happy about that as you know hundreds of times over the past two decades, we really do believe cash is the best measure performance and those are really another great cash corridor.

We've consistently convert our EBITDA free cash flow at a rate well above 70% over the past several years as you can see 76% conversion in Q1, and we certainly expect that strong cash conversion to continue moving forward next life.

So turning to page eight asset light business model. Once again, we exited the quarter with negative net working capital negative 4.4% that was aided by consistently strong working capital management across the enterprise and increasing deferred revenue across our portfolio of niche market leading software businesses.

Well first focus on cash flow working capital will be especially important as we work our way through the pandemic, while we certainly could see some negatives short term impact from delayed payments in some effected end markets such as acute healthcare, we are well positioned overall given the durable end markets. We serve our large deferred revenue balance gives us a very high recurring revenue base.

Base limiting earnings volatility on a cash basis, our renewals are spread across the independent businesses and rather evenly throughout the calendar year limiting any impact.

Attrition on our cash conversion.

So in closing, we expect our working capital to remain negative and our strong cash conversion to continue in 2020 and beyond next slide.

About our outlook and the steps we've taken it roper to prepare ourselves to continue to execute on our discipline capitals appointment strategy insured <unk> liquidity position and balance sheet are very strong. We currently have over a billion dollars a cash on hand, and our 2.5 billion dollar revolving credit facility remains fully on drawn.

A reminder, we divested argued tan business in the fourth quarter and the cash proceeds remain on our balance sheet. We we do have approximately 200 million of cash taxes, yet to be paid on the catan divestiture and that payment is now not due until July with the postponement attacks day.

So in summary at the end of the corridor gross debt that at 5.3 billion against nearly 2 billion of trailing either very gross debt to either ratio of 2.7 times, however, taking into account or unusually large cash balance net debt was only 4.3 billion.

Next slide.

[noise] to turn to page 10 wanted to take a moment really during this unprecedented time and review we think what we think are the many benefits of ropers unique business model. The diversification, we have across 45 independent high margin asset light businesses operating across made different niches result.

Excellent credit profile, we are not dependent on specific and markets and almost nothing is centralized limiting the overall financial impact of any facility closures are industry specific economic shocks. So aided by our business model and diversification. We are confident the rubber enterprise will continue to generate high levels of.

Cash flow in nearly all conceivable macroeconomic scenarios as mentioned earlier, we currently have over a billion dollars of cash on our balance sheet, which as you. All know is a very unusual.

Unusually high number for over I think longtime shareholders realize how unusual. This is typically we hold a limited amount of cash and draw on our revolver to fund acquisitions. This is however, fortunate timing given the pandemic and something you want to take advantage of with an eye toward future cash flow compounding. So over the last couple of weeks, we initiated and completed.

Amendment process with 100% support from our Bancgroup to modify our gross that even tech covenant to receive credit for this cash.

It was fascinating as Shannon and I went to the process with the banks.

One of the only companies that come to the amendment process as a purely offensive.

This process really wasn't an eye opener to just how unique our company is my thanks to Shannon and also are high quality Bank group for all the work to complete. This this amendment quickly unsuccessfully so under the new calculation our net debt. If they're ratio currently sits at 2.1 times, which is about a half a turn lower that are the old calculation.

Compared to the covenant of 3.5, so in summary, we remain very well position with significant financial capacity to take advantage of our large pipeline of high quality acquisition opportunities. So without I'll turn it back over to Neil Thanks, Rob.

It's worth underscoring the strength of her balance sheet and borrowing capacity also a great job by Robin Shannon.

Thing to him that's covenant. This further strengthens our capital employment capacity and the ability to play often ends at the appropriate time.

Also thinks toward Lindeen group.

Now, let's turn to how we're responding operationally the coven 19.

First from an employee health perspective, we are blessed to have very few coven 19 cases, each of which has recovered or his recovery.

From an operational readiness perspective, we're also fortunate.

All over businesses with manufacturing facilities have been deemed to central every main operational delivering the vital products that are customers need during this time.

The remainder of our workforce has successfully transition to working from home.

Or portfolio of this businesses are characterized by having meaningfully reduce typical exposure having high levels recording revenues low acid intensity low levels are fixed costs and high levels of operating cash flow.

We operate this portfolio in a highly centralized operating structure that enables rapid nimble execution.

Or locally driven bottoms up approached a business planning performs except certainly well any environment and clearly this is unprecedented one.

Given this there have not been any top down mandates are mandatory targets, but rather a few guiding principles to consider an incentive system that for most investments in long term organic growth.

We did after businesses to assess the short and medium term impacted or the man drivers and take a sober view a beach.

Based on this each business deploy appropriate costs countermeasures with emphasis on three items first each business work to manage their margins appropriately would always vigilant management of cash flow.

Second.

Each business targeted mostly temporary cost countermeasures and third each business continues to make no regrets investments in innovation and talent all of which have a mind's eye towards an offensive oriented posture upon recovery.

Also important and often under discussed his or direct channel access and the vast majority of our company's rarely Rover of a business that relies on third parties or distributors for market access.

Given this we remain engaged with our customers in good times and that we learn.

Adapt most importantly, we stay connected.

Typically enables markets, you're capturing the difficult times and accelerated benefits during the recovery cycle.

And all times or leaders keep an intense focus on cash.

Having worked through this process over the last several weeks I'm incredibly proud of how're leaders have reacted and managed through the current situation.

I'd like to think each and every one for the work hard decision and difficult conversations you have had to endure.

Thank you.

As we turned to her first quarter segment results I'll start with her application software segment briefly equipped run through a g., one which was quite strong.

Revenues were 405 million, 5% on on organic basis, even always 156 million or 38.6% a rabbit.

The corner was highlighted by continued straight that deltec for consistent factors strengthen goedken execution.

Swims at the enterprise level uncertain professional service markets and continued cloud or staff adoption.

However, based on the impact of C. 19, sheltering <unk> did see a slowing in perpetual deal activity during the last couple of weeks and a quarter.

Power plant was also strong in the quarter the sale five one build that we discussed in part quarters executed nicely.

Seaboard Estrada, we're strong and seaboard his case do their integrated security and subscription based software sold into higher Ed markets and for strata much of the same continued solid sales execution and adoption of their hospital based cost accounting have financial planning solutions.

As we turn to outlook considerations, we want to provide an overview of the business model drivers for the businesses in this segment.

To start.

About 10% of the revenues into segment or derived from perpetual software licenses.

Within this fucker revenue new sales are derived Prince way from three sources new logos.

Add on product sales to existing customers and finally seat or volume expansions.

Given the current economic outlook, we expect the vast majority of new logo sales to meaningfully slow down for the balance of year.

However, we do expect some volume an add on product bookings to continue.

Typically during economic slowdown some level of selling activity does occur within this bucket of license revenue.

These types of projects are smaller dollar and sold and delivered remotely.

The next bucket around when these are tied to service delivery.

Service revenues arise from two sources, new product and limitations or existing product upgrades.

The first bucket is tied directly to new license sales, either new logos or add ons.

The second Buffett or services upgrade run independent of new license activity.

Services book of business runs off a six to 12 month backlog to date. The vast majority number service projects continue, albeit at a slower pace given both our customers and our delivering teams are adjusting to working remotely.

We expect this revenue stream to be minimally impacted during the course of here.

Finally, the remaining 70% of revenue is tied to reoccurring maintenance or fast paced revenues.

Our company and this segment service in markets that are expected to perform relatively well versed abroad or economy government contractors law firms healthcare and education.

Given that we mostly sort of larger enterprises and less affected and Marcus we do expect retention rates to remain high.

Now, let's turn to the next slide to discuss some specific business impacts.

Or application software businesses.

Proven to be extremely durable and consistent organic growers and will continue to do so once customer access and activities again to come back on line.

However, environment, where we essentially whereas central essentially all businesses on a global basis are closed these businesses will be modestly impacted.

As we look at Deltec, specifically, we expect the government contractor market to continue to perform well newly generation and pipeline build have continued during the last few weeks.

On the other hand, we do expect a slowdown in new logo bookings and their professional service markets as the companies they serve armed meaningfully impacted segments and tends to be S.M.D. sized.

P S revenue and retention should perform well across both job Con and professional service markets.

Turning turning to Aderant power plant and seaboard.

We believe these businesses will be impacted in a similar fashion.

We expect some net new logo bookings a slow for the next few quarters as these businesses tend to rely on face to face interactions to drive enterprise level new logo sales.

These activities will likely be limited for the remainder of 2020.

Smaller add on tight product sales are expected to maintain at some level I'll be at a lower level of sales activity.

All three of these businesses have done a fantastic job of shifting their implementation and service activities to be remotely delivered.

Recurring revenue retention should perform well.

As we look at our for businesses, who sell into the hospital setting we're experiencing unexpected continued to experience limited physical access to hospitals.

Also given the financial duress, most us health systems are facing we expect hospital capital spending to be meaningfully down and 2020.

That said labs are extremely busy improving their value to the world over right now our teams have been busy enabling all the new Cobra 19 test and will continue to do so.

As a directory is all the coven 19, the Sunquest project in Queens, one has been cancelled.

Strata should continue to grow I'll be at a slower pace.

We expect continued strong demand for strata solution, which all hospitals identify and manage costs and helped model and execute financial plans.

Finally, we do anticipate a possible acceleration too the cloud on the back end of the current environment.

Customers have had to implement there'd be our plans, they're likely return and blood an increased appetite to off load remote I.T. management of their core systems time will tell.

Next slide please.

Turning to our network segment.

Q1 revenues grew 9% organically to 441 million.

<unk> was 185 million or 42% or revenue.

Quarter Indeed.

Trans course work for the congestion pricing infrastructure project continued and the quarter as it has been been deemed essential work by the state of New York.

Network soccer with strong and highlighted my I trade and D.A.T.

Iterating through high single digits on the back of strong renewal and cross L. activity.

T continued to expand their network and successfully completed the market launch of rate forecasting and book it now capabilities.

Finally are rough ideas did very well due to their identity management solutions.

For their segments approximately 60% of the revenues are driven by a network software businesses, 85% of which are occurring.

These businesses have very strong network effects, and generally serve less impact and markets such as health care life insurance logistics food and media enter media and entertainment.

Given the poor software functionalities value and strong network benefits, we expect retention rates to hold up well across these businesses.

Relative to Transcore as mentioned, the New York City congestion pricing infrastructure project continues and is deemed essential.

Over the course of the last couple of weeks.

New York State and the M.T.A. budgets move the congestion pricing total revenue entity operating budget versus the M.T.A. capital budget.

Our view is that this modestly increases the urgency of this project.

All this being said we have push the project to the right a bit moving approximately 25 million in the early 2021.

For the balance of Transcore project activity continues and we'll continue but we do expect some projects to be pushed into 2021.

Over the longer orchid time, the business case for all electronic polling may accelerate as a result of the current health pandemic essentially human to human contact paying a toll maybe greatly reduced if not eliminated transcore will be ready to execute this demand driver accelerates.

The next slide please.

Turning to some companies specific impacts for the softer businesses and our network segment first R.D.A.T. and Constructconnect.

Both of these businesses have subscription based revenue models.

Both have some exposure to small and medium sized businesses, but also work directly with large enterprises.

Both businesses have network benefits that typically exhibit counter cyclical behavior.

For example, and specific to construct connect the corn product. They lead they project lead identification source as more contractors look for a few our projects they tend to enter a network to source and bid for new project business.

In the first three weeks in April is encouraging to see the Constructconnect network expand modestly.

For D.A.T. brokers that connected to the network and take advantage of lower spot rates first contracted rates and carrier stay connected to find load volumes.

I trade is quite busy connecting food retailers with an increasing number of grow or shippers, we expect minimal disruption here.

I pipeline has been super active helping their life insurance customers adapt their products and their underwriting prophecies in this environment.

Outlook remain stable here as well.

Relative to foundry content creation continues.

There's a large pipeline post production work is currently being processed as well as continued new animation content creation.

As a potential earlier read for Western Productions Chinese live action has restarted on a limited basis.

Finally, our alternate site healthcare businesses will perform relatively well, but are not spare from some level of impact.

S.H.P. and Softwriters customers are being impacted by the lack of hospital based procedures and the associated outpatient recoveries.

For instance.

New starts of care for home Hell are down 30% to 35% versus a year ago. We expect these customers to likely pause buying new products until they're patient volumes return.

Tension however should remain high as our products are needed for core operations.

And finally, M- Chase revenues are tied the pharmaceutical utilization.

Cross long term care settings, starting now unlikely for several quarters into the future new admission into long term care settings will likely slow.

However, this should only modestly impact the growth rates of M.H.M.

Next slide please.

Turn into our measurement and analytical segment.

<unk> revenues group, 3% organically to 365 million.

<unk>.

123 million or 33.6% of revenue.

The quarter was highlighted by strong growth embarrassed on a near the coven 19 outbreak.

Unrelated to see 19 marathons, all continued trash and and their new single use bronchoscope products.

Additionally, northern digital and Neptune continued they're solid string of growth.

Also we did experienced declines as expected and our short cycle industrial businesses with some further weakening and the quarter due to code in 19.

Turning to the outlook.

This segment can be analyzed across four areas verify on.

Other medical products Neptune and industrial.

Zeros on we're experiencing truly unprecedented demand for their glide scope family products.

<unk> skyrocketed due to cope with 19.

Marathons video intubation products enabled a caregiver to intubate, a patient with appropriate spatial distance from the patient, making the intubation procedure meaningfully less risky for the caregiver.

The demand for these products as global and it's been sustained since the middle of March.

Or other medical product businesses, which grow organically M.S.D. like clock work in virtually all environments.

Are likely negatively impacted based on the global nature, a host of historically lower hospital based volumes and the associated economic impact hospitals have never been forced to the for all non emergency cases.

Neptune is a very stable growth business due to consistent required meter upgrades and replacements.

Given to shelter in place requirements limited access to indoor meters and municipality budget uncertainties. Some level of sales activity will likely push to the right with the most acute impacts being in a second quarter.

Finally, our industrial businesses are negatively impacted and generally tied to industrial output.

Our industrial products are critical to industrial production processes. There are some pockets of strength disco party in Hampton, but for this group our revenues for these businesses will be tied to the pacing a plant reopenings.

And as a green shoot we are seeing strong activity across Chinese and markets as our markets come back on line.

Next slide please.

Turning to our process technology segment.

Revenues were 142 million in the quarter down 10% on on organic basis.

Even though it was 46 million or 32.4% margins.

This was a difficult quarter for these businesses and we expect the outlook to remain extremely poor for an a balance of 2020.

We saw our upstream businesses decline in the high teams in the quarter.

Also C.C.C. was weak based on the inability to perform field service work all related to see 19.

One bright spot in the quarter was the tech up mid single digits based on growth from their new nondestructive testing products.

<unk> the outlook for the balance of the year is going to be an extremely challenging one.

About 60% of the segments revenue and about six per cent ropers revenue is related to oil and gas.

We'll be hit the hardest down approximately 50% and the second quarter and our upstream businesses.

For the year upstream revenues will be less than 100 million or roughly 2% or rover.

Do not expect to recovery at all and 2020.

Are mid and downstream businesses are also meaningfully negatively impacted but less though that are upstream businesses.

Peso recovery here will be dated by C.C.C. ability to get into the field to perform field service work and the recovery of fuel refining per pack.

Next slide please.

As we turn to our guidance, we are initiating deaths guidance for two q. and a range of 250 to 70 and updating our full your desk guidance, but be between 11, 60, and 12 60 per share.

Embedded in this guidance model isn't increased full your tax rate of 23%.

We built this model as we always do on a business by business bottoms up analysis, we have summarize the organic outlook for each segment for the second quarter and the full year it with the underlying material assumptions.

For application software, we see second quarter revenue down M.S.D. with the with full year revenue plus or minus low single digits.

Where we settle for the full year is dependent upon the volume and timing add on perpetual heals the pacing up services work and sustaining higher recurring revenue retention rates.

For network systems with these second quarter organic revenues low single digits and full your mid single digits, the possibly low double digits. The largest variable is the pacing of the New York congestion pricing project.

For mass we see this segment down mid single digits in the second quarter and flat to mid single digits for the year.

Principle factors for this segment or this sustained nature of marathons demands bike the timing of medical procedures coming back on line.

The nature of water municipality budgets and the ramp of global industrial production.

Finally are processed segment will be materially and negatively impacted we expect to q. revenues to be down at least 30% and full year down in the 20% to 25% range.

Again, we do not expect recovery this year.

When you're all all of this together, we expect our consolidated organic revenues to be down near the single digits for the second quarter.

And for the full year organic revenues are expected to be plus or minus low single digits. Again. This is a remarkable testament to the durability of our businesses and business model.

Our teams did a great job responding to the demand shop, and placing costs countermeasures in place.

Vast majority of which being temporary this enabled us to remain hot because this enables us to maintain high margins as we work through their demand shock, but retain virtually all no regrets investments in innovation and talent, while preserving the operational flexibility to rebound quickly.

Now, let's turn to our summary.

We had a very solid Q1 really proud of the team here for these results.

As we quickly pivot towards the operating in a C. 19 World are enterprise remains fully operational and working from home is proving to be highly effective so effective there will likely remain and this past year for quite some time.

Our balance sheet, a stronger than at any point in history, with 1 billion cash and two and a half billion a revolver capacity.

For the full year, we expect to have plus or minus flat organic revenue growth.

We believe our portfolio businesses and our governess prophecies are well suited to navigate this extremely difficult time.

We will do so it away that prudently balances short term for NASA performance and cost countermeasures without of long term investments in innovation and talent.

Or teams are keenly focused on market share gains both now and upon recovery.

As we execute our strategy that focuses on long term cash flow compounding, we will continue to patiently evaluate and pursue capital deployment opportunities.

Process as rigorous and disciplines.

We do expect many attractive capital employment opportunities to arise from the current economic situation.

Balance sheet is very well position, we will offensively deploy capital on that as the right opportunities are identified.

Final slide please.

As you prepare for your questions I wanted to highlight view a few examples of how real for businesses are aiding in the fight against Coven 19.

Our lab businesses and able to new seeing 19 test to interface with Latin information systems and provide results to doctors and patients.

I trade disconnecting, new food trading relationships as food buying shifted almost entirely to grocers.

Strata is using their A.I. tools to help hospitals have financial clarity and these uncertain times and marathon as discussed is truly on the front lines I'm extraordinarily proud to be able to leave this organization.

Now, let's turn to your question.

Thank you.

The question of match a portion of the call.

If you would like to ask a question you may do so by pressing the <unk> followed by could not just one on your touch tone telephone.

Asset our callers limit their questions to one main question one follow up.

Our first question comes from.

<unk> of RBC capital markets.

Thank you good morning, everyone.

Morning Dean.

It's great to hear everyone's voice on my call and I. Thank you for all the additional color that you provided today on both the application software network software business models in the next.

What's helpful and that last slide on all the ways, you're participating and they called the defense that was a great to see as well Neil for the first question. It's yeah, Yeah I didn't care as most companies are drawing on the ball brochure I haven't seen that doing that you're a much stronger condition, but keep.

Being a billion dollars in cash at the ready.

To deploy an m. beneath the appropriate time can you talk to the when will be the appropriate time, we'll deeds therapy targets in distress that would be opportunistic has it typically takes a while for prices to reset and eight downdraft like this so maybe kind of set expectations on.

Went on how you deploy it.

Thanks.

Appreciate a question it any environment, it's hard to predict the timing of Capitol Hill I meant to those you know it's lumpy.

But a few few comments first you know leading into this shutdown leading into the middle of March we were extraordinarily active.

And pause several things and believe it the right time weekend and pauses things only time will tell there, but we stay in constant contact with the owners of those assets. The leadership team for those assets and and these were very late stage sort of situations.

On the but once we worked through that you sort of late stage part of the pipeline there continues to be.

Some level of discussions between sponsors and ourselves you know we've spent years.

Shopping relationships you know the portfolio as well and this was the time, where those relationships matter most because it's unlikely that you hear the next couple of three four or five months how long. It is that there's going to be broad based you know sell side prophecy, but sponsors still have requirement to get mcquitty back to their shareholders and if there's a one off trades that makes sense.

For both sides, we think those could happen and then finally, you know they're more likely to not we saw it in the last downturn and those seven or eight nine time frame as we studied that I wouldn't call them. You know just they're just they're likely be some companies that are just stressed from capital structure point of view not from an operating point of view.

Which gives them sort of they put them in a pinch to wear a were able to acquire nice assets operating assets to meet all of our criteria, but they just have made some poor decisions are house and bad timing on their capital structure. So it's there is really it's the nature of where all sort of target might change modestly because you're right. It does take typically.

A couple of quarters, plus or minus for private evaluations to reset to where public ones are.

That's real helpful. And then a follow up for Rob odd working capital.

Said that there was it might be seeing some delayed payments can you elaborate on that and when you said you expect working capital to remain negative with that comment for quarterly or 40 year and how do you think the quarterly.

Stacks out for in terms of being negative each water. Thanks.

Yeah, the more than being appreciated. The question you know for me, it's always difficult to predict working capital right. It's one of the toughest thing to predict we certainly know that there are some AD markets, particularly acute care health care, where you know if you follow the news there's gonna be some challenges there were were hospitals are slowing sum payments et cetera.

So difficult to predict each quarter, you know I will say that you know our customers overall, where in very durable and markets.

And so we expect you know, there's really no credit risk across all of our all of our customers such a matter of timing of payments and when you have the huge deferred revenue balance you know when you have management teams, they're really close to their customers. You know, we feel really competent at the working capital position will remain Barry.

Strong a negative throughout the year.

That's very helpful. Thank you.

Yeah. Thank you.

<unk>.

Our next question stay comes from Steve <unk> of <unk>.

Ah Hey, guys come on it.

You know trying to see.

Actually all the detail every quarter more success of detail on all the businesses. It's very helpful and you know helping us some industrial analysts understand these tech businesses. So appreciate that on on the second quarter guide the it looks looks to me like your sales or you know down like you know.

80, 580, 90 million Bucks I'm, just using kind of I mean, it single digit rate maybe.

And like the Decaf decline of like you know 45 cents seems to be a pretty high Deco mental is that just kind of the nature of the business, adding can you kind of get help us.

I I help us walk that kind of the the profit performance or anything moving around Nick's wise.

Yeah, I'll start and then I'll s. romp in any color. So you know obviously the this demand shot for every company came fast and deep right. So we started feeling it.

Across a few of our company's at the at the end of the quarter and then obviously, it's a staying here through the first part of April So a couple of comedy. So first when this happened just from Atlantic perspective, We first you know we didn't try to overreact to react to quickly. We first had to get everybody home, which took a week or two we then took away.

The 10 days to letter leaders really on board and except the reality of the demands shock and then we started our planning process, which was really you know the first week or so in April so some time space by and so by the time to do the planning process.

The second quarter, and then start putting in the costs counter measures that was where there really just starting to layer and now against the what we believe that's going to be the steepest demand shock and so when you put those two together you'd just naturally get sort of the worst leverage if you will want to q. and things stabilize from that point, yeah, I always add to that you know, we could talk la la not perpetual lights.

Timing and so when you're in the second quarter period, where that you know economy is basically shut down for at least the first month and a quarter. So we're not assuming a much if any license renting out you know that comes at a really high margin. We do have the transport project, continuing which is lower margin. So you really also looking into mix impacts you know adding onto it.

And then the final thing Steve So I should emissions at the onset is we're not having back in either of restructuring costs. You know so that is a little bit of headwinds in the corner as well.

<unk> how much is that.

Again, it's up to $10 million.

Okay that that makes some sense and then and then it's my understanding that in some of these software businesses. You know you you see kind of perhaps a bit of a pause, but then that's that's kind of a a quarterly variants you know what kind of used system cap x. businesses that are kind of you know more more annual cycles. So that.

Are you expecting kind of.

The kind of a push on revenues.

Application software from second quarter into thirds. So that you know you kind of a bit of like <unk> in the second half an ear if he will.

Is that how how we should try to think about this or not really.

So Steve everything certainly push into the right. We've not assumes that there's it's a gym to push that comes back and three q., which is everything sliding to the right.

Went to the extent what you described happen then that would lead us to be more on the higher sign up for guidance than the lower side you know on the new logo sales you know the the new customers that are buying ill relatively high dollar you know transformational type I.T. you know projects those are gonna be pushed to the right for the for the mouse a year.

For the most part right who's got to make a big I.T. investment right now setting aside how our sales people actually get to that customer and so.

But the smaller chicken items, the upgrades and the you know the AD on products that level of activity is actually didn't quite nice adults that for instance, the the top of the final here in the last three or four weeks like the this is the inquiries are up 30% to 35% versus a year ago now some of that is everybody sitting at home.

I'm doing Google searches right. So the quality that top of the final may not be as high but what's been accepted it a sales acceptance lead to delta because actually pay even a little bit ahead of the last year. So the exact nature of how this thing has gone focus more of a shock than a cycle is you have to be seen.

I want one more one more for you any impact to NHK I know that you know, obviously I nursing homes and and you know if those those types of things are having a real hard time right now dealing with all this in certain areas you know kind of struggle to understand whether that's you know.

It's obviously negative but you know in life.

Negative or positive for your business, how does that how does that work here with with the stress in in nursing homes.

Yeah, So certainly the number of new admissions to the skilled nursing or snuff.

Sort of care setting is likely going to be pause for quite some time right. We're not we're not putting in you know the elderly population in that care settings. So that because the the census, if you will win sniffs is going to be impacted by that that will have some but it be a modest and slow building impacts negative impact.

The growth rate for them in shape, what still happens we're not seeing you know any meaningful you know discharges right. The people that are in this setting for a long archetype, they're not being pulled out a because of what's going on and and this is just one of many throw drivers that image shade right you still have pricing that goes.

You still have a pharmaceutical consumption per capita that goes up you still have the team building to put new products online. There still are new pharmacies that will start that will capture so there's a handful of sort of consistent grow drivers, but certainly census levels will will moderate some into skilled nursing facility, which will impact the growth.

Rate of modestly of imagery.

Right. Okay. Thanks for the collar guys appreciate it.

But yeah.

And the next question May come from Julian <unk>.

Oh morning Radio Galaxy Bowl.

Maybe switching back to working capital So <unk> talk at board on how you know the another <unk>.

<unk>.

You know, how well I've been called a whopping how much of a had them cannot be that you know yet guided down off the key to.

Yeah sure. This is dropped that you know the way deferred revenue works for our software business is is it's just the passage of time that needs to happen in order for the rabbinate it'd be recognized and so as I mentioned on the call is you know you. When you had a renewal then and then that.

That's the point at which you hold the custom or you know renews or they don't and generally and they do at very high 90% renewal rates and those renewal or time throughout the year. So you know as long as you maintain your recurring revenue, it's very very steady the deferred revenue continues to grow as that software businesses.

Grow.

Mind or we're selling the software it's really critical software systems across durable markets like government contractors, mostly large enterprises are the customers and so it's very very steady. It gives you high lows recurring revenue in high levels of cash flow. So we don't see any any meaningful impact from that certainly in the short term.

<unk> and then I guess you know maybe on that guided declined to night school that it does sound like a big chunk of bad. It's just you know.

Liking thing and so on but is there any impact from kind of the mix you're moving much more towards you know likings and service rather than perpetual between down the table you know 10% now.

<unk>.

Well I certainly we expect the bucket of revenue of perpetual license revenue historical 10% number that will be down that'd be it'll be impacted for the reasons that we talked about.

No the the recurring won't be impacted in any meaningful way and.

And and the services back all go work through the the back the services team for worked at backlogs, which sets I don't know what's here Yeah, and then just as you go into the guidance keep in mind, we did increase the tax rate. So that's a big difference from prior guidance and if you're looking at last year versus this year. So the tax rates, a little bit higher and and you know we are.

Being a relatively you know heidi leveraging and process technologies, given all the declines there and no we're not assuming any sort of a rebound and his meal mentioned were taking you know specific cost actions as well there that are flowing through so you know those are all key drivers in the roll up.

Fall painful.

Thank you.

Next question comes from Joe G.R. <unk> of Cohen change.

You guys the morning.

Good morning, Joe.

They apologize if you went through some of this stuff what kind of quadruple passing this morning, all that so current trends core I know you mentioned in the prepared remarks, you of course, some off into the next year I don't think that you me too surprising, but given some of the.

Paper recently about necessary hermits and issues with different government agencies can you talk about what actually needs to happen before this is able to be before the actual or where it can be deployed.

Yeah, So I would the hardware being deployed the project is is on track it's on pace other and just pushing this 25 million and our planning assumptions and to to do you want them next year.

So.

What what they've read the weather's of Red is there I think there is a distinct separation between the work that we're dealing with our customers to put the infrastructure in.

Which is pacing for the reason we said it's now the revenues of this or the operating budget not the capital budget because the M.T.A.L.C. revenues away now isn't what's going on.

And then.

Happen.

<unk>.

So enable and structure the totaling itself that's going to happen at the very <unk> in part of this year, but the infrastructure work continues and that's that's our planning assumption all of the signals and all their discussions as you can imagine we stay very very close with this customer and we're wearing the same pasta and that together whether customer.

Yeah.

So does I guess, they wouldn't have to put a potentially like a push on some of them a recurring revenue associated with this if there's some issue with like the the alive. So you get your deployment and then there could be like a delay and the <unk> stuff actually goes on.

It could ultimately don't go I've than the than the maintenance part would not turn on would be our our planning assumption there, but yeah I think there's a pretty high high level of interest by all parties to see this project turn on.

Yeah, Okay, and then again I I mean, you probably went through this older but I'm a sophomore backlogged. It yeah like get started me through how your how you're thinking about that in terms of.

You know, whether it's a six month or year like well what are you. What do you anticipate what are you modeling in in terms of like.

Being smaller and meaning less licenses.

So.

A little different questions embedded there so for now [laughter].

But <unk> first of all you have to go company by company. So really all we're talking about her comments, where we see a meeting where a meaningful headwind on the life of activities and our application software business.

Company by company on the network side, the recurring nature, you know there'll be impacted but doesn't have the license activity because they're all staff businesses. There. So when you look at application software. It's really the combination of those those companies there that are gonna likely not have large new customer perpetual deals happen.

In this environment the small or.

The AD on projects the upgrade projects the increased functionality. The how do you turn on the do some staff conversions right. During this process during the current economic environment the activity and the salesman. All suggest that is going to continue but we're only five or six weeks into situations, we have to see how that continue.

So that found a license side on the services side. The services work results from selling would licenses so they'll still be some of that and then there's a fair amount of upgrades that happened and actually when times like this are actually a pretty decent time to upgrade systems.

Because you have maybe less people in the office unless you use your activity. So the idea that can do what they need to do to get to the new version now we have to see I've been actually plays out, but even if it doesn't even if that is slowed the services teams work off a six to 12 months services backlog of implementation. They basically have six to 12 months to replenish the backlog from new.

Sales activities.

For so fair to say, you're you're assuming that the big like a a essentially zero and new and you'd be license licensing and things like that around.

Well again, you got to parse it out right. There is very low large new logos assumed into planning horizon. There is some new life in for the product <unk> exactly right.

Yeah, Okay fair enough. Thanks, guys.

Yep. Thank you.

Our next question comes from Alex <unk> of clear Harbor asset management.

Hi, good morning.

Alec Lording somewhere if you're well typically during a recession.

Dominant companies like like Loeper.

Gain market share a lot of market share in some cases from predators.

And it seems to me yeah.

It would be true right now.

<unk>.

Page could you comment on well you.

Let me expected greatest.

<unk>.

<unk>.

But you said again get in trouble during this three.

Oh I appreciate the question, though it's a we we we agree with your sentiment you know history. What suggests that the case you know when you have the when you have the operational readiness that we have when you have the balance sheet that you have we have when you have the cash flow that we have sort of mouses hierarchy of needs allows us to very quickly pivot to play.

Offense first events enough the Pasha that we're leaning right.

We also talk to enter prepared remarks about our direct channel access. So we're talking across all of our businesses everyday with our customers you know where are the opportunities are it's it's incrementally and I don't I mean, it's in all the businesses I don't Wanna Sorta call out one business, there, where there's a disproportionate opportunity because it's a structural opportunity.

With our business model that we have across the 45 businesses, but we agree there's times to fulfill need right now when our competitors cannot fulfill a product that garners you.

Sort of you know.

An opportunity to capture and keep that share of momentum going on the backside of this thing. So we agree with the sentiment and we're all offensively leaning forward, but we got to be do that in a prudent way given the current situation we all face.

Oh, and then you mentioned that you keep them very close techy pushing them. So you can identify opportunities.

That's correct.

Correct worrying about question on your.

Acquisition.

Oh.

You mentioned that there's a delay.

So maybe.

<unk> plants and several businesses, which is understandable.

<unk> characterized tobacco you said it was a marriage falls back with a pipeline.

Acquisition complicated and you could you expand on that.

Sure because you follow already.

Correct, you know, there's always a lot of activity that happens in our pipeline you know I've been here since 2011 for the first six or seven years is my responsibility to manage the pipeline. Additionally, operating responsibility and so just beeping over the the whole time I've been here, there's a lot of activity you know what were specifically.

Sitting on earlier his there was very late stage activity under exclusivity most terms agreed to most diligence done.

For you know a few deals that we just decided it was prudent to pause and take stock of the current situation. So there's a late stage pipeline now the things right behind that you know most no every other process sales process that was in the market has polled for obvious reasons and so we're going to have.

The lean into our knowledge of the existing sponsor relationships and a and relationships. So we have to see if we can build final on a proprietary basis for the next couple of quarters and the only time will tell if we're going to be able to successfully do that and then from that point you know private equity you know business models need to return.

Capitol to their limits and we expect to have to continue once the new reality of evaluation regime, the leverage regime, all sort of land on us all.

Okay. Thank you.

Thank you.

Yeah.

Our next question comes from Robert Mccarthy F. Stevens.

Thanks for the Big guys, how you doing today.

Right, Okay well.

Good yeah, just expanding on kind of the the private equity at the acquisition environment, Obviously, you know a situation where.

You know as teen suggests that prices are coming down, but I mean could you see a phenomenon here of you know as as private equity has a lot of businesses that are probably highly impacted more than what their wrist characters to split. It suggested that you could provide an H.T.M. on on some decent deals where they can get exit.

<unk> could be you know all liquidity premium to getting something out with turning itself Limited's and you could still pick off some teaching businesses that some reasonable valuations do you think there's a passport for that maybe just expand more probably about your your your Ah acquisitions capacity cancer.

Yeah. So yeah on the capacity side, you know, it's going to you know it's.

Two to 3 billion right now very easily we're going to be you know prudent and how we deploy that and always be very mindful of the current situation. We're in.

Through the first part of your question I think it depends on a sponsor right. If you talk to some of these very large highly successful sponsors who have raised.

Eight that 15 funds in return three to five X. my guesses that eliminates are going to have a lot of patients with them as they work through this so those assets and those portfolios I think they wait a little longer on the other hand, there's scores more middle market sponsors that do not have that track record that probably exhibit.

The exact behave verb their outline and so only time will tell but it's it's it's our job to identify those opportunities as big as they come up.

No. Thank you for that and then I guess in terms of thinking about the longer term opportunity with seaboard, and and and and also Transcore. I mean, obviously, you know episodic companies and talking about changing the regime for now.

The only payments, but also access, particularly given the line to the pandemic of the you're going to probably see a week configuration of of security an access around motion as opposed to touch just given the nature of sanitation and public hygiene do you think that creates a bit of an opportunity for you would enjoy each those businesses or do you think it's.

A little bit too much of a nuance right now.

I think it does over to medium term right. So there's that seaboard you know it's the work was done with Apple you know for contact lists.

Sort of entry and security I think also you know the way that you know in the near term at least universities are going to want to follow where the where the students are and so we might be able to be assistance and system and bad Transcore. We talked about you know the concept of handing cash getting change back is like.

<unk>.

I'm going to end here at some point and then also are if ideas of his way off a whole lot about we talked about a quarter I mean, they had in the quarter in a very strong border. There are all about.

You know contact lists reading for identity access for instance, in hospitals and L. systems for secure print right. So how do you actually go to a printer and get you know you're materials off and on having to touch it. So they enable those sorts of solutions from a product perspective.

Thanks.

Thank you.

That's what and our question and answer session for this call. We would know electorate turning to call back to the fact MCSI for closing remarks.

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

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Hmm.

Yeah.

Yeah.

Yeah.

Mm.

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