Roper Technologies Inc (ROP) — Q1 2020 Earnings Call Transcript

Good morning and thank you all for joining us as we discuss the first quarter financial results for Roper Technologies. We hope everyone is staying safe and healthy. Joining me on the call this morning are Neil Hunn, President and Chief Executive Officer; Rob Crisci, Executive Vice President and Chief Financial Officer; Jason Conley, Vice President and Controller; and Shannon O’Callaghan, Vice President of Finance. Earlier this morning, we issued a press release announcing our financial results. The press release also includes replay information for today’s call. We have prepared slides to accompany today’s call, which are available through the webcast and are also available on our website. Now, if you’ll please turn to slide two, we 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 COVID-19 pandemic. A description can be found on this page, in our press release, and in our SEC filings. You should listen to today’s call in the context of that information. And now, please turn to slide three. Today, we will discuss our results for the quarter and year primarily on an adjusted non-GAAP basis. Reconciliations between GAAP and adjusted measures can be found in our press release and in the appendix of this presentation on our website. For the 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 acquired deferred revenue. And now, if you’ll please turn to slide four, I will hand the call over to Neil. After our prepared remarks, we will take questions from our telephone participants. Neil?

Thanks Zack and good morning everyone. First, and most importantly, we hope that everyone that is joining us this morning and your families are staying safe and are in good health. With that in mind, our first quarter was quite good, with 4% organic revenue growth, expanding gross and EBITDA margins, and very strong cash flow coming in at 13% above last year. After a brief run-through of Q1 results, I'll turn the call to Rob, and he will discuss our P&L, our balance sheet, and our cash position. We find ourselves in a very fortunate position to have $1 billion of cash on the balance sheet and a completely undrawn $2.5 billion revolver. Then, I'll turn to discuss our operational status and respond to the COVID-19 situation. To this end, all of our product businesses are deemed essential, and our non-production workforce are being productive working remotely from home. As we turn to our segment discussion, the majority of our comments will focus on a detailed view of how our businesses and business models should perform through the current situation. The impacts we're seeing across our diverse set of businesses range from a pause in new license sales for some of our high recurring revenue software business to a positive spike in demand for our critical medical products to sharp declines in our Industrial and Process Technologies businesses. Following this, we will break down our Q2 and full year organic revenue guidance. In the midst of this global economic shutdown, we are guiding our full year organic revenue 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 outlined 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 end with a summary of a few of the Roper companies that are on the frontlines responding to the COVID-19 virus. Finally, we'll turn to your questions. Now, let's turn to a brief run-through of our Q1 results. Next slide please. Q1 was quite good for us. Our businesses continue to work hard to execute strategy and town offenses, and Q1 is another good data point that shows what we're doing is taking hold. Revenue grew 4% organically, with solid organic growth in three of our four segments. Gross margins and EBITDA margins expanded nicely and debt came in at $3.05, a $0.05 above our guidance range. And as we said for nearly 20 years, cash 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 call over to Rob to discuss our detailed financial performance.

Thanks, Neil. Good morning, everyone. It’s a pleasure to connect with you today. Looking at page six, our Q1 income statement metrics show that organic growth was a solid 4%, outperforming our expectations for the quarter. We experienced positive organic growth in three out of four segments, led by Network Software & Systems at 9% and Application Software at 5%. Our business leaders executed exceptionally well this quarter, improving operating leverage while continuing investments for future growth. Gross margin increased by 50 basis points to 63.5%, and EBITDA margin also grew by 50 basis points to a record 34.5%, contributing to a robust 7% EBITDA growth for the quarter. Earnings before taxes rose by 7% to $408 million. Last year, we had a $43 million discrete tax item in Q1, which resulted in a $0.41 benefit and brought our tax rate below 10%. This year, our Q1 tax rate was a more typical 21%, leading to earnings of $3.05, which exceeded our guidance range. In summary, it was a strong operational quarter for Roper, thanks to great execution by our business leaders. Next slide. Moving on to cash flow, Q1 operating cash flow was $364 million, a 10% increase compared to the previous year. Q1 free cash flow was $353 million, up 13% from the prior year. Over the past few years, our Q1 free cash flows have compounded at a strong rate of 14%. As we've emphasized repeatedly, we believe cash is the best measure of performance, and this is another positive cash flow metric. Our EBITDA compared to free cash flow has consistently remained above 70%, with a 76% conversion in Q1, and we expect strong cash conversion to continue moving forward. Next slide. On page eight, regarding our asset-light business model, we ended the quarter with negative net working capital at 4.4%, supported by effective working capital management and growing deferred revenue across our portfolio of software businesses. Maintaining a focus on cash flow and working capital is crucial as we navigate through the pandemic. While there may be some short-term challenges from delayed payments in affected markets like acute healthcare, we are well-positioned overall due to the resilient sectors we serve. Our substantial deferred revenue provides a strong recurring revenue base, helping to limit earnings volatility. On a cash basis, the distribution across our independent businesses and throughout the year minimizes the impact of attrition on our cash conversion. Thus, we anticipate that our working capital will remain negative and our strong cash conversion will persist in 2020 and beyond. Next slide. Turning to the balance sheet and our solid financial position, this slide is significant, especially in today’s economic climate, which has faced an unprecedented shock due to the pandemic. We will first review the numbers before discussing our outlook and the measures we've implemented at Roper to continue executing our disciplined capital deployment strategy. Roper has a robust liquidity position. We currently hold over $1 billion in cash, and our $2.5 billion revolving credit facility remains undrawn. We do have around $200 million in cash taxes pending from the Gatan divestiture, with payments postponed to July. At the end of the quarter, gross debt stood at $5.3 billion against nearly $2 billion of trailing EBITDA, yielding a gross debt to EBITDA ratio of 2.7 times. However, with our significant cash balance, net debt is only $4.3 billion. Next slide. Now on page 10, during these unprecedented times, I want to emphasize the advantages of Roper’s business model. Our diversification across 45 independent, high-margin, asset-light businesses within various niches creates an excellent credit profile. We are not reliant on specific end markets, and our decentralized structure mitigates the financial impact of facility closures or sector-specific economic shocks. Thanks to our business model and diversified portfolio, we are confident that Roper will continue to produce strong cash flow across nearly all potential macroeconomic scenarios. As previously mentioned, we maintain a strong balance sheet characterized by an unusually high amount of cash—a fact not lost on long-time shareholders. Normally, we maintain minimal cash and draw from our revolving credit line to fund acquisitions. This timing is advantageous given the pandemic, and we aim to capitalize on it to enhance future cash flow. Recently, we successfully completed an amendment process with unanimous support from our banking group to adjust our gross debt to EBITDA covenant to account for our cash reserves. This process highlighted Roper’s uniqueness, and I extend my appreciation to Shannon and our outstanding bank group for the swift completion of this amendment. Under the revised calculation, our net debt to EBITDA ratio is now 2.1 times, which is about half a turn lower than before, compared to the covenant of 3.5. In summary, we are well-prepared, with a strong pipeline of high-quality acquisition opportunities. I will now hand it back to Neil.

Thanks, Rob. It's worth underscoring the strength of our balance sheet and borrowing capacity. Also, great job by Rob and Shannon in adjusting to a net debt covenant, which further strengthens our capital deployment capacity and the ability to play offense at the appropriate time. Also, thanks to our lending group. Now let's turn to how we're responding operationally to COVID-19. We are blessed to have very few COVID-19 cases, each of which has recovered or is recovering. From an operational readiness perspective, we are also fortunate. All of our businesses with manufacturing facilities have engaged as essential and remain operational, delivering the vital products that our customers need during this time. Our portfolio of niche businesses is characterized by having meaningfully reduced cyclical exposure, high levels of recurring revenues, low asset intensity, low levels of fixed costs, and high levels of operating cash flow. We operate this portfolio in a highly decentralized operating structure that enables rapid, nimble execution. Our locally driven, bottom-up approach to business planning performs exceptionally well in any environment and clearly, this is an unprecedented one. Given this, there have not been any top-down mandates or mandatory targets but rather a few guiding principles to consider and an incentive system that promotes investments and long-term organic growth. We did ask our businesses to assess the short and medium-term impact on the demand drivers and take a sober view of each. Based on this, each business deployed appropriate cost countermeasures with emphasis on three items. First, each business worked to manage their margins appropriately with constant vigilance on 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 are aimed at an offensive-oriented posture upon recovery. Also important and often under-discussed is our direct channel access in the vast majority of our companies. Rarely does Roper have a business that relies on third parties or distributors for market access. Given this, we remain engaged with our customers in good times and bad. We learn, we adapt, and most importantly, we stay connected. This typically enables market share capture in difficult times and accelerated benefits during the recovery cycle. And in all times, our leaders keep an intense focus on cash. Having worked through this process over the last several weeks, I'm incredibly proud of how our leaders have reacted and managed through the current situation. Thank you. As we turn to our first quarter segment results, I'll start with our application software segment. Briefly, a quick run-through of Q1, which was quite strong. Revenues were $405 million, up 5% on an organic basis. EBITDA was $156 million or 38.6% of revenue. The quarter was highlighted by continued strength at Deltek due to consistent factors: strength in GovCon execution, nice wins at the enterprise level and certain professional service markets, and continued cloud or SaaS adoption. However, based on the impact of COVID-19 sheltering, Deltek did see a slowdown in perpetual deal activity during the last couple of weeks in the quarter. PowerPlan was also strong during the quarter. The sales pipeline build that we discussed in prior quarters executed nicely. CBORD and Strata were strong. In CBORD's case, due to 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 and 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 in this segment are derived from perpetual software licenses. Within this bucket of revenue, new sales are derived principally 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 the year. However, we do expect some volume of add-on product bookings to continue. Typically, during economic slowdowns, 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 of revenues are tied to service delivery. Service revenues arise from two sources: new product implementations or existing product upgrades. The first bucket is tied directly to new license sales, either new logos or add-ons. The second bucket or services upgrade runs independently of new license activity. The services book of business runs off a six to twelve-month backlog. To date, the vast majority of our service projects continue, albeit at a slower pace, as both our customers and our delivery teams adjust to working remotely. We expect this revenue stream to be minimally impacted during the course of the year. Finally, the remaining 70% of revenue is tied to recurring maintenance or SaaS-based revenues. Our companies in this segment serve end markets that are expected to perform relatively well relative to the broader economy, including government contractors, law firms, healthcare, and education. Given we mostly serve larger enterprises and less affected end markets, we do expect retention rates to remain high. Now let's turn to the next slide to discuss some specific business impacts. Our application software businesses have proven to be extremely durable and consistent organic growers and will continue to do so once customer access and activities begin to come back online. However, in an environment where we essentially have essentially all businesses on a global basis closed, these businesses will be modestly impacted. As we look at Deltek specifically, we expect the government contractor market to continue to perform well. New lead 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 are in significantly impacted segments and tend to be SMB-sized. PS revenue and retention should perform well across both GovCon and Professional Service markets. Turning to Aderant, PowerPlan, and CBORD, we believe these businesses will be impacted in a similar fashion. We expect some net new logo bookings to 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. The smaller, add-on type product sales are expected to maintain at some level, albeit 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 four businesses, we sell into the hospital setting, we are experiencing and expect to continue to experience limited physical access to hospitals. Also, given the financial duress most U.S. health systems are facing, we expect hospital capital spending to be meaningfully down in 2020. That said, labs are extremely busy improving their value to the world right now. Our teams have been busy enabling all the new COVID-19 tests and will continue to do so. As a direct result of COVID-19, the Sunquest project in Queensland has been canceled. Strata should continue to grow, albeit at a slower pace. We expect continued strong demand for Strata solutions, which help hospitals identify and manage costs and help model and execute financial plans. Finally, we do anticipate a possible acceleration to the cloud on the back end of the current environment. As customers have had to implement their disaster recovery plans, they are likely returning with an increased appetite to offload and remotely manage their core systems. Time will tell. Next slide, please. Turning to our network segment. Q1 revenues grew 9% organically to $441 million. EBITDA was $185 million, or 42% of revenue, a solid quarter, indeed. TransCore's work for the congestion pricing infrastructure project continued in the quarter, as it has been deemed essential work by the state of New York. Network software was strong and highlighted by iTrade and DAT. iTrade grew high single digits on the back of strong renewal and cross-sell activity. DAT continued to expand our network and successfully completed the market launch of rate forecasting and book-it-now capabilities. Finally, RF Ideas did very well due to their identity management solutions. For this segment, approximately 60% of the revenues are driven by our network software businesses, with 85% of those being recurring. These businesses have very strong network effects and generally serve less impacted end markets such as healthcare, life insurance, logistics, food, media, and entertainment. Given the core software functionality 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 MTA budget moved the congestion pricing toll revenue into the operating budget versus the MTA capital budget. Our view is that this modestly increases the urgency of this project. All this being said, we have pushed the project to the right a bit, moving approximately $25 million into early 2021. For the balance of TransCore, project activity continues and will continue, but we do expect some projects to be pushed into 2021. Over a longer arc of time, the business case for all electronic tolling may accelerate as a result of the current health pandemic. Essentially, human-to-human contact paying a toll may be greatly reduced, if not eliminated. TransCore will be ready to execute if this demand driver accelerates. Next slide, please. Turning to some company-specific impacts for the software businesses in our network segment. First, our DAT 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 countercyclical behavior. For example, and specific to ConstructConnect, the core product is a project lead identification source. As more contractors look for fewer projects, they tend to enter our network to source and bid for new project business. In the first three weeks in April, it's encouraging to see the ConstructConnect network expands modestly. For DAT, the brokers stay connected to the network and take advantage of lower spot rates versus contracted rates, and carriers stay connected to find load volumes. iTrade is quite busy connecting food retailers. With an increasing number of grower shippers, we expect minimal disruption here. iPipeline has been super active helping their life insurance customers adapt their products and their underwriting processes in this environment. The outlook remains stable here as well. Relative to foundry, content creation continues. There is a large pipeline of post-production work that is currently being processed as well as continued new animation content creation. As potential early reads for western production, Chinese live-action has restarted on a limited basis. Finally, our alternate site healthcare businesses will perform relatively well, but are not spared from some level of impact. Both SHP 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 health are down 30% to 35% versus a year ago. We expect these customers to likely pause buying new products until their patient volumes return. Retention, however, should remain high as our products are needed for operations. Finally, MHA's revenues are tied to pharmaceutical utilization across long-term care settings. Starting now and likely for several quarters into the future, new admissions into long-term care settings will likely slow. However, this should only modestly impact the growth rate of MHA. Next slide, please. Turning to our Measurement & Analytical Segment, Q1 revenues grew 3% organically to $365 million. EBITDA was $123 million, or 33.6% of revenue. The quarter was highlighted by strong growth at Verathon amid the COVID-19 outbreak. Unrelated to COVID-19, Verathon saw continued traction in their new single-use bronchoscope products. Additionally, Northern Digital and Neptune continued their solid string of growth. We did experience declines, as expected, in our short-cycle industrial businesses, with some further weakening in the quarter due to COVID-19. Turning to the outlook, this segment can be analyzed across four areas: Verathon, other medical products, Neptune, and industrial. At Verathon, we are experiencing truly unprecedented demand for their GlideScope products. Intubation procedures have skyrocketed due to COVID-19. Verathon's video intubation products enable the 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 is global and has been sustained since the middle of March. Our other medical product businesses, which grow organically in virtually all environments, are likely negatively impacted based on the global nature of historically lower hospital-based volumes and the associated economic impact. Hospitals have never been forced to defer all non-emergency cases. Neptune is a very stable growth business due to the consistent requirement for meter upgrades and replacements. Given the shelter in place requirements and limited access to indoor meters and municipality budget uncertainties, some level of sales activity will likely push to the right with the most acute impact being in the second quarter. Finally, our industrial businesses are negatively impacted and generally tied to industrial output. Our industrial products are critical for industrial production processes. There are some pockets of strength, but for this group, our revenues for these businesses will be tied to the pacing of plant reopenings. And as a green shoot, we are seeing strong activity across Chinese end markets as our markets come back online. Next slide, please. Turning to our Process Technologies segment, revenues were $142 million in the quarter, down 10% on an organic basis. EBITDA 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 the balance of 2020. We saw our upstream businesses decline in the high teens in the quarter. Additionally, CCC was weak based on the inability to perform field service work, all related to COVID-19. One bright spot in the quarter was Zetec, which was up mid-single digits based on growth from their new non-disruptive testing products. The outlook for the balance of the year is going to be extremely challenging. About 60% of the segment's revenue and about 6% of Roper's revenue is related to oil and gas. We will be hit the hardest, down approximately 50% in the second quarter in our upstream business. For the year, upstream revenues will be less than $100 million or roughly 2% of Roper's revenues. We do not expect any recovery at all in 2020. Our mid and downstream businesses are also meaningfully negatively impacted, but less so than our upstream businesses. The pace of recovery here will be gated by CCC's ability to get into the field and perform field service work and the recovery of fuel refining for PAC. Next slide, please. As we turn to our guidance, we are initiating DEPS guidance for Q2 in the range of $2.50 to $2.70 and updating our full year DEPS guidance to be between $11.60 and $12.60 per share. Embedded in this guidance model is an increased full-year tax rate of 23%. We built this model, as we always do, on a business-by-business, bottom-up analysis. We have summarized the organic outlook for each segment for the second quarter and the full year, with the underlying material assumptions. For application software, we see Q2 revenue down MSD, with full-year revenue being plus or minus low single digits. Where we settle for the full year is dependent upon the volume and timing of add-on perpetual deals, the pacing of services work, and sustaining high recurring revenue retention rates. For network systems, we've seen Q2 organic revenues up low single digits and full-year up mid-single digits to possibly low double digits. The largest variable is the pacing of the New York congestion pricing project. For Measurement & Analysis, we see this segment down mid-single digits in Q2 and flat to up mid-single digits for the year. Principal factors for this segment are the sustained nature of Verathon's demand spike, the timing of medical procedures coming back online, the nature of water municipality budgets, and the ramp of global industrial production. Finally, our Process Technologies segment will be materially and negatively impacted. We expect Q2 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 roll all this together, we expect our consolidated organic revenues to be down mid-single digits for Q2. 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 good job responding to the demand shock, placing cost countermeasures in place, the vast majority of which being temporary. This enabled us to maintain high margins as we work through the demand shock while retaining virtually all no-regrets investments in innovation and talent, preserving the operational flexibility to rebound quickly. Now let's turn to our summary. We had a very solid Q1, and I am really proud of the team here for these results. As we quickly pivot towards operating in a COVID-19 world, our enterprise remains fully operational, and working from home is proving to be highly effective. So effective that we'll likely remain in this posture for quite some time. Our balance sheet is stronger than at any point in history, with $1 billion in cash and $2.5 billion of revolver capacity. For the full year, we expect to have plus or minus flat organic revenue growth. We believe our portfolio of businesses and our governance processes are well suited to navigate this extremely difficult time. We will do so in a way that prudently balances short financial performance and cost countermeasures with long-term investments in innovation and talent. Our teams are keenly focused on market share gains, both now and upon recovery. As we execute our strategy focused on long-term cash flow compounding, we will continue to patiently evaluate and pursue capital deployment opportunities. Our process is rigorous and disciplined. We do expect many attractive capital deployment opportunities to arise from the current economic situation. Since our balance sheet is well-positioned, we will offensively deploy capital as the right opportunities are identified. Final slide, please. As we prepare for your questions, I wanted to highlight a few examples of how Roper businesses are aiding in the fight against COVID-19. Our lab businesses enabled a new COVID-19 test to interface with lab information systems and provide results to doctors and patients. iTrade is connecting new food trading relationships as food buying shifted almost entirely to grocers. Strata is using their AI tools to help hospitals achieve financial clarity in these uncertain times. And Verathon, as discussed, is truly on the front lines. I'm extraordinarily proud to lead this organization. Now let's turn to your questions.

Thank you. Good morning, everyone.

Good morning, Dean.

It's great to hear everyone's voice on the call. And I just want to thank you for all the additional color that you provided today on both the application software and network software business models in the mix. That was helpful. And that last slide on all the ways you're participating in the COVID defense, that was great to see as well. So Neil, for the first question, it's the idea here is most companies are drawing on revolvers. You're obviously not doing that. You're in a much stronger position. But keeping $1 billion in cash at the ready to deploy on M&A at the appropriate time, can you talk through when that will be the appropriate time? Because will there be targets in distress that would be opportunistic? It typically takes a while for prices to reset in a downdraft like this. So maybe kind of set expectations on when and how you deploy M&A here? Thanks.

Sure. I appreciate the question. In any environment, it's hard to predict the timing of capital deployment because, as you know, it's lumpy. But a few comments. First, leading into the shutdown, leading into the middle of March, we were extraordinarily active and paused several things, and we believe at the right time, we can unpause those things. Only time will tell there. But we stay in constant contact with the owners of those assets, and the leadership team for those assets. And these were very late-stage sort of situations. But once we work through that, sort of, late-stage part of the pipeline, there continues to be some level of discussions between sponsors and ourselves. We've spent years developing relationships, and we know the portfolio as well. This is the time where those relationships matter the most, because it's unlikely that in the next couple, three, four, or five months, however long it is, that there are going to be broad-based sell-side processes. But sponsors still have requirements to get liquidity back to their shareholders. If there are one-off trades that make sense for both sides, we think those could happen. Finally, historically, in the last downturn of 2007, 2008, and 2009 timeframe, I wouldn't call them just distressed situations, but there are likely to be some companies that are distressed from a capital structure point of view, not from an operating point of view, which would give them some pressure to sell to acquire nice operating assets that meet all of our criteria. So, the nature of where we target might change modestly because it does typically take a couple of quarters, plus or minus, for private valuations to reset to where public ones are.

That's really helpful. I have a follow-up for Rob regarding working capital. You mentioned there might be some delayed payments. Can you provide more detail on that? When you mentioned expecting working capital to remain negative, were you referring to quarterly or yearly expectations? Also, how do you anticipate the quarterly performance in terms of remaining negative each quarter? Thanks.

Yeah. Good morning, Deane. Appreciate the question. It's always difficult to predict working capital, right? It's one of the toughest things to predict. We certainly know that there are some end markets, particularly acute care, where, if you call the news, there's going to be some challenges there where hospitals are slowing some payments, et cetera. So, difficult to predict each quarter. I will say that our customers overall were in very durable end markets, and so, we expect really no credit risk across all of our customers. So it's a matter of timing of payments. And when you have the huge deferred revenue balance when you have management teams that are really close to their customers, we feel confident that the working capital position will remain very strong and negative throughout the year.

That's very helpful. Thank you.

Yeah. Thank you.

Hey, guys. Good morning.

Good morning, Steve.

Good morning, Steve.

Thanks for all the detail. Every quarter, more successive detail on all the businesses. It's very helpful in helping us, some industrial analysts understand these tech businesses. So, I appreciate that. On the second quarter guide, it looks to me like your sales are down like $85 million to $90 million, just using kind of a mid-single-digit rate maybe. But the EPS decline of like $0.45 seems to be a pretty high decremental. Is that just kind of the nature of the business? How can you help us walk to the profit performance there? Anything moving around mix-wise?

Yeah. I'll start, and then I'll ask Rob to add any color. So obviously, this demand shock for every company came fast and deep, right? We started feeling it across a few of our companies at the end of the quarter. And then obviously, it's sustained here through the first part of April. So a couple of comments. So first, when this happened, just from a planning perspective, we first – we didn't try to overreact or react too quickly. We first had to get everybody home, which took a week or two. We then took a week to 10 days to let our leaders really onboard and accept the reality of the demand shock. And then we started our planning process, which was really the first week or so in April. So sometimes, things take time. And so by the time you do the planning process in Q2 and then start putting in the cost countermeasures, it was really just starting to layer in now against what we believe is going to be the steepest demand shock. And so when you put those two together, you just naturally get the worst leverage in Q2, and things stabilized from that point in time.

Yes. And I'll just add to that. We talked a lot about the perpetual license timing. And so when you're in the second quarter period where the economy is basically shut down for at least the first month of the quarter. So we're not assuming much, if any, license revenue. As you know, that comes at a really high margin. We do have the TransCore project continuing, which is lower margin. So you're really also looking at some mix impacts, adding on to what Neil said.

And then the final thing, Steve, so I should have mentioned at the onset is we're not adding back any of the restructuring costs. So that is a little bit of a headwind in the quarter as well.

Got it. How much is that again?

It's sub-$10 million.

Okay. That makes some sense. And then it's my understanding that in some of these software businesses, you see kind of perhaps a bit of a pause, but then that's kind of a quarterly variance. We're kind of used to in some CapEx businesses that are more annual cycles. So that – are you expecting kind of a push on revenues in application software from second quarter into third, so that you kind of have a bit of like pent-up revenue in the second half of the year, if you will? Is that how we should kind of think about this or not really?

So Steve, everything is certainly pushing to the right. We've not assumed that it's a 2Q push that comes back in 3Q. It's just everything sliding to the right. To the extent what you describe happens, then that would lead us to be more on the higher side of our guidance than the lower side. On the new logo sales, the new customers that are buying relatively high dollar transformational type IT projects, those are going to be pushed to the right for the most part, right? Who's going to make a big IT investment right now? Setting aside how our salespeople actually get to that customer and sell. The smaller ticket items, the upgrades, and the add-on products, that level of activity has actually been quite nice. At Deltek, for instance, the top of the funnel here in the last three or four weeks, like this is the inquiries up 30% to 35% versus a year ago. Now some of that is everybody sitting at home doing Google searches, right? So the quality of that top of the funnel may not be as high. But what's been accepted as sales acceptance leads at Deltek has actually paced even a little bit ahead of last year. So the exact nature of how this thing is going to unfold because it's more of a shock than a cycle is yet to be seen.

Sorry, one more for you. Any impact to MHA? I know that obviously, nursing homes and those types of things are having a real hard time right now dealing with all of this in certain areas. It's kind of a struggle to understand whether that's obviously negative in life, but whether it's negative or positive for your business. How does that work here with the stress in nursing homes?

Yeah. So certainly, the number of new admissions to the skilled nursing, or SNF, sort of, care setting is likely going to be paused for quite some time, right? We're not putting in the elderly population in that care setting. Because the census, if you will, in SNFs, is going to be impacted by that. That will have some, but it'd be a modest and slow building impact, negative impact to the growth rate for MHA. What still happens: we're not seeing any meaningful discharges, right? The people that are in this setting for a long arc of time, they're not being pulled out because of what's going on. And this is just one of many growth drivers at MHA, right? You still have pricing that goes up, you still have pharmaceutical consumption per capita that goes up, you still have team building to put new products online. There still are new pharmacies that will start that we'll capture. So there's a handful of consistent growth drivers. But certainly, census levels will moderate some in the skilled nursing facility, which will modestly impact the growth rate of MHA.

Great. Thanks for the color, guys. I appreciate it. Best of luck.

Hey. Good morning, everyone. This is John for Julian. Maybe switching back to working capital first. Can you talk a bit about how unearned revenue is going to play with that expectation? How well has that been holding up? And how much of a headwind can that be with AS guided down for Q2?

Yes, this is Rob. Deferred revenue in our software businesses requires a certain amount of time to pass before we can recognize the revenue. As I mentioned earlier, when a renewal occurs, that's when we hope the customer will renew, and typically they do at very high rates, around 90%. These renewals happen throughout the year. As long as we maintain our recurring revenue, it remains very steady. Deferred revenue continues to increase as our software businesses expand. It's important to note that we are selling critical software systems to durable markets, mainly large enterprises like government contractors. The stability in our revenue is strong, and we do not anticipate any significant short-term impacts.

Got it. And then I guess maybe on that guided decline for next quarter, it does sound like a big chunk of that is just the push-out of licensing and so on. But is there any impact from kind of the mix here moving much more towards license and service rather than perpetual just being down to 10% now kind of as you say?

Well, certainly, we expect the bucket of revenue from perpetual license revenue, the historical 10% number, that will be down. It will be impacted for the reasons that we talked about. The recurring won't be impacted in any meaningful way, and the services backlog will work through the services teams to work through the backlog as we've said. So I don't know if you have...

Yeah. And then, just as you go through 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 rate is a little bit higher. And then we are assuming relatively high deleveraging and process technologies, given all the declines there and that we're not assuming any sort of a rebound. As Neil mentioned, we're taking specific cost actions as well that are flowing through. So those are all key drivers in the roll-up.

Got it. Thanks, guys.

Yeah. Thank you.

Hey, guys. Good morning.

Good morning.

Hey, Joe.

Hey, I apologize if you went through some of the stuff with kind of quadruple passing this morning a little bit. So for TransCore, I know you mentioned in the prepared remarks, you pushed some off into next year. I don't think that should be too surprising. But, given some of the stuff that's been in the paper recently about necessary permits and issues with different government agencies, can you talk about what actually needs to happen before this is able to be before the actual hardware can be deployed?

Yes. The hardware is being deployed. The project is on track. It's on pace other than just pushing this $25 million in our planning assumptions into the Q1 of next year. What you may have read and what others have read is there – I think there is a distinct separation between the work that we're doing with our customer to put the infrastructure in, which is pacing for the reasons we said. It's now the revenue from this or the operating budget, not the capital budget because the MTA, obviously, revenues are way down, given what's going on. And then what happened – governmental process to enable and structure the tolling itself. That's going to happen at a very, in part of next year, but the infrastructure work continues, and that's our planning assumption. All the signals and all the discussions, as you can imagine, we stay very close with this customer, and we're in the same posture on that together with a customer.

So would that potentially affect some of the recurring revenue if there are issues with going live after your deployment, leading to delays in when things actually start?

Yes, it could. If we ultimately don't go live, then the maintenance part would not turn on as per our planning assumption there. But I think there's a pretty high level of interest by all parties to see this project turn on.

Okay. Can you discuss your thoughts on the software backlog in terms of whether it's a six-month or a year outlook? What are you considering regarding smaller companies needing fewer licenses and similar factors?

Well, there's a couple of different questions embedded there.

Yes. I know.

So first, but first of all, you have to go company by company. So really, all we're talking about in our comments is that we see a meaningful headwind on the license activities at our application software business. We went company by company on the network side. The recurring nature, they'll be impacted, but doesn't have the license activity because they're all SaaS businesses there. So when you look at application software, it's really the combination of those companies there that are going to likely not have large new customer perpetual deals happen in this environment. The smaller products, the add-on projects, the upgrade projects, the increased functionality, the how do you turn on, do some SaaS conversions, right, during this process in the current economic environment, the activity in the sales funnel suggests that's going to continue, but within five or six weeks end of the situation, we have to see how that continues. So, that's on the license side. On the services side, the services work results from selling licenses. So there'll still be some of that. Finally, there's a fair amount of upgrades that happened. Actually, when times like this are actually a pretty decent time to upgrade systems because you have maybe less people in the office and less user activity, so the IT staff to do what they need to do to get to a new version. Now we have to see if it actually plays out. But even if it doesn't, even if that has slowed, the services teams work off a six to twelve-month backlog of implementation, and they basically have six to twelve months to replenish the backlog from new sales activities.

Perfect. So it’s fair to say you’re assuming that there is basically no new large licensing activity for now.

Well, again, you've got to parse it out, right? It's very low large new logos assumed in the planning horizon. There is going to be some new licensing for the product add-ons. That's exactly right.

Good morning.

Good morning, Alex.

Hey, Alex.

Typically, during recessions, dominant companies like Roper gain market share, a lot of market share, in some cases, from weaker competitors. And it seems to me that that would be true right now in spades. Could you comment on where you would expect the greatest cash effective Roper. You're gaining share from companies that get in trouble during this period.

I appreciate the question. No. It's a – we agree with your sentiment. History would suggest that's the case. When you have the operational readiness that we have, when you have the balance sheet that we have, when you have the cash flow that we have, sort of amount of those heartily needs allow us to pivot to play offense versus defense, and that's the posture that we're leaning. We also talked in our prepared remarks about our direct channel access. So we're talking across all of our businesses every day with our customers. Where the opportunities are, it's incrementally, and I don't – I mean, it's in all the businesses. I don't want to 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 are times to fulfill need right now when our competitors cannot fulfill a product that garners you sort of an opportunity to capture and keep that share momentum building on that side of this thing. We agree with the sentiment, and we're leaning forward, but we've got to do that in a prudent way, given the current situation we all face.

Right. Then you mentioned that you keep in very close touch with your customers, so you can identify these opportunities when they arise.

That's correct.

I have one more question on your acquisition outlook. You mentioned that there's a delay in implementing some of the sellers' plans to sell the businesses, which is understandable. But could you characterize the backlog? You said it was a very full backlog or pipeline of acquisition opportunities. Could you expand on that a bit?

Sure. Sure. There's always a lot of activity that happens in our pipeline. I've been here since 2011. For the first six or seven years, it was my responsibility to manage the pipeline in addition to my operating responsibilities. Just speaking over the whole time I've been here, there’s a lot of activity. What we're specifically commenting on earlier is there was very late-stage activity. Under exclusivity, most terms agreed to, most diligence done—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, most every other process, sales process that was in the market has pulled for obvious reasons. We're going to have to lean into our knowledge of the existing sponsor relationships and relationships that we have to see if we can build funnel on a proprietary basis for the next couple of quarters. Only time will tell whether we're going to be able to successfully do that. From that point, private equity business models need to return capital to their Limiteds, and we expect that to continue once the new reality of the valuation regime and leverage regime all sort of land on us.

Thanks for fitting me in, guys. How are you doing today?

Great. Hope you are well?

Good. Yes, just expanding on private equity and the acquisition environment. Obviously, a situation where, as Deane suggested, prices are coming down. But could you see a phenomenon here, as private equity has a lot of businesses that are probably highly impacted more than what their risk characteristics would have suggested that you could provide the ATM on some decent deals where they could get an exit, so there could be a liquidity premium to getting something out, returning it to Limiteds and you could still pick off some decent businesses at some reasonable valuations? Do you think there's a path forward for that? And maybe just expand more broadly about your acquisition capacity?

Yes. Regarding capacity, it currently stands at $2 billion to $3 billion. We will be cautious in our deployment and stay aware of the prevailing circumstances. As for the first part of your question, it largely hinges on the sponsor. For instance, large and successful sponsors who have raised between eight to fifteen funds and achieved returns of three to five times will have more patient Limiteds as they navigate through this period. Consequently, those assets and portfolios may take a bit longer. Conversely, there are many middle-market sponsors without that same track record, which may prompt them to act more quickly. Only time will reveal the outcomes, but it's our responsibility to pinpoint those opportunities as they arise.

Thank you for that. And then I guess in terms of thinking about the longer-term opportunity with CBORD and also TransCore, I mean, obviously, episodically, companies have been talking about changing the regime for not only payments but also access, particularly given the light of the pandemic. I mean, are you going to probably see a reconfiguration of security and 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 in each of those businesses or do you think it's a little too much of a nuance right now?

I think it does over the medium term, right? So there's the Seaboard, it's the work we've done with Apple for contactless sort of entry and security. I think also the way that in the near term, at least, universities are going to want to follow where the students are, and so we might be able to assist them in that. TransCore, we talked about the concept of handing cash and getting change back, likely going to end here at some point. Also, RFID is a business we all talk a whole lot about. We talked about in the quarter; I mean, they had a very strong quarter. They're all about contactless reading for identity access, for instance in hospitals and health systems for secure print, right? So, how do you actually go to a printer and get your materials off without having to touch it? They enable those sorts of solutions from a product perspective.

Thanks for your time.

Thank you.

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