Earnings Call Transcript - ROP Q3 2020

Operator, Operator

Good morning. The Roper Technologies Conference Call will now begin. Today's call is being recorded. All participants will be in a listen-only mode. Please follow the operator instructions. I would like now to turn the call over to Zack Moxcey, Vice President of Investor Relations. Please go ahead.

Zack Moxcey, Vice President of Investor Relations

Good morning and thank you all for joining us as we discuss the third-quarter financial results for Roper Technologies. We hope everyone is doing well. Joining me on the call this morning are 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 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 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 third 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 acquired deferred revenue and related commission expense, transaction-related expenses for completed acquisitions. And lastly, we've adjusted our cash flow results to exclude income tax payments deferred from Q2 to Q3 due to COVID-19 and cash taxes paid for the Gatan divestiture. As a reminder, GAAP requires tax payments for a gain on sale to be classified as an operating cash flow item, even though it is related to a divestiture. And now if you please turn to Slide 4, I'll hand the call over to Neil. After our prepared remarks, we'll take questions from our telephone participants. Neil?

Neil Hunn, President and CEO

Thanks, Zack, and good morning, everyone. Thanks for joining us. Let's go ahead and get into this morning's content. And as we always do, we'll start by reviewing our agenda. I'll begin discussing our enterprise highlights for the quarter, which was a very busy and very productive quarter for us. To that end, I'll briefly review our acquisition activity. Rob will then discuss our financial performance and capital market activity. Afterwards, I'll walk through a detailed segment review and associated outlook, followed by our enterprise fourth quarter and raised full-year guidance. We will then look forward to your questions. Now with that, let's turn to a brief run through of our Q3 enterprise highlights. Next slide please. The third quarter demonstrated the strength of our execution capabilities. First, on an operating basis. Second, on a capital deployment basis. And finally, from a capital markets perspective. Operationally, our revenues and EBITDA continued to grow, albeit modestly, despite the well-documented economic challenges resulting from the pandemic situation we're all facing. At a summary level, our software recurring revenues continue to grow. Recurring revenue growth is very important for us. This indicates high levels of retention, demonstrates our ongoing and increasing relevance we have with our customers and provides for a more stable and predictable forward financial model. However, as anticipated, we experienced modest declines in our perpetual license revenue tied to lower levels of market activity across a few of our software end markets and a difficult comparison from a year ago. We discussed this on each of our last few calls. COVID is absolutely driving faster adoption of our SaaS or cloud-based recurring revenue solutions. This is a very healthy and positive trend. Separately, we continue to see very nice momentum for our products and software used in the fight against COVID. Most notably, our laboratory software businesses continue to see strong demand as we're helping stand up and maintain health system and country-level COVID testing capability. In addition, Verathon, our largest medical product business, continues to drive meaningful market adoption across their video intubation product line. The final operating item I'll point out here is that Neptune and our short-cycle industrial businesses started to rebound in the quarter from which we draw encouragement. From a financial point of view, our organic revenues declined 3%. Our gross margin was 64% and our operating profitability remained very strong with 37% EBITDA margins. Most importantly, we grew our cash flows double-digits again. Turning to our acquisition activities, we completed four acquisitions for a total of $5.8 billion of capital deployment, certainly led by our $5.35 billion acquisition of Vertafore. More on these when we turn to our next slide. Finally, the team was successful in the debt capital markets completing a $2.7 billion bond offering with a blended rate of 1.3% and increasing our revolver capacity to $3 billion that has an extended maturity date. I'm super proud of our execution in this quarter with all three phases of our offense on full display: Solid operating performance across the enterprise; $5.8 billion of CRI accretive capital deployment; and successfully executing a capital market transaction at extremely favorable interest rates. Now let's turn to our next slide and talk to our recent acquisitions. This was a very strong quarter for us relative to our capital deployment strategy. As we mentioned for several calls, the quality and quantity of ideas in our M&A pipeline has been robust for quite some time. We were very selective in our approach for landing on these acquisitions highlighted on this page. First, we completed the acquisition of Vertafore for $5.35 billion. I refer you to the call we did just after announcing this transaction for all the relevant details. But the highlight, Vertafore is a business that delivers cloud-based software to the property and casualty insurance industry principally in the United States. Vertafore’s focus is straightforward—to simplify, automate and drive productivity across the complex and highly regulated processes in the P&C space. Today, the business serves over 20,000 independent agencies, 1,000 insured carriers, and touches over $140 billion of premiums per year. And high-quality management teams motivated to build their businesses are super important for us. And to that end, Amy and her team have done a tremendous job building this business over the last several years. We expect Vertafore will deliver about $590 million of revenue and $290 million of EBITDA next year. Separately, we announced and closed three strategic add-ons, one for Strata, and two for iPipeline. Relative to Strata, we acquired EPSi. As a reminder, both Strata and EPSi deliver decision support, financial planning, and analytic software solutions that help hospitals manage their cost structure and identify opportunities for operational improvements. Strata, when combined with EPSi, would serve over 400 health systems and 2,000 hospitals. The aggregate spending power of this combined customer base is approximately $1 trillion, or about 25% of the total healthcare spend in the U.S. The combination of Strata and EPSi will be a powerful one for the market and our customers. Relative by iPipeline, we acquired both WELIS and IFS. WELIS is a nice product tuck-in that enhances iPipeline’s life insurance and annuity illustration capability. For those who don't know, the illustration is the modeled value calculation that permanent insurance carriers are required to provide to their insurers. IFS enhances iPipeline's capabilities to better serve the financial planning channel relative to life insurance account management. We expect these three bolt-ons will deliver about $75 million of revenue and $30 million of EBITDA next year. We're looking at each of these deals either individually or together, and they are right down the middle for us. Each business has very strong cash flow capability, which is punctuated by being super asset light. Also, these businesses are, as our most Roper businesses, market leaders in their niche. Over the years when we refer to niche we mean smaller markets. We like small markets; small towns provide deterrence for new potential entrants. On top of this, these and other Roper businesses provide deeply verticalized solutions. By this, we mean solutions that are specifically developed to address unique industry workflows or challenges. It is at the cross-section of being the market leader, operating in smaller markets, and delivering vertical solutions that enable our businesses to have intense customer intimacy. This intimacy enables our businesses to invest at the pace our customers require. Importantly, these four businesses have very high levels of recurring revenue. For instance, Vertafore has over 90% returns. Finally, these businesses grow nicely on an organic basis. Their growth drivers are diversified and are multiple. We expect these businesses to grow mid-single digits over the long arc of time. Taken together, the $5.8 billion in capital deployment should deliver about $665 million in revenue and $320 million of EBITDA to our enterprise in 2021. In a few pages, Rob will discuss our financing package for these deals which, as you likely know by now, was quite good. So now, I'm going to hand it over to Rob, but look forward to discussing our activities here more during the Q&A. Rob, your ball.

Rob Crisci, CFO

Thanks, Neil. Good morning, everyone. We appreciate your interest in Roper Technologies. Turning to Page 7, looking at our Q3 income statement performance. Total revenue increased 1% to $1.369 billion. Organic revenue for the enterprise declined 3% versus the prior year, similar to what we saw in Q2 and about what we would expect for Q4 as the pandemic continues. We had positive organic revenue growth in both Network Software & Systems and Measurement & Analytical Solutions. We had a slight organic decline in Application Software due to the difficult perpetual license comparison we discussed last quarter. Lastly, and similar to Q2, we experienced a 25% decline in our smallest segment, Process Technologies. Margin performance was once again quite strong with gross margin of 64.2% and EBITDA margin down 10 basis points versus the prior year, but up quite a bit sequentially to 36.6%. EBITDA grew in the quarter despite the pandemic to a Q3 record of $501 million. The tax rate came in at 22.2%, which was a couple of points higher than last year. So that all results in adjusted diluted earnings per share of $3.17, which was well above our guidance range aided by both better organic performance and some accretion from our Vertafore acquisition. So once again, strong execution by our business leaders in a very challenging environment. Next slide, turning to Page 8 on net working capital. Here we look at the three-year trend on working capital which continues to improve. You may recall we exited last quarter with negative working capital of minus 5.4%. And now we further improved working capital as a percent of revenue down to minus 6.3%. Continuing to improve on these important working capital metrics, despite the challenging macro environment really is a testament to the excellent work of our finance organizations across the Roper Enterprise. Our people do a really good job of focusing on what matters. We will see more evidence of this as we move forward to look at cash flow and cash conversion on the next few slides. Next slide. Turning to Page 9 on compounding cash flow. Really amazing as Neil had mentioned to have our third straight quarter of double-digit cash flow growth in 2020. As we discussed last quarter, for better compatibility and clarity, we adjusted our results for the $124 million of cash tax payments that were deferred from Q2 to Q3 due to COVID-19. So that adjustment hurt our numbers in Q2 and helps us in Q3 but has no net impact on our year-to-date results. Next year, we expect the IRS to return back to their normal schedule. We do have one additional adjustment this quarter, as Zack mentioned, for the $192 million of cash taxes that we paid in the quarter that were due from the 2019 Gatan divestiture. So none of those adjustments, Q3 operating cash flow grew 12% to $454 million, which represented 33% of revenue. Q3 free cash flow grew 14% to $442 million, which represented 32% of revenue. And you can see on the right-hand side on a year-to-date basis, our adjusted free cash flow was up 13% to $1.1 billion. So as a takeaway reads, really consistent cash flow performance in a very challenging environment. Next slide, on Page 10, turning to Roper's strong cash conversion. Through three quarters of 2020, 28% of our revenue and 78% of our EBITDA has converted to free cash flow. So comparing our 2020 year-to-date to our full-year cash conversion over the past few years, we actually see that we are trending ahead of where we've been historically on cash conversion. Even better, Q4 is typically a seasonally strong quarter for cash conversion driven by annual billing cycles and lower tax payments. So, we are quite confident we are heading for a very strong cash result in 2020. Our consistently high cash conversion is important because it further demonstrates the high quality of our EBITDA, which allows us to quickly and predictably reduce leverage after large acquisitions. Next slide, turning to Page 11, updating on our balance sheet. So you can see here where we stand after the completion of the Vertafore acquisition in September. Our cash balance is reduced to a normal level of about $300 million, down from $1.8 billion at the end of the second quarter. That excess cash was used to partially fund the acquisitions. Net debt to trailing EBITDA ended the quarter at 4.8 times. Importantly, this calculation does not include the pro forma impacts of the Vertafore acquisition. Including a full year of Vertafore’s EBITDA would push this ratio down into the low 4s. We expect our leverage to decline quickly over the next year as the EBITDA flows through and we use our generated cash flow to reduce our debt. Next slide. So on Page 12, we'll talk about the financing activities that occurred in the third quarter. Including the EPSi deal that closed in October, we recently deployed a little over $5.8 billion of capital financed by our excess cash on hand, a meaningful amount of which was generated from last year's Gatan divestiture, new investment grade debt, and a draw on our credit facility. We launched a bond offering in August and benefited from strong demand from Roper's debt investors, consistent with what we had experienced when we accessed the high-grade bond market in June. So we ended up spreading the $2.7 billion of principal over four tranches which resulted in a very good blended interest rate of 1.3% and duration of a little over seven years. Notably, and importantly, no changes to Roper credit ratings. We remain triple B plus at S&P and Baa2 at Moody's and we remain committed to maintaining solid investment grade ratings moving forward. We also successfully extended our revolving credit facility out three years and also upsized it from $2.5 billion to $3 billion. The current floating borrowing rate on the revolver is about 1.2%. So we like to strike a balance between fixed rate debt and prepayable floating debt to enable us to delever quickly. So in summary, these financing activities are consistent with our long-term strategy of augmenting our internally generated cash flow with investment grade debt. Then we use our consistent and durable cash flow generation to rapidly reduce leverage, which we plan to do over the next 12 to 18 months.

Neil Hunn, President and CEO

Thanks, Rob. Let's turn to our Application Software segment. Revenues here were $451 million, down 1% on an organic basis; EBITDA was $201 million or 44.6% of revenue. Similar to the way we started our commentary about this segment during our last call, our retention rates and thus our recurring revenues remained strong in the quarter. In addition, we're continuing to see an acceleration of our Software as a Service or cloud solutions across this segment. This trend will provide a long-term benefit for both our customers and for our business. Our customers outsource the operations of their software applications to us and gain the benefit of being on the most recent software release at all times. Our businesses are improved by having higher levels of recurring revenue and customer intimacy. Importantly, we believe this migration to the cloud will be a net growth driver for us. So based on this SaaS migration trend, and our continued high levels of customer retention, we saw recurring revenues grow mid-single-digits in the quarter. We expect this strength to continue into next year. As an offset, and as expected, we saw declines in our perpetual revenue stream for two reasons: first, a difficult prior year's license comparison; and second, a slowing of new logo licenses associated with the current macro headwinds. Things remain solid at Deltek. We saw normalized bookings increase double-digits in the quarter, coming off very large perpetual bookings a quarter ago. They were seeing particular strength across their GovCon offerings and with their subscription content solutions. Recurring revenues are up double-digits versus this time last year. And as you'll note towards the bottom of this page, a business that has been negatively impacted in this segment is CBORD. To remind everyone, CBORD designs and delivers K-12 and university campus integrated security and nutrition management solutions. Given the fact that many educational campuses are deferring in-person attendance, this business is negatively impacted in the short run. As soon as in-person classes resume, we expect CBORD to return to normal levels of growth. Our laboratory software businesses, Sunquest, Data Innovations, and CliniSys all performed nicely, aided by global demand to deploy laboratory software associated with combating COVID-19. A good example we're talking about here is the activity CliniSys is helping drive. Specifically, CliniSys is the IT backbone for the French and Belgian national COVID testing programs. You'll also note from the page that Data Innovations, our diagnostic middleware business, had record orders in the quarter, congrats to the team at Vermont. With this being said, we do expect some of this COVID strength to moderate going forward. Also, we continue to see strength in Strata. One of the nice perks of having Strata in the family of business is this learning from their hospital analytics. From Strata's research, we know that hospital volumes are normalizing in the 90% to 95% pre-COVID level. In addition, most hospitals have enacted cost measures to right-size their operating structures for this level of patient activity. Given our healthcare, IT, and medical product businesses primarily serve the hospital market, we take confidence that patient volumes are coming back and hope to see the associated hospital capital spending come back online next year. Finally, we will be reporting Vertafore and the EPSi-Strata bolt-on in this segment. As we turn to the outlook for the fourth quarter, we expect this segment to be flat on an organic basis, principally for the reasons just discussed. We expect to see continued high levels of recurring revenue retention. As a reminder, the vast majority of our customers in this segment are enterprise or larger companies. That said, we do anticipate some continued pressure on our upfront software license sales. We're encouraged by seeing our sales pipeline activity being higher than this time a year ago, but we continue to expect our new logo prospects' decision timeframes to extend longer than our historical experience, which leads deals likely moving into next year. All in all, we expect flat organic growth, but with a higher-quality revenue mix towards recurring versus perpetual. With that, next slide, please. Now let's turn to our Network segment. Revenues here increased 1% organically to $430 million. EBITDA was $180 million or 41.8% of revenue. I'd like to start, and as a reminder, that our software businesses in this segment principally share highly recurring SaaS revenue models, which are further aided by strong network effects that drive high retention rates, which was certainly the case in this quarter. The entire segment, similar to that of the Application Software segment, we saw mid-single-digit organic increases in recurring revenue. ConstructConnect continues to perform well. Their network expanded in the quarter and was driven by strong customer adds and network utilization. DAT continues to post record quarters. This quarter is highlighted by record net addition of carriers to the network and enterprise brokerage seats fully recovering to pre-COVID levels. In addition, iPipeline's SHP and SoftWriters all continue to be strong. A couple of our software businesses in this segment are facing modest headwinds, each of which are short-term and tied to COVID-related economic activity. iTrade is being negatively impacted as food volumes in institutional settings, such as restaurants and sporting events are down. As these activities come back online, so will iTrade's growth. Also, MHA was down a bit in the third quarter as well, directly resulting from patient volumes and long-term care being down. We expect MHA to recover starting in the fourth quarter. Of note, during the quarter, Foundry was awarded their first Engineering Emmy Award for visual effect innovation used in television. The team at Foundry are excited about this recognition, congrats. Finally, the TransCore New York City congestion pricing infrastructure project continues. However, the project at the election of our customer continues to slow and be pushed into 2021. Execution of the project remains quite strong, but the timing continues to elongate. In addition, a few other projects are slightly delayed as we near go live, causing some revenue and margin pressure in this segment. Now let's turn to our outlook for this segment. We see low-single-digit organic growth for the final quarter of the year. We continue to see growth and resiliency in our Network Software businesses driven by high recurring revenue mix, strong retention rates, and expanding networks and network participation. Relative to TransCore, we continue to see the New York City project pushing to the right. A few other projects being delayed and lower tag shipments due to the lower levels of vehicle traffic in 2020. All in all, again, we expect low-single-digit organic growth for the final quarter of the year. Next slide, please. Turning to our Measurement & Analytical segment. Revenues grew 2% organically to $368 million. EBITDA was $131 million or 35.7% of revenue. With the current pandemic backdrop, this segment's activities continue to be best broken into four boxes. One, Verathon and IPA; two, other medical product businesses; three, Neptune; and fourth, our industrial businesses. First, Verathon continues to experience high levels of demand for their GlideScope video intubation solutions. In this quarter, orders remained strong, and the company is able to clear much of the backlog that entered the quarter. As a result of COVID-19, the percentage of all intubations, not just COVID-related that are being done using video assistance has meaningfully increased. We expect video-assisted intubation market share to remain above pre-COVID levels going forward, which is a great long-term and recurring benefit for Verathon's business model. IPA continues to be strong as well. Second, and relative to our other medical product businesses, we did see revenue headwinds tied directly to lower patient volumes within acute care hospitals. We also note this group of companies normally grow mid-single digits, but this growth is conditioned on normalized hospital activity. As hospital capital budgets begin to free up in 2021, we expect these businesses to return to a more normal state at some point next year. Third, Neptune improved sequentially but the pace of recovery was hampered a bit by continued restricted access to indoor meters, in particular, in the Northeast United States and Canada. Finally, and as expected, we did see recovery across our shorter-cycle industrial businesses. As we turn to the fourth quarter outlook, this will be the last quarter we have Gatan results in our prior period given its divestiture was in the fourth quarter of last year. For the fourth quarter, we expect to see low-single-digit growth for this segment, led by continued strong but moderating demand at Verathon. Given the strength in 2020, Verathon continues to accelerate investments in both product and go-to-market areas. In addition, we do expect to see our other medical product businesses improve from historic lows, but as discussed, hospital spending continues to be somewhat uncertain for the near term. We expect to see continued improvements at Neptune as they gain more access to indoor meters. And finally, we expect to see continued but likely modest short-cycle industrial improvement. Next slide, please. Now turning to the segment that represents 9% of our revenue, Process Technologies. Revenues were $120 million in the quarter, down 25% on an organic basis. EBITDA was $34 million or 28.4% of revenue. While these businesses are facing incredible market headwinds, they continue to demonstrate their resiliency with their 28% plus EBITDA margins. As we said for the last couple of quarters, this, too, was a difficult quarter for these businesses, and we expect the outlook to remain poor for the balance of the year. We saw our upstream businesses decline approximately 40%. CCC was weak based on their inability to perform field service work, again, related to COVID. Cornell declined on weakness in their rental markets but did grow in many of their other end markets. And a bright spot in the quarter was Zetec, which experienced growth based on the strength in their new non-disruptive testing products. The outlook for the fourth quarter continues to be an extremely challenging one as we expect to see approximately 20% organic declines. Specifically, we do not anticipate any recovery in upstream oil and gas markets but do anticipate sequential and seasonal improvement from many of the other businesses in this segment. Next slide, please. As we turn to our guidance, we are raising our full-year adjusted DEPS guidance to be in the range of $12.55 and $12.65 per share. The increase is principally attributed to the acquisitions closed since our last call. Full-year revenue and EBITDA are expected to increase in the range of 2% to 3%. Our organic revenue outlook for the full year now leans to be flat to slightly down, perhaps 1% or so. Back in April, we guided revenues to be plus or minus flat, now flat to down 1%. While there are several puts and takes, the primary assumption that changed is the substantial amount of revenue tied to the TransCore New York City project pushing into 2021. The majority of other businesses have improved versus our April outlook. For the fourth quarter, we are establishing adjusted DEPS guidance to be in the range of $3.39 and $3.49 per share. We expect consolidated organic growth to be similar to that of the third quarter. Our tax rate for the quarter is expected to be about 20%. Now let's turn to our summary and get to your questions. In closing, I'll recap what we started. Strong execution across the three parts of our offense: operational; capital deployment; and capital markets. Operationally, revenue grew 1% overall and declined 3% on an organic basis. EBITDA grew and margins remained strong. Most importantly, free cash flow grew 14% in the quarter. Throughout this year, our asset-light niche and market-leading businesses remain focused on investing for higher levels of long-term and sustainable organic growth. As such, this year, we are seeing increased levels of R&D across many of our businesses. Also, and it's worth repeating, we meaningfully enhanced our portfolio by successfully deploying $5.8 billion. Following these acquisitions, two-thirds of Roper's EBITDA will be generated from our software group of businesses. These acquisitions further add to our recurring revenue profile and our ability to compound our cash flows moving forward. Given our recent capital deployment and our commitment to investment-grade ratings, we are focusing our efforts for the next few quarters on operating our businesses and generating our durable cash flow, which will allow us to delever just as we did following our Deltek acquisition in 2016. So with all of this, we continue to be bullish about the coming quarter, about 2021, and about our longer-term future. And finally, and relative to our long-term strategy model, I'll conclude by highlighting, we compound cash flow. That's our job. Our cash flows are remarkably durable as demonstrated this year. We do this by operating a portfolio of businesses that have leading positions in small, niche and growing markets. Also, our businesses, whether our product or software, deliver highly application-specific or vertical solutions. Taken together, our businesses are awarded with intense customer intimacy. This intimacy allows us to innovate at the pace required by our customers. Our businesses have high margins and asset-light economic models that naturally generate high levels of operating cash flow as they grow. To this end, we incent our management teams based on growth. And finally, we take the excess free cash flow generated by our businesses. And by this, we mean the cash flow that the businesses generate beyond investments required to drive organic growth, combine it with investment-grade leverage, and acquire businesses that have better cash returns than our existing company, that in turn, improve Roper and further accelerate our cash flow compounding. This very model, this very strategy, are the simple ideas that deliver our powerful results. So with that, let's get to your questions.

Operator, Operator

Our first question will come from Deane Dray with RBC Capital Markets. Please go ahead.

Deane Dray, Analyst

I was hoping you could quantify the revenue push out for the New York City congestion tolling project. We've been thinking $30 million in the fourth quarter. So that's obviously lower, but hopefully you can quantify that. And can you clarify whether there's been any change in scope? Or are these pushouts more as a result of COVID kind of logistics?

Neil Hunn, President and CEO

Yes, Dean, it's Neil. I'll take the second half of your question and give the first half to Rob. So scope is completely unchanged. The project continues, it's just slower, pushing a little bit as we discussed in the prepared remarks into next year. But yes, the scope is fully intact.

Rob Crisci, CFO

Yes. So it's continuing, as Neil mentioned. And so there's now, we've got about $100 million for the project this year, right? So maybe that's down $10 million or so versus what we said last quarter.

Deane Dray, Analyst

Got it. Could you elaborate on the point regarding fourth-quarter seasonality? Perhaps you could start by discussing the expectations for free cash flow, considering the macro environment and your concerns about what might be typically seasonal and what may not occur as expected. Additionally, within the businesses, could you remind us where and how you anticipate seasonality will affect the fourth quarter?

Rob Crisci, CFO

Sure. Regarding cash flow, we are pleased with the conversion year-to-date, and Q4 typically sees a high cash conversion due to the annual billing cycle in our software businesses. Additionally, most tax payments occur in the first half of the year, resulting in lower tax payments during the fourth quarter. Historically, when Roper was focused more on cyclical businesses, we experienced a boost in Q4 related to our energy segment. Though it's a minor part of Roper now, it still contributes. As for this year, our medical product businesses, particularly Verathon, had significant revenue increases in the second and third quarters due to the COVID surge. However, we're seeing a decrease of about $30 million in revenue for the fourth quarter compared to the third, although they are up considerably year-over-year. If the COVID situation escalates, we expect Verathon's sales to rise, but we hope that doesn't occur. This information is reflected in our Q4 guidance.

Operator, Operator

Our next question will come from Allison Poliniak with Wells Fargo. Please go ahead.

Allison Poliniak, Analyst

Just want to go to your comments around iTrade and Foundry. Understanding COVID is certainly having disruption. But obviously, those markets are quite a bit more challenged than maybe others. Are you seeing any sort of longer-term impairment to some of those customers? Any color?

Neil Hunn, President and CEO

No, I don't think so at all. Take iTrade, as I mentioned in our prepared remarks, I mean, that business is partially indexed to sort of the institutional food, and that's also partially indexed to retail. So institutional down, retail up, it just balances a little bit towards the negative. The renewal rates for the more institutional side have been fine. They’re not dropping off. Obviously, the contract sizes have gotten a little smaller, but the retention rates of the actual customers are the same. On Foundry, Foundry has had a good year. Recurring revenues are up. The EBITDA is up in that business. It's just there's the way that the flow of work happens in converting live production into post and to releasing content, either film or television. There was a fair amount of backlog being worked on in the first half of the year. Then there was this pause in 2Q of live action, came back on slowly in Q3. It's fully ramped up right now across the globe. That creates more content for post. And so there's a couple of quarters inside the middle of this year where the number of net new software sales to new customers paused or waned a bit, but the recurrence was high and we expect that to fully bounce back as the pipeline is filling back up with content.

Allison Poliniak, Analyst

Understood. And then just kind of going back to TransCore and some of the other projects. Anything tied to municipal in your portfolio that you're starting to see incremental challenges or delays there?

Neil Hunn, President and CEO

I would say no. On the municipal side, with TransCore, the bidding activity and sales pipeline look quite good. There are many projects currently in the process of being awarded, which is a positive sign. The municipal budgets at Neptune are largely intact, renewed, and funds are being allocated to them. Overall, we feel optimistic about the spending and budgets available for the municipal aspects of our business.

Rob Crisci, CFO

Yes. It’s really just project slowing, which is probably mostly due to COVID, right? It's just things are just taking longer to get going at TransCore for the most part.

Operator, Operator

Our next question will come from Christopher Glynn with Oppenheimer. Please go ahead.

Christopher Glynn, Analyst

So I was curious about Sunquest. It sounds like you have some fresh momentum going there. Are you moving past the kind of net attrition, modest slide that, that business has been seeing?

Neil Hunn, President and CEO

I would describe Sunquest as having had a very strong year. They are expected to see a slight increase in EBITDA this year compared to last year, thanks to various factors including the impacts of COVID, some growth in their diagnostic and molecular business segments, new product launches, and public health initiatives. Nevertheless, I believe this year will serve as a temporary pause in the broader trend. I anticipate that the business may encounter one to two years of challenges before it stabilizes and returns to a state of low-single-digit organic growth.

Operator, Operator

Our next question will come from Steve Tusa with JPMorgan. Please go ahead.

Steve Tusa, Analyst

Can you just give us some color on how, with a little more precision, your revenue performed in license, maintenance and recurring? I mean, you guys are definitely giving a lot more really solid color directionally on this stuff. But just love to understand, you can talk about it enterprise-wise, if you want. Just a little more precision on kind of how those 3 buckets performed in the quarter?

Rob Crisci, CFO

Yes. So I think overall, recurring revenue, which right is maintenance plus subscription, as I think Neil mentioned earlier, was up mid-single digits. The license and the services piece is impacted by COVID, as we talked about all throughout the year. So there's some declines there, and that's what gets you to that. Basically, overall, the software businesses were in line, a tad better than we had coming in really since the pandemic began. I think overall, our software revenue is about 80% recurring, and that's the maintenance and the subscription piece, which continues to grow. Our retention rates continue to be very, very high. So it all bodes well for next year when the services and the perpetual stuff should start to come back.

Steve Tusa, Analyst

So I guess, shouldn't that be dilutive to margins for you guys? Aren't licenses higher-margin than the recurring side?

Neil Hunn, President and CEO

Yes. I mean, the perpetual...

Rob Crisci, CFO

Not services.

Neil Hunn, President and CEO

Yes, perpetual licenses or high-margin services represent the lowest margin segment of a software business, while recurring revenue remains quite strong. Additionally, many businesses around the world, not just ours, have seen a reduction in their cost structure this year due to COVID, as expenses for travel and customer meetings have significantly decreased. This has naturally offset some of the challenges related to perpetual licenses.

Operator, Operator

Our next question will come from Julian Mitchell with Barclays. Please go ahead.

Jeff Hou, Analyst

This is Jeff Hou on for Julian. Maybe just asking on, you guys mentioned the short-cycle business is seeing a bit of recovery here. Is there any color you can give on sort of how the cadence of that has looked? Was there some pent-up demand earlier in the quarter? Or are we still seeing kind of more gradual sequential improvement that should continue ahead?

Neil Hunn, President and CEO

Yes, I appreciate the question. It's a small part of our business, and we mentioned last quarter that the consumable segment was starting to improve. That strength continued throughout this quarter. We noticed some increase in capital spending, especially at our Struers business. The pace gradually improved as the quarter progressed, and overall it was quite clear for us.

Rob Crisci, CFO

Yes, very gradual sequential improvement. That's a good way of stating it.

Jeff Hou, Analyst

Thanks for that. Rob, you mentioned it earlier, but we're seeing an increase in COVID cases and hospitalizations over the past week or two. How does this align with the Q4 outlook and the expectations for the medical businesses that benefit from COVID, as well as those that would gain from more normalization?

Rob Crisci, CFO

Yes. So we've really had five businesses this year, right, that have benefited from COVID financially. Verathon, IPA, we talked a lot about in our three businesses and our laboratory software platform, and they're all at the frontlines of fighting this thing. And so there would be some give and take, if COVID surged and you had more hospitalizations, which I don't think has happened yet, if that started to happen and those businesses would probably do more and then that could hurt other areas. So it's great of having this big diversified portfolio of businesses. Whereas we'll do great in a post-COVID world, we can't wait for it to happen, but you get a little bit of financial benefit in the short term. Do you have anything to add to that, Neil?

Neil Hunn, President and CEO

No.

Operator, Operator

Our next question will come from Scott Davis with Melius Research. Please go ahead.

Scott Davis, Analyst

What you’ve likely seen in the news is the surge of new technology stacks, with what seems like hundreds emerging. Is there any concern that this could create new competition for your company, or do you believe your offerings are too specialized for that kind of competitor?

Neil Hunn, President and CEO

Yes. We discussed this for a while with some advisers regarding the question of whether a new competitor is emerging for capital deployment. Our conclusion is no. A SPAC involves the seller conducting a backdoor IPO, and they receive only a portion of the proceeds at closing, not the entire amount. Additionally, there are other considerations related to the business dynamics, leadership team, and the capability of being a public company that investors find appealing. So overall, no. There might be one or two fringe cases, but it's not a significant competitor compared to our capital deployment. Moreover, SPACs have been prevalent in large volumes for the past three to four years, and while there has been a slight increase recently, a lot of SPAC money may go unused or be recycled. Just because funds are raised doesn't guarantee that deals will happen. This is not a completely new occurrence; it is simply gaining more attention from mainstream media at the moment.

Scott Davis, Analyst

I'm glad you've studied it. However, I have a question about Vertafore. The SaaS versus perpetual model is notably stronger compared to most of your other software offerings. Is there a specific reason why this product performs better in a SaaS model rather than perpetual? Is it due to your go-to-market strategy or pricing? Essentially, I'm asking whether it's related to the product itself or the pricing structure.

Neil Hunn, President and CEO

I believe the reason is that they began their transition to SaaS earlier than many of our other businesses. Currently, they have around 80% of their systems deployed in SaaS, with over 90% of their revenue being recurring. For example, Deltek is in the middle of that conversion and is currently 75% recurring, aiming for 80% this year. Looking ahead five years, it will likely resemble Vertafore's model. Companies like CBORD, Aderant, and PowerPlan are just starting their migration. This process is determined by our customers, who decide when they are ready to move to the cloud and when the timing and value are right for them. This customer-driven approach can extend the timeline over several years. We do not experience the risks that come with other companies, which may face a decline before seeing growth. As we have mentioned multiple times, this transition is a net growth driver for us. When we migrate maintenance to the cloud, we see an increase in that area. Additionally, selling new SaaS licenses contributes to the growth of our recurring revenue. Essentially, Vertafore started this process earlier than some of our other companies.

Operator, Operator

Our next question comes from Joe Giordano with Cowen. Please go ahead.

Joe Giordano, Analyst

I would like to clarify the factors influencing the guidance. It seems you exceeded the midpoint of your previous guidance by $0.22 and are increasing the full-year guidance by $0.45. Can you explain how much of that additional amount is attributable to the deals? Additionally, how should we view the core guidance excluding M&A compared to what it was three months ago?

Rob Crisci, CFO

Yes. So think of the deals as $0.45 to $0.50 to the second half. Some of that we got in Q3, about $0.12 and the rest in Q4. And then everything else is pretty much a wash. There's $0.04 or $0.05 from tax. There's the Verathon and TransCore sort of pushed to the right. And then, quite frankly, a lot of investment that we're doing in the fourth quarter with businesses like Verathon, to continue to position ourselves well for next year. So think about the operational stuff as sort of washed in. So when you add the M&A, there’s the midpoint change.

Joe Giordano, Analyst

Okay. Fair enough. And then just curious on Deltek. What are your guys there saying about like the potential for that business in the Biden administration, given the spending plans that they have and things like that?

Neil Hunn, President and CEO

Yes. It's a common question regarding Deltek that has been asked many times over the years. The short answer is that either administration is acceptable for Deltek. The main reason is that government subcontractors tend to focus on the current government spending trends. For example, during Obama's term, the focus was on healthcare, and if Biden is elected, it will likely be on infrastructure. They will adapt to where that spending occurs. There may be a few additional government subcontractors in infrastructure, but it won’t significantly drive growth for Deltek. The advantage of this business is that it performs well in nearly any government spending scenario since government spending tends to rise consistently.

Operator, Operator

Our next question comes from Blake Gendron with Wolfe Research. Please go ahead.

Blake Gendron, Analyst

So we've been focused on the better-than-expected recovery in non-emergent hospital activity. You mentioned, and you've been very descriptive with the Verathon, IPA impacts of COVID. So wondering if this healthcare recovery is driving somewhat of a subdued non-emergent healthcare exposed businesses versus the Verathon and IPA tailwinds? I'm just wondering how we in aggregate maybe frame the improvement in the non-emergent side of the healthcare business?

Rob Crisci, CFO

Yes. The other medical products businesses outside of Verathon have experienced a significant decline this year, in the double digits. However, this decline is beginning to stabilize in the fourth quarter, likely resulting in a year-over-year performance that is more flat. Following this period, we expect substantial growth. As Neil mentioned, these businesses have consistently shown mid-single-digit organic growth for the past decade. As more procedures are performed, these businesses should return to normal levels and potentially experience some catch-up growth as well.

Neil Hunn, President and CEO

Yes. And just a little more color on that. I mean, hospitals, like a lot of businesses, right, when things got economically really challenged and patient volumes were down quite a bit in Q2 and coming into Q3, hospitals may took dramatic cost actions on the operating side, but also basically froze all capital spending. And hospital budgets as they cycle back in next year, there'll be some level of capital spending, and that's likely going to be on things that are more akin to what we do. I mean, we're like mainstream procedure type things, not esoteric or sort of super high-technology that is super high dollar and sometimes questionable at the hospital level.

Blake Gendron, Analyst

Understood. And just a follow-up here. So the question was asked last quarter, businesses like that and ConstructConnect getting more sign-on, just given the sheer dynamism in the market. The shorter-cycle industrial recovery broadly seems to be plateauing or stabilizing. How do you expect this to impact new logos in some of these businesses versus the opportunity to expand existing customer touches through things like product enhancement, perhaps R&D maybe is folded in here?

Neil Hunn, President and CEO

Yes. The team at ConstructConnect has spent the last three years developing software that is integral to the workflows of general contractors, subcontractors, and building product manufacturers. The business has evolved beyond simply identifying leads for new projects; it now focuses on integrating the software into the daily routines of its users. In the current environment, more individuals are seeking work, leading them to ConstructConnect to purchase initial products. We have the opportunity to cross-sell additional workflow products, and we are seeing good, and improving, attachment rates with multiple products. Notably, we are witnessing an increase in daily usage, which we believe will lead to higher long-term retention rates. We anticipate this trend to continue for a considerable time. ConstructConnect currently serves less than 10% of the market, leaving 90% of it untapped, and this unserved market is increasingly turning to ConstructConnect in this environment.

Operator, Operator

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

Zack Moxcey, Vice President of Investor Relations

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

Operator, Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.