Q3 2020 Roper Technologies Inc Earnings Call
Good morning, Robert Technologies Conference call will now begin today's call is being recorded all participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero on your telephone keypad.
I would like now to turn the call over time, Zack Moxi Vice President of Investor Relations. Please go ahead.
Thanks, Good morning, and thank you all for joining us as we discuss the third quarter financial results for Roper technologies. We hope everyone is doing well joining me on the call. This morning are Neal Hot President and Chief Executive Officer, Rob Appreciate Executive Vice President and Chief Financial Officer, Jason Connolly, Vice President Controller, and General Callahan, Vice President of Finance earlier. This morning, we issued a press release.
I think our financial results. The press release also includes replay information for today's call we.
We have prepared slides to accompany today's call, which are available through the webcast and are also available on our website now if you'll please turn to slide two.
We begin with our Safe Harbor statement during the course of today's call. We will make forward looking statements, which are subject to risks and uncertainties. As described on this page in our press release and in our S. Easy filings you should listen to today's call in the context of that information and.
Now please turn to slide three.
They will discuss our results for the quarter primarily.
On an adjusted non-GAAP basis, reconciliations between GAAP and adjusted measures can be found in our press release and in the appendix to this presentation on our website.
The third quarter the difference between our GAAP results and adjusted results consist of the following items.
Amortization of acquisition related intangible assets purchase accounting adjustments to acquired deferred revenue and related Commission expense.
Transaction related expenses for completed acquisitions and lastly, we've adjusted our cash flow results to exclude income tax payments deferred from Q2 to Q3 due to cope in 19 and cash taxes paid for the good Tan divestiture as a reminder, GAAP requires tax payments for a gain on sale to be classified as an operating cash flow I don't even know what it's related to what about.
Sure.
Now if you please turn to slide four I'll hand, the call over to meal. After our prepared remarks, we'll take questions from our telephone participants Neil.
Thanks, Zach and good morning, everyone. Thanks for joining us.
Let's go ahead and get to this morning's content and as we always do we'll start by reviewing our agenda.
I'll begin discussing your enterprise highlights for the quarter, which was a very busy and very productive quarter for us.
To that end I'll briefly review our acquisition activity.
Rob will then discuss our financial performance and capital market activity after.
Afterwards, I'll walk through our detailed segment review and associate outlook, followed by our enterprise fourth quarter and raised full year guidance.
We will then look forward to your questions.
Now with that let's turn to a brief run through every Q3 enterprise pilots next slide please.
Third quarter demonstrated the strength of our execution capabilities first on an operating basis second on a capital deployment basis and finally.
From a capital markets perspective, operationally, our revenues and EBITDA I continued to grow, albeit modestly despite the well documented documented economic challenges, resulting from the pandemic situation. We're all facing.
At a summary level.
Our software recurring revenues continue to grow quicker.
Recurring revenue growth is very important for us.
This indicates high levels of retention demonstrates our ongoing and increasing relevance we have with our customers and provides for a more stable and predictable forward financial model.
However, as anticipated we experienced modest declines in our perpetual license revenue tied to lower levels of market activity across a few of our softer end markets and a difficult comp from a year ago.
We discussed this on each of our last two calls co that is absolutely driving faster adoption of our SaaS or cloud based recurring revenue solutions. This is a very healthy and positive trend.
Separately, we continue to see very nice momentum for our products and software used in the fight against code.
Most notably our laboratory software businesses continued to see strong demand as are helping stand up and maintain health system and country level cobot testing capability.
In addition marathon our largest medical products business continues to drive meaningful market adoption across their video intubation product line.
The final operating item I'll point out here is at the onset is the fact that Neptune and our short cycle industrial business has started to rebound in the quarter from which we draw encouragement.
From a financial point of view, our organic revenues declined 3%, our gross margin were 64% and our operating profitability remained very strong with 37% EBITDA margins mostly.
Most importantly, we grew our cash flow double digits again.
Turning to our acquisition activities, we completed four acquisitions for a total of 5.8 billion of capital deployment, certainly led by a $5.35 billion acquisition of Vertis for.
More on these might turn to our next slide final.
Finally, the team was successful in the debt capital markets, completing a $2.7 billion bond offering with a blended rate of 1.3% and increasing our revolver capacity to 3 billion that has an extended maturity date.
Super proud of our execution in this quarter with all three phases of our offense on full display saw.
Solid operating performance across the enterprise.
$5.8 billion of Seer, I accretive capital deployment and successfully executing capital markets transactions have extremely favorable interest rates.
Now, let's turn to our next slide and talk to our recent acquisitions.
Okay. This with a very strong quarter for us relative to our capital deployment strategy.
As we mentioned for several calls the quality and quantity of ideas in our M&A pipeline has been robust for quite some time.
We were very selective in our approach and for landing on these acquisitions highlighted on this page.
First we completed the acquisition of Vertis for for 5.35 billion.
I refer you to the call we'd adjust after announcing this transaction for all the relevant details, but the highlight vertical is a business that delivers cloud based software to the property and casualty insurance industry, principally in United States.
Murder Force focus is straightforward to simplify automate and drive productivity across the complex and highly regulated process. These prophecies and the PNC space.
Today, the business serves over 20000 independent agencies.
1000 insurance carriers and touches over 140 billion of premiums per year.
And high quality management teams motivated to build their businesses are super important for us and to that end Amy and her team have done a tremendous job building this business over the last several years.
We expect vertical or will deliver about 590 million of revenue and 290 million of EBITDA next year.
Separately, we announced and closed three strategic add ons, one for strata and to Fry pipeline realm.
Relative to strata, we acquired ESI.
As a reminder, both strata and ESI deliberate decision support financial planning and analytics to offer solutions that help hospitals manage their cost structure and identify opportunities for operational improvements.
Strata when combined with ESI or serve over 400 health systems and 2000 hospitals.
The aggregate spending power of this combined customer base is approximately one trillion or about 25% of the total healthcare spend and the use the.
The combination of strata and ESI will be a powerful one for the market and our customers.
Relative to I pipeline, we acquired both wireless and ISS.
Well it is a nice product tuck in that enhances our pipelines life insurance and annuity illustration capability for.
For those who do not know the illustration is the modeled value calculation that permanent insurance carriers are required to provide to their insured.
Hi, Fs enhances eye pipelines capabilities to better serve the financial planning channel relative to life insurance account management.
We expect these three bolt ons, we'll deliver about $75 million of revenue and $30 million of EBITDA next year.
When looking at each of these deals either individually or together they are right down the middle for us each.
Each business has very strong cash flow capability, which is punctuated by being super asset light.
Also these businesses are as our most roper business as market leaders and their niche over the years when we referred to niche we mean smaller markets we.
We like small markets small towns provides utterance for new potential entrants.
On top of this these and other roper businesses provide deeply verticalized solutions.
Hi, This we mean solutions that are specifically developed to address unique industry workflows or challenges.
It is that the cross section of one being the market leader to operating in smaller markets and three delivering vertical solutions that enable our businesses to have intense customer intimacy. This.
This entered this intimacy enables our businesses to invest at the pace our customers require importantly, these four businesses have very high levels of recurring revenue for instance, vertical or has over 90% returns.
Finally, these businesses grew nicely on an organic basis the growth drivers our diversified and our multiple we expect these businesses to grow mid single digits over a long arc of time.
Taken together, the 5.8 billion of capital appointment should deliver about $665 million or revenue and $320 million EBITDA jure enterprise in 2021.
A few pages, Rob will discuss our financing package for these deals which as you likely know by now it was quite good.
Now I'm going to hand, it over to Rob, but look forward to discussing your activities here more dirty Gionee, Rob Your ball. Thanks, Neil Good morning, everyone. We appreciate your interest as always in Roper technologies, turning to page seven looking at our Q3 income statement performance total revenue increased 1% to $1.369 billion.
Organic revenue for the enterprise declined 3% versus prior year similar to what we saw in Q2 and about what we would expect for Q4 as the pandemic continues we had positive organic revenue growth in both network software and systems and measurement analytical solutions, we had a slight organic decline in application software due to the difficult.
Perpetual license comp, we discussed last quarter lastly, and similar to Q2, we experienced a 25% decline in our smallest segment process technologies margin performance was once again quite strong with gross margin of 64.2% and EBITDA margin down 10 basis points versus prior year, but up quite a bit.
Sequentially to 36.6%.
EBITDA grew in the quarter. Despite the pandemic to a Q3 record of $501 million tax rate came in at 22.2%, which was a couple of points higher than last year. So that all result in adjusted diluted earnings per share of $3.17, which was well above our guidance range aided by both better organic performance and some increase.
And from our vertical our acquisition. So once again strong execution by our business leaders at a very challenging environment.
Next slide turning to page eight on net working capital here, we looked at three year trend on working capital, which continues to improve you may recall, we exited the last quarter with negative working capital of minus 5.4% and now we further improved working capital as a percent of revenue down to minus 6.3%.
Continuing to improve on these important working capital metrics. Despite the challenging macro environment really is a testament to the excellent work of our finance organizations across the Roper enterprise our people do a really good job of focusing on what matters. We will see more evidence of this as we move forward to look at cash flow and cash conversion on the next two.
Slide nine.
Next slide turning to page nine on compounding cash flow really amazing as Neil had mentioned to have our third straight quarter of double digit cash flow growth in 2020, as we discussed last quarter for better comparability and clarity we adjusted our results for the 124 million of cash tax payments that were deferred from Q2.
Q3, due to COVID-19, so that adjustment hurt our numbers in Q2 and helps us in Q3, but has no net impact on our year to date results next year, we expect the IRS to return back to their normal schedule. We do have one additional adjustment this quarter as Zach mentioned for the $192 million of cash taxes that we pay.
Late in the quarter that were due from the 2019 contained divestiture. So net of those adjustments Q3 operating cash flow grew 12% to 454 million, which represented 33% of revenue Q3 free cash flow grew 14% to 442 million, which represented 32% of revenue and you can.
See on the right hand side on a year to date basis, our adjusted free cash flow is up 13% to $1.1 billion. So as a takeaway reads really consistent cash flow performance in a very challenging environment.
Next slide.
On page 10, turning to roper's strong cash conversion so through three quarters of 2020, 28% of our revenue and 78% of our EBITDA has converted to free cash flow. So comparing our 2020 year to date to our full year cash conversion over the past few years, we actually see that we are trending ahead.
Ed where we've been historically on cash conversion, even better Q4 is typically a seasonally strong quarter for cash conversion driven by annual billing cycles and lower tax payments. So.
So we are quite confident we are heading for a very strong cash result in 2020, our consistently high cash conversion is important because it further further demonstrates the high quality of our EBITDA, which allows us to quickly and predictably reduced leverage after large acquisition.
Next slide turning to page 11, and updating on our balance sheet.
So you can see here, where we stand after the completion of the verb for acquisition in September our cash balance is reduced to a normal level of about 300 million down from 1.8 billion at the end of the second quarter that excess cash was used to partially fund the acquisitions net debt to trailing EBITDA ended the quarter at four.
<unk> 0.8 times importantly, this calculation does not include the pro forma impact of the vertical acquisition, including a full year of vertis towards EBITDA would push this ratio down into the low fours, we expect our leverage to decline quickly over the next year as the EBITDA flows through and we use or generate cash flow to reduce our debt next.
Slide.
So on page 12, we'll talk about the financing activities that occurred in the third quarter, including the ESI deal that they closed in October we recently deployed a little over $5.8 billion of capital financed by our excess cash on hand, a meaningful amount of which was generated from last year's contend divestiture new investment grade debt.
And a draw on our credit facility, we launched a bond offering in August and benefited from strong demand from roper's debt investors consistent with what we had experienced when we access the high grade bond market in June.
So we ended up spreading the $2.7 billion of principal over four tranches, which resulted in a very good blended interest rate of 1.3% and duration of a little over seven years, notably and importantly, no changes to Roper credit ratings, we remain triple B plus at S&P and beat up late two at Moody's and we remain.
Committed to maintaining solid investment grade ratings moving forward. We also successfully extended our revolving credit facility out three years and Ulta upsize it from $2.5 billion to $3 billion.
The current floating borrowing rate on the revolver is about 1.2%. So we like to strike a balance between fixed rate debt and prepayable floating debt to enable us to de lever quickly.
In summary, these financing activities are consistent with our long term strategy of augmenting our internally generated cash flow with investment grade debt, then we use our consistent and durable cash flow generation to rapidly reduce leverage which we plan to do over the next 12 to 18 months, so with that I'll pass it back over to Neil.
Thanks, Rob lets turn to our application software segment.
Revenues here were $451 million down 1% on an organic basis.
EBITDA was $201 million or 44.6% of revenue.
And the way we started our commentary about this segment during our last call our retention rates and thus our recurring revenues remain strong in the quarter.
In addition, we are continuing to see an acceleration of our software as a service or cloud solutions across this segment. This.
This trend will provide a long term benefit for both our customers and for our business.
Our customers outsource the operations of their software applications to us and getting the benefit of being on the most recent softer released at all times, our businesses are improved by having higher levels of recurring revenue and customer intimacy imply.
Importantly, we believe this migration to the cloud will be a net growth driver for us.
So based on this SaaS migration trend and our continued high levels of customer intention. We saw recurring revenues grow mid single digits in the quarter. We expect this strength to continue into next year.
As an offset and as expected we saw declines at our perpetual revenue stream for two reasons first it difficult prior year license comp and second a slowing of new logo licenses associated with the current macro headwinds things.
Things remain solid Deltek, we saw normalized bookings increased double digits in the quarter coming off very large perpetual bookings a quarter ago.
They were seeing particular strength across the Gulf coast offerings, and what their subscription content solutions recurring revenues are up double digits versus this time last year.
And as you'll note towards the bottom of this page a business that has been negatively impacted in this segment as seaboard.
To remind everyone seaboard designs and delivers K through 12, and University campus integrated security and Nutrition management solutions.
Given the fact that many educational campuses are deferring in person attendance. This business is negatively impacted in the short run.
As soon as in person classes resume we expect seaboard to return to normal levels of growth.
Our laboratory software businesses Sunquest data innovations and Clinisys all performed nicely aided by global demand to deploy laboratory software associated with combating Cove in 19.
A good example, we're talking about here is the activity Clinisys is helping drive specifically clinisys as the IP backbone for the French and Belgian National Cobot testing programs.
Also note from the page that data innovations, our diagnostic middleware business had record orders in the quarter congrats to the team and Vermont.
With this being said, we do expect some of this kobe strength to moderate going forward.
Also we continue to see strength this drop one of the nice parts of having strata in the family of businesses is learning from their hospital analytics firm Stratas research, we know that hospital volumes are normalizing of the 90% to 95% pre coded level.
In addition, most hospitals have enacted cost measures to rightsize their operating structures for this level of patient activity.
Given our healthcare it and medical product businesses, primarily serve the hospital market, we take confidence that patient volumes are coming back and hope to see the associated hospital capital spending come back online next year.
Finally, we will be reporting vertical for and the ESI strata bolt on in this segment.
As we turn to the outlook for the fourth quarter. We expect this segment to be flat on an organic basis, principally for the reasons just discussed.
We expect to see continued high levels of recurring revenue retention as a reminder, the vast majority of our customers in this segment, our enterprise or larger companies.
That said, we do anticipate some continued pressure on our upfront software license sales.
We are encouraged by seeing our sales pipeline activity being higher than this time, a year ago, but we continue to expect our new logo prospects decision time frames to extend longer than our historical experience, which leads deals likely moving into next year. All in all we explicit expect flat organic growth both at.
Higher quality revenue mix towards recurring versus perpetual with that next slide please.
Now, let's turn to our network segment revenues here increased 1% organically to $430 million EBITDA was $180 million or 41.8% of revenue.
Like the start and as a reminder, that our software businesses. In this segment principally share highly recurring SaaS revenue models, which are further aided by strong network effects that drive high retention rates, which was certainly the case in this quarter.
The entire segment similar to that of the application software segment, we saw mid single digit organic increases in recurring revenue.
Constructconnect continues to perform well their network expanded in the quarter and was driven by strong customer adds network utilization.
D.A.T. continues to post record quarters this quarter as highlighted by record. Net addition of carriers to the network and enterprise brokerage seats fully recovering to pre turnover levels.
In addition, I pipeline ESP Softwriters all continued to be strong.
A couple of our software businesses in this segment are facing modest headwinds each of which are short term and tied to co bid related economic activity.
Hi, trade is being negatively impacted us food volumes in institutional settings, such as restaurants in sporting events are down.
As these activities come back on line, so why trade growth.
Also MHK was down a bit in the third quarter as well directly resulting from patient volumes and long term care being down.
We expect imagery to recover starting in the fourth quarter.
Of note during the quarter foundry was awarded their first Engineering Emmy Award for visual effect innovation used in television.
The team at foundry are Super excited as they should be for this recognition congrats.
Finally trance the Transcore in New York City congestion pricing infrastructure project continues.
However, the project at the election of our customer continues to slow and be pushed into 2021.
Execution of the project remains quite strong, but the timing continues to elongate.
In addition, a few other projects are slightly delayed as we near go live, causing some revenue and margin pressure in this segment.
Now, let's turn to our outlook for the segment, we see low single digit organic growth for the final quarter of the year.
We continue to see growth in resiliency in our network software businesses, driven by high recurring revenue mix strong retention rates and expanding networks and network participation.
Relative to Transcore, We said, we continue to see the New York City project pushing to the right a few other projects being delayed and lower tag shipments due to the lower levels of vehicle traffic in 2020.
All in all again, we expect low single digit organic growth for the final quarter of the year.
Next slide please.
Turning to our measurement and analytical segment.
Revenues grew 2% organically to 368 million EBITDA was $131 million or 35.7% of revenue.
With the current pandemic backdrop. This segment's activities continue to be best broken into four boxes.
One verifone and IP to other medical product businesses, three Neptune and for our industrial businesses.
First various on continues to experience high levels of demand for their glide scope video intubation solutions.
And this quarter orders remained strong and the company is able to clear much of the backlog that entered the quarter.
As a result of a 19 the percentage of all innovations.
Not just covered related that are being done using video assistance has meaningfully increased.
We expect video assisted intubation markets year to remain above pre covered levels going forward, which is a great long term and recurring benefit for Verifones business model.
It continues to be strong as well.
Second and relative to our other medical product businesses, we did see revenue headwinds tied directly to lower patient volumes within acute care hospitals.
We also note this group of companies normally grow mid single digits, but this growth is conditioned on normalized hospital activity.
As hospital capital budgets begin to free up in 2021, we expect these businesses to return to a more normal state at some point next year.
Third Neptune improved sequentially, but the pace of recovery was hampered a bit by continued restricted access to indoor meters in particular in the northeast United States and Canada.
Finally, and as expected, we did see recovery across our shorter cycle industrial businesses.
As we turn to the fourth quarter outlook. This will be the last quarter. We have detailed results in our prior period given that its divestiture was in the fourth quarter of last year.
The fourth quarter, we expect to see low single digit growth for this segment led by continued strong but moderating demand at Verifone.
Given the strength in 2020 Verifone continues to accelerate investments in both product and go to market areas.
In addition, we do expect to see our other medical product businesses improved from historic lows, but as discussed hospital spending continues to be somewhat uncertain for the near term.
We expect to see continued improvements in Neptune as they gain more access to indoor meters and finally, we expect to see continued but likely modest short cycle industrial improvement next.
Next slide please.
Now turning to the segment the reference is 9% of revenue process technologies.
Revenues were 120 million in the quarter down 25% on an organic basis.
EBITDA was 34 million or 28.4% of revenue.
While these businesses are facing incredible market headwinds that continue to demonstrate their resiliency with their 28% plus EBITDA margins.
As we said for the last couple of quarters. This too was a difficult quarter for these businesses and we expect the outlook to remain poor for the balance of the year.
We saw our upstream businesses declined approximately 40%.
BCC was weak based on their inability to perform field service work again related to coated.
Cornell decline on a weakness in their rental markets, but did grow in many of their other end markets.
And a bright spot in the quarter was the tech which experienced growth based on the strength in their new nondestructive testing products.
The outlook for the fourth quarter continues to be an extremely challenging one as we expect to see approximately 20% organic declines this.
Specifically, we do not anticipate any recovery in upstream oil and gas markets, but do anticipate sequential and seasonal improvement for many of the other businesses in this segment.
Next slide please.
As we turn to our guidance, we are raising our full year adjusted Deps guidance to be in the range of 12, 55, and 12 65 per share.
The increase is principally attributed to the acquisitions closed since our last call.
Full year revenue and EBITDA are expected to increase in the range of 2% to 3%.
Our organic revenue outlook for the full year now leans to be flat to slightly down, perhaps 1% or so.
Back in April we guided revenues to be plus or minus flat now flat to down a percent.
While there are several puts and takes the primary assumption that change is this is the substantial amount of revenue.
And to the Transcore in New York City projects pushing into 2021 the.
The majority of the other businesses have improved versus our April outlook.
For the fourth quarter, we are establishing adjusted Deps guidance to be in the range of 339 and 349 per share.
We expect consolidated organic growth to be similar to that of the third quarter.
Our tax rate for the quarter is expected to be about 20%.
Now, let's turn to our summary, and get to your questions.
In closing I'll recap with what we started strong execution across the three parts of our offense operational capital deployment and capital markets.
Operationally revenue grew 1% overall and declined 3% on organic basis.
EBITDA margin EBITDA grew and margins remain strong.
Most importantly, free cash flow grew 14% in the quarter.
Throughout this year, our asset light niche and market, leading businesses remain focused on investing for higher levels of long term and sustainable organic growth.
As such this year, we're seeing increased levels of R&D across many of our businesses.
Also and it's worth repeating we meaningfully enhance our portfolio by successfully deploying 5.8 billion.
Following these acquisitions two thirds of brokers EBITDA will be generated from our software group of businesses. These.
These acquisitions further add to our recurring revenue profile and our ability to compound our cash flows moving forward.
In our recent capital deployment and our commitment to an investment grade ratings, we are focusing our efforts for the next few quarters on operating our businesses and generating our durable cash flow, which will allow us to delever just as we did following our deltak acquisition in 2016.
So with all of this we continue to be bullish about the coming quarter about 2021 and about our longer term future.
And finally and relative to our long term strategy and model I'll conclude by highlighting we compound cash flow that's our job.
Our cash flows are remarkably durable as demonstrated this year.
We do this by operating a portfolio of businesses that have leading positions and small niche and growing markets.
Also our businesses with our product or software deliver highly application specific or vertical solutions taken.
Taken together our businesses are awarded with intense customer intimacy. This intimacy allows us to innovate at the pace required by our customers.
Our businesses have high margin asset light economic economic models that naturally generate high levels of operating cash flow as they grow to.
To this end, we incent our management teams based on growth.
And finally, we take the excess free cash flow generated by our businesses and by this we mean the cash flow that the businesses generate beyond investments required to drive organic growth combined it with investment grade leverage and acquire businesses that have better cash returns than our existing company that in turn improve.
Moreover, and further accelerate our cash flow compounding.
This very model. This very strategy are the simple ideas that deliver our powerful results.
So with that let's get to your questions.
We will now go to our question and answer portion of the call. We request that callers limit their questions to one main question and one follow up if you'd like to ask a question you may do so by pressing the star key followed by the digit one on your Touchtone telephone if youre using a speakerphone. Please pick up your handset before.
In the case to withdraw your question. Please press Star then the digit too again, we request that callers limit their questions to one main question and one follow up.
Our first question will come from Deane Dray with RBC capital markets. Please go ahead.
Thank you good morning, everyone. Good morning, Deane Brandy I was hoping you could quantify the revenue push out for the New York City congestion tolling project, we've been thinking 30 million in the fourth quarter. So that's obviously lower but being quantified that and can you clarify whether there's been any change in scope.
Or are these push outs more as a result of coal that kind of logistics Deane, it's Neil I'll take the second half of your question and give the first half to Rob. So scope is completely unchanged. The project continues its just slower pushing a little bit as we discussed in the prepared remarks into next year, but yeah. The scope is this for.
All intact, yes. It is continuing as Neal mentioned and so there is now we've got about a 100 million.
For the project this year right. So maybe that down 10 tended 10 million or so versus what we said last quarter.
Got it and then.
Food feed Neal or Rob, but could you expand the point on fourth quarter seasonality.
Maybe you can start with the free cash flow expectations, because just given the macro you're concerned about what might be seasonally normal what what might not happen. Our play out the same and then within the businesses is there just remind us on where and how you would expect.
Seasonal impact in the fourth quarter.
Sure. So on cash flow as I mentioned earlier, we feel great about where the conversion news is year to date and Q4 is generally a high cash conversion quarter because of the annual billing of the software businesses and the fact that we don't have mostly tax payments are usually in the first half the year. So tax payments are less than the fourth quarter.
On the on the seasonality. So yes, I think it's a good point I mean normally if you go back historically right. When Rover was more of the cyclical business as a percent you'd get the Q4 bump in what used to be our energy segment.
So theres some of that I think sequentially, we still have as its a very small part of Roper what's happening. This year as Neal mentioned is our medical products business is really specifically marathon had any norm its second and third quarter driven by the Covance surge and so their fourth quarter versus the third quarter is down about $30 million.
As a revenue.
They're still up quite a bit year over year, and we're hopeful that happens right. If the cobot search gets worse than marathon will sell more products, but we're hoping that doesn't happen. So that was all included in our guidance and for Q4.
Our next question will come from Allison Poliniak with Wells Fargo. Please go ahead.
Thanks, Good morning.
Good morning Allison.
Go to your comments around I trade and foundry understanding that certainly having disruption, but it obviously those markets are quite a bit more challenging maybe others are you seeing any sort of longer term impairment to some of those customers.
I don't I don't think so at all you know take I'd trade as I mentioned in her prepared remarks, I mean that business is partially index to sort of the institutional food and that's also partially index to retail so institutional down retail up. It's just the balance is a little bit towards the negative you know the renewal rates for the more institutional.
Additional side have been fine, there's not they're not dropping off obviously the contract sizes have gotten a little smaller but the retention rates of the actual customers are the same on foundry foundry has had a good year recurring revenues are up you know the EBITDA is up in that business.
There is the way that the flow of work happens and converting live production and opposed into releasing content either film or television. There was a fair amount of backlog being worked on in the first half of the year. Then there was this pause in Twoq you have live action came back on slowly in Q3, it's for.
Fully ramped up right now across the globe that creates more content for post and so there is a couple of quarters inside the middle of this year, where the number of net new software sales to new customers.
Paused or waned a bit but the recurrence was high and we expect that the fully bounce back as a pipeline is filling backup what content.
Understood and then just kind of going back to transcribe and some of the other projects.
Anything tied to mean if at all in your portfolio that you are starting to see incremental challenges or delays there.
I would say no I mean, if you on the municipal side the.
One transcore no I mean, the the bidding activity the sort of the sales pipeline. The transcore are quite quite good. The number there are large number of projects that are sort of in the process of being awarded now thats a good leading indicator the municipal budgets at Neptune or.
Or are largely intact and been renewed and sort of dollars are being spent against them on that municipal side. So no I mean, I think we feel pretty good about the spending that's the budgets that are out there to be spent across municipal parts of our business religious project slowing which is probably mostly due to covert rides.
Things are just taking longer to get going and transport for the most part.
Our next question will come from Christopher Glynn with Oppenheimer. Please go ahead.
Yes, thanks, good morning.
Good morning.
I was curious about.
On quests.
Sounds like you have some fresh momentum going there.
Are you moving past that.
The kind of net attrition mob.
Modest slide that that business has been saying.
So I'd characterize Sunquest, Hey, Theyve had just a great year, they actually going to be up a little bit and EBITDA this year versus last year.
Based on all the activities going on around Cove, it in a little bit of strength, we're seeing in the diagnostic the molecular part of their business and new product offering in some public health offerings, they have as well let's.
That said I think we've still got.
Sort of view this year as a pause.
And the longer term trend and I would expect that business to have faced a little bit maybe a year or so maybe.
Carded for pinpoint it precisely but call it a year to two.
Headwinds general normalized stabilizing it back into.
Sort of a maybe a low single digit organic growth the sort of business.
Okay and as you are focused on debt reduction the next year year and a half.
You still anticipate some you know Fcs or well this type of.
Additions to existing platforms.
It was going to be the bar is very high.
For those it wouldn't surprise me that said, if there was a little bit.
A little bit of bolt on activity, but our principal focus here is news to deleverage for the next year or so.
Our next question will come from Steve Tusa with JP Morgan. Please go ahead.
Hey, guys good morning.
Hi, David.
Can you just give us some color on you know how in a live with a little more precision youre.
You know revenue performed in license and maintenance and recurring I mean, you guys are definitely getting a lot more really solid color directionally on this stuff but.
Just love to understand you can talk about an enterprise wise, if you want just a little more precision on kind of how those three buckets performed in the quarter.
Yes, so I think overall recurring revenue, which right is maintenance plus subscription as I think Neil mentioned earlier was up mid single digits. The the license and the services piece is impacted by co, but as we talked about throughout the year. So theres some declines there and that's what gets you to that basically over.
All the software businesses were in line, a tad better than we had coming in really since that since the pandemic.
Began I think overall, our our software revenue is about 80% recurring and that's that the maintenance and subscription piece, which continues to grow our retention rates continue to be very very high.
It all bodes well for next year, when when the services and the perpetual stuff should start to come back.
I guess I shouldn't shouldn't that be dilutive to margins for you guys aren't license to higher margin then.
The recurring side, yes.
Yes, I mean, they perpetual not service perpetual licenses are high margin services is the lowest margin part of the of a software business and recurring revenue is quite high as you know.
Also these you know not just us pretty much every business on the planet their cost structure is lower this year because of the co with you just couldn't spend money on travel and customer meetings and things like that so that became a natural offset.
So some of the perpetual headwinds.
Okay.
Our next question will come from Julian Mitchell with Barclays. Please go ahead.
Hey, good morning, everyone. This is Jeff well on for Julian good.
Good morning.
Maybe just.
Asking on you guys mentioned, the short cycle businesses being a bit of recovery here.
Any is there any color you can give on sort of how the cadence of that is look there is some pent up demand earlier in the quarter or are we still seeing kind of.
More gradual sequential improvement that should should continue add.
No I appreciate the questions you know, it's such a small part of our business you know Weve reported and talked about last quarters is the consumable piece will starting to pick up that continued the strength of that continue through the quarter than we saw some.
Some pickup of the capital spending, particularly at our stores business.
I think the pace throughout the quarter was just improving a little bit sequentially through the quarter. I mean, it was pretty straightforward, yes, very gradual sequential improvement that's that's a good way of stating it.
Thanks, guys and then.
You touched on it earlier, but obviously, we're seeing Cobra cases in hospitalization rates kind of going up over the past week or two.
How does that kind of line up with the Q4 outlook and sort of the expectations for.
The medical businesses that are benefiting from coated the ones that are sort of would benefit from more normalization.
Yes, so we really had five businesses. This year right that had benefited from covered financially marathon Ipi and talk a lot about that our three businesses and our laboratory software platform and they're all it at the at the front lines of fighting this thing and so there would be some give and take if covance surge and you had more hospitalization.
And I don't think it's happened yet if that started to happen in those businesses would probably do more in that that covered other areas. So it's great to having this big diversified portfolio of businesses.
Whereas will do great in a postcode world, we can't wait for it to happen.
Right, but you get a little bit of financial benefit in the short term into that Neil no. Okay.
Our next question will come from Scott Davis with Molina Research. Please go ahead.
Hey, good morning, guys good morning.
What.
I'm sure you guys have seen the news with all these new specs coming out seems to be.
Literally hundreds of them but.
Our many of them I should say.
Our any concern that thats going to provide.
New competitor for you guys, you or do you think youre.
Two niche for really that.
Type of vehicle Yep. So we felt we spent a little bit of time on this we've got some.
We studied it with some advisors to get on this very question Scott is as a new competitor emerging for capital deployment and our conclusion that to that is no and the reason is that you know a stack.
The seller is obviously doing a backdoor IPO the sellers getting a percentage of their proceeds.
Closing not the whole thing.
And then you also theres other factors around the business dynamic and the leadership team and the ability for it to be.
A public company that investors have appetite for and so principally know could there be one or two on the fringe, maybe but it's not not like a full on competitor relative to our capital deployment.
Oh by the way specs have been around you know and big volume for the last three or four years. It's obviously increased a bit here there'll be a lot of this fact, my doesnt get deployed and recycled.
It's just because you raise it doesn't mean that a deal is going to happen and so it's not it's not a totally new phenomenon is just catching some obviously mainstream media right now.
Yeah. Thanks.
Thanks, Hans I'm glad you've studied it but.
A question about vertical for the.
The SaaS versus perpetual two higher than.
Then then most of the other software businesses you have is there a particular reason why that product sells better into assaf.
Versus perpetual or is that how you go to market. How you price. It is that the product or is that the pricing I guess the capex question.
Well I think it's that they started the journey to migrating the SaaS earlier than many of our other businesses. So they just got to the point, where they have about 80% deployed and SaaS little over 90% recurrence of their revenue stream. We're friends. It's a deltek is midstream and that conversion going that way by the way you mean deltek is 75% return.
Im pushing the 80 this year.
Good.
Fast forward five years, a look more like Mike Deltek, and then companies like.
Seaboard Adder Enc power plan are just beginning that migration again all of this paced by our customers our customers decide when they're ready to go to the cloud and when the value and when the time is right for them and because of that pacing. It elongates over multiple years, we don't run sort of any of this adobe risk where you have a.
You know the J curve and go backwards before you go forwards and as we said many many times. This is all a net growth driver for us as you migrate that the maintenance part up to the cloud you get uplift on that then obviously, you're selling net new Hsas licenses would drive your current revenue base up I think it's just a vertical or started earlier in this process.
Some of our other companies.
Our next question comes from Joe Giordano with Cowen. Please go ahead.
Hey, guys good morning good.
Good morning, Joe.
I just wanted to understand the.
Puts and takes in the guide here so like you.
You beat the midpoint of your prior guide by 22 cents in raising the full year by 45.
How much of that incremental.
Is from the deals and how that how should we think about like that the core guidance.
M&A versus what it was three months ago.
Yes, so think of the deals is 45 to 50 cents to the second half some of that we got in Q3 about 12 cents and the rest in Q4.
And then everything else is pretty much a wash, there's four or five cents from tax.
There's the Vera thought in Transcore sort of pushed to the right and then quite frankly, a lot of investment that we're doing in the fourth quarter it businesses like marathon.
We continue to position ourselves well for next year.
Thank goodness the operational stuff is sort of caution.
Yes.
The midpoint change.
Okay fair enough.
And then just curious on deltak.
What are your guys.
They're saying about like the potential for that business and by the administration given spending plan that they have things like that.
It's a it's often it's a frequent question around elections for deltak that goes back.
A lot of years, many elections and what what the short answer is it either administration either way is fine for deltak. The principal reason for that is these government. Some caught subcontractors just gravitate towards the rapid or fast currents of government spending and so for instance, with Obama is health care.
Where you know if biden wins as infrastructure, they'll just migrate into that where that spending is.
There might be a few incremental sort of subcontractors government government subcontractors that might show up an infrastructure bill this might be a little bit incrementally beneficial for deltak, but not a meaningful growth driver were that the great thing about this business is that it does well in almost any government spending environment, because as you know government spending always increases.
Our next question comes from Blake Gendron with Wolfe Research. Please go ahead.
Thanks, Good morning, so even folks on the better than expected recovery in non emergent hospital activity, you mentioned and you've been very descriptive with the Vera on Ipi impacts of Cove it.
So wondering if this has helped to recover its driving somewhat of a subdued non emergent healthcare exposed businesses versus the verified an IP tailwinds I'm just wondering how we in aggregate maybe frame the improvement in the non emergent side of the health care business.
Yes, so the other medical products businesses that aren't verified right had been down this year quite a bit so really double digits and that's starting to moderate a little bit in the fourth quarter, whether or not they're going to be probably more flattish year over year and they would grow quite a bit coming out of that right. These are the.
Businesses as Neil mentioned that grow mid single digit organically like clockwork literally going back 10 years and and so as you get more procedures happening then in those businesses become get back to normal probably had some catch up as well, yes, and just a little more color on that I mean hospitals like a lot of businesses right when things got economically really.
Managing patient volumes were down quite a bit and in Q2 and coming it coming out in the coming into Q3 hospitals may took dramatic cost actions on the operating side, but also basically froze all capital spending.
And hospital budgets as they cycle back in next year, and there will be some level of capital spending and thats likely going to be on things that are more akin to what we do I mean, we were Blake mainstream procedure type things not ask Derek or sort of Super high technology that is.
That is.
Super High dollar and sometimes questionable at the hospital level.
Understood and just a follow up here. So the question was asked last quarter businesses like that and Constructconnect getting more sign on just given the sheer dynamism in the market the shorter cycle industrial recovery broadly seems to be plateauing or stabilizing how do you expect this to impact new logos and some of these businesses versus the.
You need to expand existing customer touches.
Through things like product enhancement.
Perhaps R&D maybe is folded in here.
Yes, so couple of things on Constructconnect you know the the businesses spent the team there spent really three years building the software capability. That's part of the work flow of both general contractors and subcontractors and building product manufacturers is no longer just a content business essentially identify.
Buying leads for new projects really working to drive a bit utilization of the software and the daily workflow of all the users and so when you get into an environment like the one we're in the environment opens up meaning there's more people that are looking for work. So they come the constructconnect and by the first product the cross sell into some of the workflow.
Products now, we actually have the ability to do it and we're seeing.
Recent better than than decent attach rates of multiple products and importantly, then we're seeing what we hope to see which is the increase of the daily use and so we think the long term retention rates will be higher. We think this is going to continue for quite some time I mean, constructconnect services sub 10% of the market and there is 90% of the.
Market has amended and that market is the one that's that unvended market as the one that is coming to constructconnect and environment like this.
This concludes our question and answer session. We will now return back to the Sac Moxy for any closing remarks.
Thank you everyone for joining us today, we look forward to speaking with you during our next earnings call.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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