Roper Technologies Inc (ROP) 2020 Q4 法說會逐字稿

Good morning. The Roper Technologies conference call will now begin. Today's call is being recorded. (Operator Instructions)

I would now like to turn the call over to Zack Moxcey, Vice President, Investor Relations. Please go ahead.

Good morning. Thank you all for joining us as we discuss the fourth quarter and full year financial results for Roper Technologies. We hope everyone is doing well. 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 please turn to Slide 2. We begin with our safe harbor statement. During the course of today's call, we will make forward-looking statements, which are subject to risks and uncertainties as described on this page, in our press release and in our SEC filings. You should listen to today's call in the context of that information.

And now please turn to Slide 3. Today, we will discuss our results for the quarter 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 fourth quarter, the difference between our GAAP results and adjusted results consists of the following items: amortization of acquisition-related intangible assets; purchase accounting adjustments to acquire deferred revenue and related commission expense; and lastly, transaction-related expenses for completed acquisitions.

And now if you please turn to Slide 4, I'll 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. Thanks for joining us, and we hope everyone is doing well.

For today's agenda, we'll walk through our 2020 financials and operational highlights. Then we'll turn to our 2020 segment detailed results and discuss our '21 segment-by-segment outlook and end with our '21 enterprise guidance prior to discussing your questions. Next slide, please.

As we look back on 2020, it was quite a year. Our businesses performed at a very high level during this period. Revenues grew 3% with organic revenue declining a single percent. EBITDA also grew 3%, and free cash flow grew 16%. This cash flow performance, $1.7 billion, is just astounding. This is a testament to many things, notably our asset-light business model, the intimacy we have with our customers and the high level of skill and execution of our field teams. This cash flow is just simply a great result.

Perhaps more important, 2020 was a year of forward progress for our company. We exit 2020 as a better company, a company with higher-quality revenue streams, a company with improved future innovation prospects and a company with whose portfolio was enhanced with $6 billion of capital deployment. To this end, we saw our software recurring revenues increase mid-single digits in 2020 and were benefited by high levels of retention and an acceleration to the cloud.

We continue to be benefited by having close intimate relationships with our customers. Most often, our software is mission-critical to our customers' operations.

In addition, we continue to strategically invest throughout our portfolio during the year. Based on our historical experience, we find times of market disruption the best time to double down on innovation and market investments which, in turn, will drive market share gains in the years to come. Finally, we were able to deploy $6 billion to further enhance Roper's group of companies, headlined by our Vertafore acquisition.

So when we look back on 2020, we highlight 2 key themes. First, we grew. Cash flow increased 16% in the middle of a pandemic. And second, the quality of our enterprise continued to improve during the year. Net-net, we got bigger and better during 2020. Let's turn to the next slide.

Over the past 5 years, we highlight that our revenue grew at a 9% compounded rate, EBITDA at 10% and cash flow at 13%. We continue to grow and compound through macroeconomic cycles. Also, during the time period, the quality of our enterprise meaningfully improved. We are more software focused with nearly 2/3 of our EBITDA coming from software with higher levels of recurring revenue. Conversely, we are much less tied to cyclical end markets today, a little over 15% of our portfolio.

Given our long-term strategy and these factors, we are a low-risk enterprise. We compound cash flow through cycle and do so with multiple growth drivers across both organic and inorganic fronts. As we look to '21, we will continue our long-term string of revenue and EBITDA and cash flow compounding.

So with that, let's turn to the next page and discuss the macro backdrop for '21. As we look to 2021, we are set up for a strong year. We expect revenue and EBITDA will grow well into the double digits, likely in the mid-teens range, with organic revenue growth in the mid-single-digit plus range. This is on top of growth in 2020. The compounding continues.

Breaking it down. Our software businesses, both in our Application Software and network segments, are well positioned heading into '21. These businesses entered the year with momentum from strong retention and recurring revenue gains. They'll be further aided by growth in perpetual license as pipeline and customer activity are anticipated to recover to some extent.

Our non-Verathon medical product businesses are expected to return to a more normalized pattern of customer activity as health care facilities loosen restrictions. But since 2020 was well below trend, we expect above-trend growth here. Of note, Verathon has a challenging comp. However, the reoccurring revenue base will remain strong given the large volume of capital placements in 2020 and continued growth of their new single-use bronchoscope business.

We expect Neptune to recover and grow nicely as our customers especially in the Northeast U.S. and Canada gain access to residential locations. We expect our industrial and process tech businesses to continue their quarterly improvements and return to growth after 2 years of macro headwinds.

Finally, 2021 will be meaningfully aided by the contribution from our 2020 cohort of acquisitions. To this end, we continue to work with a very full and high-quality M&A pipeline. We are committed to deleveraging, but we also remain active in building and maturing our pipe.

So as I think back over the nearly 10 years I've been with Roper, I cannot think of a better set of tailwinds heading into a year. Clearly, lots to do and lots of execution in front of us, but we have a strong momentum heading into '21.

So now let me turn the call over to Rob. Rob?

Thanks, Neil. Good morning, everyone.

Turning to Page 8, looking at our Q4 income statement performance. Total revenue increased 8% as we eclipsed $1.5 billion of quarterly revenue for the first time. Organic revenue for the enterprise declined 2% versus prior year.

EBITDA grew 7% in the quarter to a record $552 million. EBITDA margin was down 40 basis points versus prior year at 36.6%. Tax rate came in at 19.9%, a little lower than last year's 21.6%. So all in, this resulted in adjusted diluted earnings per share of $3.56, which is above our guidance range.

Next slide. Turning to Page 9 and reviewing the Q4 results by segment. Neil will discuss the full year 2020 segment performance in more detail later so just touching on some of the Q4 highlights here by segment.

Application Software grew 35% with the addition of Vertafore. Organic for the segment was minus 2% with mid-single-digit recurring revenue growth continuing. Sharp declines in our CBORD and Horizon businesses serving K-12 and higher education impacted the segment as many schools unfortunately remain closed.

For Network Software & Systems, plus 2% organic growth with our software businesses, putting up a very solid plus 4% organic. And TransCore was flat versus prior year.

For Measurement & Analytical Solutions, plus 1% organic growth as we start to see some sequential recovery in Neptune and our industrial businesses. Segment margins were impacted a bit by the acceleration of some product and channel investments at Verathon, as we discussed, coming into the quarter, and it's really been an exceptional year for Verathon overall.

Lastly, for Process Technologies, a 21% organic decline, with margins holding up well at 31.3%. And once again, here, we started to see some early signs of improvement after a couple of years of declines.

Next slide. So turning to Page 10, looking at net working capital. Honestly, the slide mostly speaks for itself, ending the quarter with negative 8% net working capital as a percentage of Q4 annualized revenue.

While there are certainly some seasonal trends, primarily around timing of software renewals, they do typically benefit our Q4 performance. You can see here a meaningful improvement versus 2018, improving from negative 3.4% to negative 8% in 2020. Our asset-light negative net working capital model drives our sustainable high cash conversion and fuels our cash flow compounding.

Our people focus on what we all believe matters, and our culture is built around growing the right way. Top line growth converts to cash flow, and we are always mindful of impacts to our balance sheet.

Next slide. So turning to cash flow. Cash flow performance, as Neil mentioned, was really pretty spectacular no matter how you look at it. Q4 free cash flow of $558 million was 23% higher than last year and represented 37% of revenue. This excellent result was driven by the great working capital performance I just discussed, which is really across the enterprise, along with meaningful cash contributions from Vertafore and the other recent acquisitions.

So for the full year 2020, we generated $1.72 billion of operating cash flow and $1.67 billion of free cash flow. So to repeat, that's $1.7 billion of free cash flow in 2020, truly a great year. Full year free cash flow growth was 16%, and our free cash flow conversion from EBITDA was a robust 84%. So really tremendous cash flow performance, and it was broad-based and very durable.

Next slide. So turning to Page 12, updating on our balance sheet. As Neil mentioned earlier, we ended the year with total capital deployment of approximately $6 billion, which included the EPSi acquisition that closed during the fourth quarter on October 15. We were able to take advantage of attractive market conditions to complete and opportunistically fund these acquisitions with a combination of internally generated cash flow, proceeds from our 2019 Gatan divestiture and investment-grade leverage. Overall cost of financing was approximately 1%.

Thanks to our excellent Q4 cash performance, we are off to a great start on our plan to quickly reduce leverage, paying down to around $500 million since we closed the EPSi deal. Looking ahead, we plan to rapidly reduce leverage throughout 2021, taking advantage of our prepayable revolver, which has a current balance of approximately $1.6 billion. Our solid investment-grade balance sheet supports long-term cash flow compounding, which we are well positioned to continue.

So with that, I'll pass it back over to Neil for the remainder of our prepared remarks.

Thanks, Rob. Let's turn to our recap for 2020. To help orient you to this page, we're comparing our full year outlook from last April to that of what actually happened.

It's worth reminding everyone that we felt our businesses and our business model had the level of recurring revenue, customer intimacy and the business leadership required to guide in the face of the COVID uncertainty, both in terms of supply and demand. In aggregate, we thought our full year organic revenues to be plus or minus flat, and we came in at down minus 1%. The TransCore New York project is the primary reconciling item between being down a touch and being flat or slightly up, and more on this in a minute.

We guided DEPS to be between $11.60 and $12.60 and came in at $12.74. Looking back on this, we are very proud of our team's ability to look forward and operate through the uncertainty of last year. Also, there is no better example of the durability of our model than this past year.

With that, let's walk through the macro drivers across each of our 4 segments. Relative to Application Software, this segment played out as anticipated and was up 1% on an organic basis for the year. Specifically, we saw recurring revenue up mid-single digits, aided by very strong retention rates as well as an acceleration to the cloud. As a reminder, recurring revenue in this segment is about 70% of our revenue stream.

Perpetual revenues, about 10% of this segment's revenue, were under pressure as expected. We saw this revenue stream down mid-teens as new logo opportunities and wins were pushed and delayed. That said, cross-selling activity remained active for much of 2020.

Relative to services revenue, we anticipated some pressure tied to shifting to remote installs and having fewer new implementations, which are tied to new perpetual transactions. For 2020, we saw mid-single-digit declines here, principally tied to fewer new deals. Our teams did a wonderful job shifting to remote installs, a trend we anticipate will continue in large part on the backside of the pandemic.

As it relates to our network segment, we expected organic revenue for the year to be up mid-singles to double digits when, in fact, we grew 3% for the full year. Our network software businesses performed as anticipated with recurring revenues growing low single digits, again benefited by high retention rates and high levels of recurring revenue. This segment underperformed our expectations primarily due to TransCore's New York congestion infrastructure project timing.

In April, we expected approximately $75 million more in revenue from this project than actually occurred in 2020. More on this when we turn to the segment overview, but we expect this $75 million of pushed revenue to be recognized in '21. It's also worth noting that the number of toll tags shipped last year were at historic lows given the lower traffic volumes, but this was anticipated.

For our MAS segment, we've talked all year about this being the tale of 4 situations: Verathon, other medical products, Neptune and industrial. For the year, again, back in April, we felt this group would be flat to up mid-single digits on an organic basis. We posted 1% growth. We feel very good about the execution across this group of companies. The primary reconciliation factor is a slower recovery ramp tied to our non-Verathon medical product businesses and Neptune.

Specifically, we anticipated unprecedented demand for Verathon's innovation product family. For the year, Verathon grew substantially as COVID accelerated the further adoption of video intubation as the preferred technology. Our other medical product businesses, which grow mid-single digits like clockwork, were down mid-single digits for the year, tied directly to lower elective procedure volumes and limited hospital capital spending.

Interestingly for Neptune, we highlighted municipal budget uncertainty in April. This proved generally to be a nonfactor as municipalities budgets were approved and available. However, the impact of the lockdowns, especially in the Northeast U.S. and Canada, had a prolonged impact on our customers' ability to do routine meter replacements. As a result, Neptune was down low double digits for the year, slightly worse than our initial expectations.

Finally for this segment, we expected sharp industrial declines, and that is what happened with these businesses being down low double digits for the year. That said, we are seeing sequential quarterly improvements across both Neptune and our industrial businesses.

Finally and as it relates to our process tech segment, we expected it to be down 20% to 25%, and we were, logging in at down 21%. This played out as we anticipated with much lower energy-related spending, project timing pushes and the inability to get field service resources into customer locations. So this is the play-by-play rewind for 2020. Now let's turn to the segment pages for a bit more detail.

Next slide, please. For Application Software, revenues here were $1.81 billion, up 1% organically, with EBITDA of $772 million. The broad macro activity for this segment has remained quite consistent for much of 2020. Specifically, we continue to see accelerating demand for our cloud solutions. This bodes well for our long-term recurring revenue growth and customer intimacy.

At a business-unit level, Deltek's GovCon business continues to be super solid and grow very nicely. But we did see some headwinds relative to their offerings that target the consulting, marketing services and AEC space. That said, recent customer activity and top-of-funnel activity suggest some market falling is occurring.

Aderant and PowerPlan delivered flat EBITDA in the year with nice recurring revenue gains. We experienced very nice growth across our lab software group, again doing our part to help fight the COVID war. Strata delivered double-digit organic growth and completed a strategic acquisition in EPSi. Notably, the combined business will annualize roughly half of the U.S. hospital spend.

Finally, our 2 businesses that serve the education space, CBORD and Horizon, declined double digits in the year simply due to having a customer base that was shutdown. A decent amount of revenues in these businesses are tied to student volumes. Importantly, we acquired Vertafore last year. They're off to a great start with strong earnings and very strong cash flow in the fourth quarter. Looking to Q1, we see flat to low single-digit organic growth based on continued mid-single-digit recurring revenue growth, offset slightly by lower perpetual and services revenues given last year's non-COVID comp.

Now let's turn to our Network segment. Here, revenues were $1.74 billion, up 3% on an organic basis with EBITDA of $732 million. Our network software businesses performed well during last year, growing low single digits. Specifically, DAT was strong, growing double digits. DAT's network scale and innovation focus continues to enable very solid organic gains.

ConstructConnect grew based on network utilization tied to a tighter construction labor market. iTrade, MHA and Foundry had some headwinds tied to their end markets being disrupted due to COVID. That said, each of these businesses had high retention rates and the networks remain very strong. iPipeline also performed well during their first year being with Roper and completed 2 bolt-on acquisitions.

Our non-software businesses struggled a bit during the year. Specifically, RF IDeas, our multi-protocol credential reader business, did well in their health care applications but was hampered by meaningful declines in their secure print market. For the full year, TransCore pushed about $100 million of revenue out of 2020 into '21 associated with our New York project. In addition, EBITDA margins were pressured due to lower tag shipments and a few non-New York project pushouts.

As we look to the first quarter of 2021, we see organic revenue, as you can see in the lower right-hand box, to be down 3% to 5% for the quarter. An important distinction to highlight, our software businesses will continue to grow in the low single-digit range but our non-software businesses, driven by TransCore, will decline in the high-teens range in the first quarter due to much lower anticipated tag shipments and timing of revenue associated with the New York projects. As a reminder, the first quarter of this year is coming off a mid-teens growth comp from a year ago.

Now let's turn to our MAS segment. Revenues for the year were $1.47 billion, up 1% on an organic basis with EBITDA of $508 million. Verathon was awesome in 2020. The business grew substantially based on unprecedented demand for their video intubation product line. Demand was global.

Given Verathon's ability to fulfill this demand, we expect our meaningfully expanded installed base of GlideScopes to generate increased levels of reoccurring consumables pull-through in the years to come. In addition, the first year of their single-use bronchoscope release was successful. We believe we gained a substantial foothold in the market during the inaugural year of this product category.

Our other med product businesses declined, but they started to see more normalized patient volumes towards the end of the year. Further, customer interactions are starting to resemble more normal levels of engagement. Neptune declined low double digits tied exclusively to our customers in the Northeastern U.S. and Canada not having access to indoor meters. Other regions were flat during 2020. Neptune's market share remains strong throughout the year.

Finally, our industrial businesses were down but have shown sequential improvements throughout the year. For Q1, we expect low single-digit organic growth for this segment with similar patterns to that of the fourth quarter.

Now let's turn to our final segment, process tech. Revenues for the year were $519 million, down 21% on an organic basis with EBITDA of $156 million or 30% of revenue. Compared versus 2 years ago, these businesses are down about $90 million in EBITDA and yet maintained 30% EBITDA margins. Congrats and thanks to our leadership team for their continued exceptional execution. As a side note, Roper continued to compound despite these cyclical headwinds.

That said, this segment is pretty straightforward and has been the same story all year. COVID has negatively impacted our oil and gas and short-cycle businesses. Certainly, low oil prices did not help either. That said, we have seen some green shoots across this group as capital spending started to improve as we exited 2020.

As we look to the first quarter, we expect declines to moderate in the first quarter to be in the 10% range. Importantly, we have easing comps as we enter the second quarter. Also, over the last couple of years, these businesses continue to make product and channel investments to be best positioned to fully capture this cyclical upswing. The next few years here should be pretty good.

Now let's turn to our guidance and the associated framework. While this slide is somewhat busy, we wanted to line up for you the key macro differences between our 2021 full year outlook on a segment basis versus our actual 2020 results. In aggregate, we expect total revenue to increase in the mid-teens range with organic growth being in the mid-single-digit-plus area.

As we look across the revenue streams for our Application Software segment, we expect mid-singles growth. Specifically, we expect a slightly improved recurring revenue growth rate aided by last year's recurring momentum and an increased mix towards SaaS. We expect flat services revenues and mid-single-digit-plus growth in perpetual as we expect a modest market recovery and easing second half comps.

Similarly, we expect mid-single-digit organic growth in our network segment with our network software businesses growing mid-single digit plus. We expect TransCore to complete the New York project and see recovering tag sales. When combined, TransCore should grow mid-singles for the year.

We expect MAS to grow mid-single digits as well. Our medical product businesses were exceptional last year, up 20%. Importantly, the quality of our medical products revenue stream will continue to improve as Verathon's reoccurring revenue streams tied to GlideScope and BFlex continue to gain momentum. As we look to 2021, our medical product businesses are expected to grow low single digits as elective procedures and hospital capital spending return to more normalized levels throughout 2021, this return being partially offset by our difficult 2020 COVID comp.

Neptune should be up high single digits plus with easing restrictions and more access to indoor meter replacements. And finally, our industrial businesses should recover and grow in the high single-digit plus range after 2 years of declines.

Our PT businesses are expected to be up high single digits through the year based on the resumption of deferred projects and field maintenance as well as modest improvements in these end markets. So all in all, we expect organic revenues to increase mid-single digits plus and total revenue to grow in the mid-teens range.

Let's turn to our guidance slide. Based on what we just outlined, when you roll everything together, we're establishing our 2021 full year adjusted DEPS guidance to be in the range of $14.35 and $14.75. Our tax rate should be in the 21% to 22% range.

For the first quarter, we're establishing adjusted DEPS guidance to be between $3.26 and $3.32. Of note, our guided Q1 adjusted DEPS is roughly 22% to 23% of our full year guidance range and is consistent with our long-term historical DEPS seasonality.

Now let's turn to our summary and get to your questions. What a year. None of us will ever forget 2020.

Our business performed so very well last year. We grew revenue 3% in aggregate and only declined a single percent on an organic basis. EBITDA margins were steady at 35.8%, and cash flow grew 16% to $1.7 billion. This means we had cash flow margins of 30%. Just amazing.

Given this performance, our business model's ability to foresee this performance, we stayed focused on executing our capital deployment strategy, which resulted in $6 billion of deployment on high-quality, niche-leading vertical software companies. There is no doubt the quality of our enterprise improved during 2020, something we're incredibly proud to be able to say. Our recurring revenue grew mid-single digits, we increased innovation investments and increased the quality of our portfolio with our capital deployment spend.

So as we look to 2021, we feel we are incredibly well positioned. We expect strong organic growth that will be further augmented by contributions from our recent acquisitions. In 2021, we expect about 2/3 of our EBITDA to come from our software businesses, which provides us all the virtues of an increased mix towards recurring revenues. We will continue to focus on deleveraging our balance sheet, but we remain committed and focused on our long-term capital deployment strategy. To this end, our pipeline of M&A candidates is active, robust and has many high quality opportunities.

So as we look back over 2020, we are proud of our business model's durability and our leaders' ability to successfully navigate last year's uncertainties. We are proud that we continue to be forward-leaning and strategic. We are proud that we improved our business last year with an increasing mix of growing recurring revenue and continued innovation focus. In short, we got bigger and better during 2020.

As we turn to your questions, I'll remind everyone that at Roper, we operate a low-risk model whose strategy centers on acquiring fantastic businesses and then providing them with an environment where they can get even better over the long arc of time. This was certainly the case in 2020.

So with that, let's turn to our first question.

(Operator Instructions) The first question today comes from Deane Dray of RBC Capital Markets.

I really appreciate all the new disclosures you're providing here, especially Pages 14 and 20. Those bridges between your original guidance, what you delivered and then the organic bridge on 20 is really helpful. A lot of granularity there.

And if we were to start, just because the New York City contract is such a high profile and it did have a swing factor, can you give us a sense of how much -- just remind us the revenue you're expecting for the year, how much of it could land in the first quarter. And just confirm there's been no change in scope.

Yes. So Deane, it's about $100 million for the full year, and in the first quarter, we only have about $10 million to $15 million in there. As we mentioned, there's a bit of a pause, but now it's started up and running again. The scope is unchanged.

Got it. And if you were to highlight all the areas where you're seeing improvement in licenses and the services pipeline, what's at the high end in terms of the businesses today?

Deane, maybe I can ask you to sort of rephrase the question. I want to make sure that we fully understand the question.

Yes. Just in terms of the licenses revenues that you're seeing today, you've taken us through where some of the challenges have been. What's on the upper end of your guidance where you would see potentially the -- how it would play out on the positive side?

Sure. Yes. Okay. So appreciate the question. I think we understand it now. So the total perpetual revenue for our core businesses, the software businesses that have been in the portfolio for a while was down obviously in 2020. We expect about -- the recovery in '21 to be about half of what we are down.

We're seeing strength. We've seen continued strength all year in the -- in 2020 in the perpetual book of business, in Deltek's GovCon business. As I talked about in the prepared remarks, we're seeing thawing and some activity in their professional services end markets that's encouraging. These are the architects, the engineers, the contractors, the marketing services firms, the consulting firms, those -- that book of business.

In addition, the other large parts of the perpetual book are at Aderant and PowerPlan. Aderant has its own unique set of competitive factors where the customers have to -- the customers that have not upgraded their software from -- the competitive customers who have not upgraded their software have to upgrade, and we're winning a large percentage of those. And so all that activity just got pushed to the right a bit, and that's somewhat encouraging. And pipeline activity is positive there.

And then PowerPlan's pipeline activity is full. It has a handful of large opportunities in it, which are obviously hard to predict the exact timing. But we actually like the pipeline build across the companies that have the primary book of perpetual business.

Okay. That's helpful. And just as -- my follow-up question would be for Rob.

Do you have specific deleveraging plans for the year that you could share with us in terms of where and how? You said you'd be paying down the revolver, but just are there specific goals that you can share for 2021?

Sure. So it will be -- as you know, when we're in deleveraging mode, all the free cash flow goes towards deleveraging. So we pay a dividend. That will continue. But essentially, the rest of the free cash flow goes towards deleveraging. So that's a rough -- probably after paying a dividend, roughly $1.5 billion in deleveraging is probably a good ballpark number.

The next question comes from Christopher Glynn of Oppenheimer.

Yes. So congrats on all the capital allocation last year. I'm just curious. You're getting a lot of inbounds after some of your subsegment divisions. Given you had some real emphasis on the quality and fullness of the pipeline, there's certainly liquidity in the markets. So wondering if your calculus has shifted towards any nonoperating cash flow to fund the deleverage and trade back into the pipeline a little sooner.

Yes. Appreciate the question. We -- it's very routine for us to get inbounds. I've been here almost 10 years, and there's a handful of what I would say meaningful and credible inbounds in any given year.

Like we said for years though, it's just very difficult to make the math work because when we sell a business -- just look back at Gatan. You sell a business to a strategic buyer, we leak taxes, then you have to redeploy it. It's just hard with a compounding orientation to make that math work.

Certainly, the lower tax rate sort of helped in the Gatan timing.

So yes, we get inbounds. I would not say the activity in the last few quarters has ramped up more than it's been over the decade I've been here. But yes, there's always inbound inquiry.

Any appetite to entertain that was the other part of that question.

Yes. I think it's -- the appetite, we've never not had the appetite. It just comes down to the math and doing what's best in our view according to our math for our shareholders. So it's -- the appetite has remained unchanged.

The next question is from Steve Tusa of JPMorgan.

The free cash was pretty strong in the fourth quarter, like almost 95% of EBITDA. Last couple of fourth quarters, it's been around 80%. What was the kind of overdrive there? And then when it comes to cash and EBITDA, how much did -- roughly did Vertafore add?

Vertafore was around 90% or so of both cash and EBITDA. And yes, as I mentioned earlier, Steve, just great working capital performance across the portfolio, very broad-based. You're getting your software renewals, which were very strong in the fourth quarter.

There certainly is some benefit, right, from those more cyclical businesses being a little bit softer, right? And that lowers working capital overall. But just great working capital performance. Our cash taxes year-over-year were about flat, so it really was all on working capital.

Got it. And then within the guidance, I guess, you didn't really quite -- you don't usually guide for free cash flow for next year. I think you said $1.5 billion.

Is that -- is the $1.5 billion after the dividend? And then does that include any of the tax benefit that you guys bought with Vertafore, the benefit of that?

Yes. So the $1.5 billion is a deleveraging number, so that's an estimate. That's after paying dividends. So for next year -- yes, you're right, we don't guide free cash flow. We always have very strong conversion, as you know. We expect that very high conversion to continue.

As I mentioned, those working capital trends are very sustainable, right? It's the culture, it's the type of businesses we buy. As the software businesses grow, their working capital continues to go down. So that all should continue.

In terms of the tax attributes, yes, there are some tax attributes related to Vertafore, which we disclosed, a little over $100 million. So there'll be some benefit from that coming in '21. There's also -- like many other multi-industry and really all companies, right, we benefited some from deferral of payroll taxes. So that will go back the other way next year as you're starting to pay those payroll taxes again.

So those are sort of -- those will sort of counter to it a little bit. But we feel great about cash flow next year, but we don't guide, as you know.

Next question comes from Allison Poliniak of Wells Fargo.

Just want to talk to you -- obviously, the theme of reopening seems pretty pervasive in a number of your businesses. Could you help me understand maybe the progression of some of those businesses that you're thinking about if we, in fact, do start to reopen here? Is it sort of an outsized bump as things start to get back to work? Or is it more of a progression out of that? Any thoughts?

Well, I'll give you the -- this is Neil. I'll give you the headline, and I'll let Rob sort of add his color on the back end.

So it's not like a step-function bump up. It is a sort of sequential improvement throughout the year. Obviously, when you roll past Q1, the comps get a whole lot easier. So that's part of what the last 3 quarters of the year will look like as well.

When you look at it on a company by -- or sort of segment-by-segment basis, just rolling through, basically, it's the perpetual book of business and the associated services that come with that for Application Software that ramps back up. In network, they're really -- for the network businesses, it's a little bit of ramp back at Foundry, it's a little bit of ramp back at iTrade. But the other businesses were pretty steady as she goes, DAT, ConstructConnect, et cetera.

TransCore stands by itself. It's tied principally to 2 things. One is the New York project completing; and second, the return of traffic volumes and the associated tags that go with them.

For the MAS segment, it's Neptune just sequentially coming back and importantly, getting the access to the indoor meters in Northeast U.S. and Canada. I said in the prepared remarks, market share was super steady, maybe plus a little bit in that business last year. It's just access -- our customers getting access to do retain/replacements.

Verathon will have a difficult headwind because of the capital placement we talked about. But the other medical product businesses just rotate up in a sequential basis. And then finally, the industrial businesses do the same.

Process is much like industrial, just a cyclical rebound. Modestly higher oil prices help. But you have all this -- in the energy businesses, you have all this deferred maintenance that's got to get done. There's a lot of -- there's sort of -- there were some restocking orders in the fourth quarter there and then some pipeline activities like we got to get in and do the maintenance in a handful of these important customers.

So that would be sort of the color of the ramp, but no step function. But Rob, what would you add, if anything?

No, I think that's right. We're assuming Q1 is very much clearly still the middle of the pandemic and then things improve from there.

Got it. And then in line with that, obviously, we've been under this closure for a significant amount of time. Any concerns of the financial impact of some of your existing customers that you would anticipate that ramp from or not at this point?

I would say no. And I think the -- I mean obviously, there's going to be small pockets here and there. We're very -- most of our customers across the portfolio, most are enterprise level. A very small percentage of our software companies would be in the small, medium size where it may be more subject to some sort of macro sort of headwinds or business uncertainty.

I think the data point we point to is just the incredible cash flow. I mean we got paid by our customers, right? And so -- last year. And so what we do is just critical to what they do. And no, I don't think there's going to be...

The pockets of areas that are hit as we talked about, right, colleges and universities. Most of those customers -- we tend to have larger customers there. So we're not too worried about our schools being in financial trouble overall.

And then on like the iTrade network side, they have customers that are in the food area. So there certainly could be an impact from some smaller restaurants and some of those issues in that market. But overall, not really a meaningful impact to us.

The next question comes from Joe Giordano of Cowen.

On the net working capital, obviously, that keeps getting more and more negative and more interesting. But with the current portfolio, like where is that -- where is like the maximum that, that can get to without doing more deals to -- that further push it that way?

Yes. So I think if you go to our working capital page, Page 10, you'll see all the benefit here Q4-to-Q4 was on the liability side, right? We're basically equal to -- on the asset side, which is that's -- that indicates to us, and we go business by business, it's structural and driven by an increasing mix towards software. So that's the first thing I'd say.

Second is when you look at the art of the possible, if you think about a business that is 100% SaaS recurring revenue that's prepaid a year ahead, let's say that you bill on January 1 and you take 90 days to get paid, that company is going to have 75% of its revenue. That's negative net working capital, right? And we certainly have a couple of businesses that don't quite get to 75% but they approach 40% or 50%.

So as we become more software and our legacy perpetual business becomes more SaaS, you're going to see this number get higher. Will it ever get to 40% to 50%? No, it won't. But it will keep inching higher, it should, over the next 5 to 10 years.

We don't have a target. It's not that we're trying to drive the business to be X percent negative. We just have an incentive system and a culture that we get a little bit better every year on this metric.

That's definitely helpful to frame that up. A follow-up would be on Vertafore. How is that business doing since you've been there? Have you noticed anything like -- kind of what kind of initial changes have been instituted, if any?

And like when we did our diligence, that was definitely a market like where -- that business was a leader, but there was -- that whole market seemed right for some change there. And how are you guys approaching that? Are there upstarts that you look at? Is it an internal change that drives the market forward? Like how are you just approaching that business now?

Yes. So the most important thing that I think we can say in regards to Vertafore and for that matter, any acquisition is that -- if we had to summarize what we do is we buy these amazingly great businesses and then provide them environment to get better over a long period of time. So as a result, there is not a short-term "we've got to do these 5 things to improve the business." That's not in our strategic M&A strategy.

That said, the business is -- as in the piece of research you did, we thought, was quite good and reflective of ours. It's basically a duopoly. We share a market with 1 principal competitor on the agency side. Fortunately for us, just after the business -- we acquired the business and closed, we won the largest deal in the market in the last 3 or 4 years in assured partners. There was a press release that went out a handful of weeks ago. So we're delighted about that.

It's a slow ramp over a couple of years, a couple, 3 years. I think that's just an indication of the quality of the business that Vertafore and the products they have. But also the customer, in that case, was reassured by being -- by Vertafore being owned by Roper who is just a long-term owner that's not going to look to sell the business in a handful of years, and therefore, you can make the right investments.

If there is one thing that we're, if you will, doing in the short run, based on our diligence and similar to work you did, it's we wanted to allocate a little bit more to R&D, which we have done. That's reflected in the numbers we've given you from the very beginning. And so that's going to take a few years to play out, just continuing to add functionality and add features and ways to monetize their customer base.

And Joe, just on the -- obviously, the company has performed very, very well since we owned it. But just to clarify my last answer, the $90 million of EBITDA, that's since we owned the business. There's a month in there as well. It wasn't all in the fourth quarter. But it was $90 million of cash in the fourth quarter.

The next question comes from Blake Gendron of Wolfe Research.

I want to follow up on that R&D comment actually, kind of in the broader context of your portfolio. So COVID was disruptive for a number of reasons structurally with the end markets and I would imagine competitively. In addition to Vertafore and maybe ramping R&D there, are there any opportunities to ramp R&D across some of the other business units simply because there's new market opportunities as a result of the pandemic moving forward?

I know it's hard for us to really fully appreciate all the changes that will stick structurally across all your business units. But I'm just wondering if we should expect R&D to ramp a little bit across the portfolio and not just Vertafore.

Yes. So a few things I'd say there to begin with. First is when we engage with each of our businesses strategically, we talk to them broadly about how to grow sustainably with CRI-accretive growth over a long arc of time, answering the 2 questions of where to play and how to win. But then when you get into how to win, it is -- sometimes it's a product answer. A lot of times, it's a go-to-market or market -- go-to-market effective sort of answer. So it's not -- our strategic orientation of each business doesn't narrow into innovation from the get-go.

That said, obviously, innovation and R&D, we're mostly a D shop, mostly development across our software and product businesses. You have seen and likely will continue to see a modest increase in R&D spend as a percent of revenue for years to come. In '19, it was about 7.5%. Last year, it's about a little over 8%. This coming year, we're probably going to add about 100 basis points to be a little over 9%. There's Vertafore mix in there that they have a little bit higher percentage as compared to some of our other businesses. But I think you will see and are seeing an increase in innovation there.

The -- so I'd sort of stop there. I mean if you have any follow-ups, we're happy to do it. But the short answer is yes.

I guess there's one other thing. If you compare Roper's 8% or 9% of revenue that we spend in R&D compared to other software companies, it appears low. When you look at our software businesses, we're right in line with the peers. We're between 10% and 15%, 17% depending on the company. The application businesses tend to be on the higher side of that. The network businesses tend to be on the lower side of that.

And the reason the mix for Roper is low is because we have quite a bit of revenue in TransCore, MHA and others that effectively don't have any R&D in our business model. So it's always important to point it out when we get asked a question about R&D.

That's helpful to think about the framework there. I wanted to shift to Deltek. I thought it was interesting when you mentioned GovCon's stability versus maybe some of the professional services being impacted by COVID. The GovCon, I would imagine you're dealing with large enterprise customers so we should expect it to be kind of stable, in addition to just general government spending being stable.

On the professional side, is it just a matter of reopening? Or is there anything we can think about with respect to customer size, large versus SMB? And then maybe end markets specifically that we should be looking at for the recovery, is it just non-residential construction on the AEC side? How should we think about Deltek improvement in 2021 and beyond?

I give you a gold star for getting like 7 questions into 1 question. So I'm going to do our best to try to come -- tick through these.

So on Deltek, it is -- it's important to note, it is a combination of large enterprise and the smaller end of the GovCon space that's been super strong throughout the year. It's not just been at the high end. And yes, we expect that to just continue as the -- it's not tied to infrastructure per se. These government contractors go toward the fast currents of where government spend is. It's gone from military to education, maybe infrastructure. They just go to where it is. That might drive some M&A activity, by the way, which is generally good for us.

On the professional services side, the book of business here is broad. But if there are pockets of concentration, it's in architects, engineers and contractors. Obviously, the contractors, mostly non-res contractors in this case, they are the ones that are a little bit worried, and they've sort of tightened up a little bit more. It's the architects and engineering firms that have shown some green shoots here in Q4.

In addition, marketing services firms is a leading niche for Deltek, and those businesses also have started to thaw. So I think that checked off your questions. If we missed 1 or 2, we're happy to follow up with you after the call.

The next question comes from Julian Mitchell of Barclays.

This is Joao on for Julian. Maybe to start with, could we get your thoughts on maybe margin expectations for the segment? Obviously, a lot of movement in the software margins in 2020, kind of a lot of mix shift you guys are calling out on that Slide 20. So I just wanted to get your thoughts there.

Yes. I mean we can go through the segments in detail later on. But I mean overall, our margins are relatively flat year-over-year in the guide. I think there's a little bit of a core decline in the margins given a lot of the costs will come back post COVID, travel and things that didn't happen, very modest decline there.

And then the Vertafore revenue comes in at a higher margin, so overall, margins are relatively flat. And then we'd expect some improvement in the bottom, sort of the more cyclical type stuff in process, which should get some nice bounce back as that starts to grow in margins.

And if I could just add one thing there, sort of piggybacking your question with the last one. Core EBITDA margins are going to be down a bit because, as Rob said, these costs are coming back in. It's hard to spend money on travel and customer meetings, for instance, last year, and we expect some of that to come back in this year.

That said, I sort of call it like a trap of leadership. We're increasing our R&D as a percent of revenue by about the same amount that we expect the core margins to come down. So there's going to be -- some teams and some companies may choose to hold margins and they're going to have to -- because there's opportunity cost inside the business somewhere. In our case, we're very specifically and intentionally not doing that as we come into that trap. And then obviously, we get the benefit of the Vertafore mix coming in. So on -- in aggregate, margins should be flat to up a touch.

Perfect. And then maybe on the services piece of Application Software, you guys talked about kind of rebuilding that pipeline. What does that process look like? And any thoughts on some of the cadence or just kind of expectations beyond that sort of flat growth you guys guided for?

Yes. I think -- so what you have here is a dynamic where the most -- first, as a precursor, most -- the vast majority, I should say, of our services work in the applications segment are tied to new implementations, whether they're SaaS or on premise. So if you look back and think through what happened sequentially in 2020, very quickly in the shutdown, the license activity, the perpetual activity slowed down. So you had low license activity basically through Q4.

The services book of business had a little bit of a backlog, right? So the services were continued in Q2, continued a little bit in Q3, completed the in-flight projects. And then it sort of slowed down a handful of months behind the license activity.

So when you come back on this side, the license activity will pick up sooner, but then you got to -- and the services work will follow back behind it. So you've essentially had a slower ramp down and a slower ramp-up for services. So that's why you see it flattish where you can see growth in the perpetual book.

The next question comes from Alex Blanton of Clear Harbor Asset Management.

I wanted to ask -- could you characterize your acquisition intentions for 2021? You had said earlier that you'd be -- primarily you'd be deleveraging for 12 to 18 months. But today, you mentioned that you had a very active, robust pipeline of potential acquisitions with many opportunities.

So has there been a change in your intentions there in terms of deleveraging? How would you characterize the acquisition outlook for this year?

Thank you, Alex, for the question. So I would share 2 things with you. First is we are -- maybe more than a couple of things.

So we are active. The pipeline is active. We are spending time with learning businesses, spending time with all the sponsors that we have relationships with to understand what the cohort of opportunities looks like.

Importantly, every sizable transaction that we've completed since 2016, we have had a chance to meet the management teams at least once, if not multiple times, anywhere between 6 and 18 months before we completed the transaction. So the work that we're doing now is principally focused on that. These are getting to understand businesses well before they're ready to be transacted, right? So businesses we're meeting this month are likely going to be businesses that we may acquire at the end of this year or into the first half of next year. So it's -- the early pipeline work is the first thing I would say.

Second is we're absolutely committed to deleveraging. We're unwavering on that.

Third thing, if the right deal came through, there's always a way to figure that out. But that's not our primary focus. Our primary focus is the early part of the pipeline build as well as the deleveraging.

Okay. And secondly, how would you characterize the makeup of these companies that you're getting to know? What industries? Is it still primarily software? Are you still going in that direction?

Absolutely. It's -- again, we're characterized -- our M&A pipeline and process is characterized by buying businesses that are better than us through the -- our quantitative cash return lens. So that yields mostly software, informatics types businesses. They're a combination of a wide variety of end markets, a wide variety of SaaS versus perpetual business models. But yes, essentially what the capital deployment over the last 7 to 10 years is what -- our pipeline is characterized by that same type of business.

This concludes our question-and-answer session. We will now return back to Zack Moxcey 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.