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Roper Technologies Inc (NYSE:ROP)
Q3 2020 Earnings Call
Oct 27, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. The Roper Technologies Conference Call will now begin. [Operator Instructions]

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

Zack Moxcey -- Vice President, 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 consist of the following items: amortization of acquisition-related intangible assets; purchase accounting adjustments to acquired deferred revenue and related commission expense; transaction-related expenses for completed acquisitions; and lastly, we have 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 items, even though it is related to a divestiture.

And now, if you'll please turn to Slide 4, I will hand the call over to Neil. After our prepared remarks, we will take questions from our telephone participants. Neil?

Neil Hunn -- President and Chief Executive Officer

Thanks, Zach, 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 our 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. 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 softer end markets and a difficult comp from a year ago. We discussed this on each of our last two 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, at the onset, is the fact 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 were 64% and our operating profitability remained very strong with 37% EBITDA margins. Most importantly, we grew our cash flow double-digits again.

Turning to our acquisition activities, we completed four acquisitions for a total of $5.8 billion of capital deployment, certainly led by 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. Okay. 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 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 delivered 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 will serve over 400 health systems in 2,000 hospitals. The aggregate spending power of this combined tester 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 to our 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 do not know, the illustration is the modeled value calculation that permanent insurance carriers are required to provide to their insured. 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.

When looking at each of these deals, either individually or together 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 one being the market leader; two, operating in smaller markets; and three, 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 business grow nicely on an organic basis. Their growth drivers are diversified and are multiple. We expect these businesses to grow mid single-digits over a long arc of time. Taken together, the $5.8 billion of capital deployment should deliver about $665 million of 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.

Robert Crisci -- Executive Vice President and Chief Financial Officer

Thanks, Neil. Good morning, everyone. We appreciate your interest, as always, 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 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 comp we discussed last quarter. Lastly, and similar to Q2, we experienced a 25% decline in our smallest segment, Process Technologies.

Margin performance was once again quite strong, with gross margin of 64.2% and EBITDA margin down 10 basis points versus prior year but up quite a bit sequentially to 36.6%. EBITDA grew in the quarter despite the pandemic to a Q3 record of $501 million. Tax rate came in at 22.2%, which was a couple 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 at 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 the last quarter with negative working capital of minus 5.4% and now we further improved working capital as a percent of revenue, down to minus 6.3%. Continuing to improve on these important working capital metrics despite the challenging macro environment really is a testament to the excellent work of our finance organizations across the Roper enterprise. Our people do a really good job of focusing on what matters. We will see more evidence of this as we move forward. So, look at cash flow and cash conversion on the next two 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 comparability 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 would expect the IRS to return back to their normal schedule. We do have one additional adjustment this quarter as Zach mentioned for the $192 million of cash taxes that we paid in the quarter that were due from the 2019 Gatan divestiture.

So, net of those adjustments, Q3 operating cash flow grew 12% to $454 million, which represented 33% of revenue. Q3 free cash flow grew 14% to $442 million, which represented 32% of revenue. And you can see on the right hand side on a year-to-date basis, our adjusted free cash flow was up 13% to $1.1 billion. So, as a take away reads, really consistent cash flow performance in a very challenging environment.

Next slide. On Page 10, turning to Roper's strong cash conversion. So, through three quarters of 2020, 28% of our revenue and 78% of our EBITDA had 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 and 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 impact 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 this $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 BBB+ 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 pre-payable 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.

So, with that, I'll pass it back over to Neil.

Neil Hunn -- President and Chief Executive Officer

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 are 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 outsourced 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 intention, we saw recurring revenues grow mid single-digits in the quarter. We expect this strength to continue into next year. As an offset and as expected, we saw declines in our perpetual revenue stream for two reasons. First, a difficult prior-year license comp; 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 is being 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 on the short run. As soon as in-person classes resume, we expect CBORD's 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 will also note from the page is Data Innovations, our diagnostic middleware business had record orders in the quarter. Congrats to the team in 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 businesses is 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 rightsize their operating structures for this level of patient activity. Given our healthcare, IT and medical product businesses, primarily serve the hospital market, we take confidence that patient volumes are coming back and hope to see the associated hospital capital spending come back online next year. Finally, we will be reporting 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 time frames 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, 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 in 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 super excited as they should be for this recognition. Congrats.

Finally, the TransCore New York City congestion pricing infrastructure project continues. However, the project that 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 remain 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 in Neptune as it 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-destructive 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 for many of the other businesses in this segment.

Next slide please. As we turn to our guidance, we are raising our full year adjusted DEPS guidance to be in the range of $12.55 and $12.65 per share. The increase was 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 lean to be flat to slightly down, perhaps 1% or so. Back in April, we guided revenue to be plus or minus flat, now flat to down 1%. While there are several puts and takes, the primary assumption that change 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 with what we started, strong execution across the three parts of our offense, operational, capital deployment and capital markets. Operationally, revenue grew 1% overall and declined 3% on organic basis. EBITDA 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 with 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 margin 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.

Questions and Answers:

Operator

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

Deane Dray -- RBC Capital Markets -- Analyst

Thank you. Good morning, everyone.

Neil Hunn -- President and Chief Executive Officer

Good morning, Deane.

Robert Crisci -- Executive Vice President and Chief Financial Officer

Good morning, Deane.

Deane Dray -- RBC Capital Markets -- Analyst

I was hoping you could quantify the revenue pushout 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 Chief Executive Officer

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

Robert Crisci -- Executive Vice President and Chief Financial Officer

Yeah. So, it's continuing, as Neil mentioned, and so there is 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 -- RBC Capital Markets -- Analyst

Got it. And then I don't know if it would be Neil or Rob, but could you expand the point on fourth quarter seasonality, maybe you can start with the free cash flow expectations because just given the macro you're concerned about what might be seasonally normal, what might not happen or play out the same. And then within the business, is there -- just remind us on where and how you would expect a seasonal impact in the fourth quarter?

Robert Crisci -- Executive Vice President and Chief Financial Officer

Sure. So, on cash flow, as I mentioned earlier, we feel great about where the conversion is year-to-date and Q4 is generally a high cash conversion quarter because of the annual billing of the software businesses and the fact that we don't have -- most of the tax payments are usually in the first half of the year. So the tax payments are less in the fourth quarter.

On the seasonality, so, yeah, I think, it's a good point. I mean, normally, if you go back historically right when Roper was more of the cyclical business, as a percent, you'd get the Q4 bump in what used to be our energy segment. So, there is some of that, I think, sequentially we still have is it's just a very small part of Roper. What's happening this year, as Neil mentioned, is our medical products business is really specifically Verathon had an enormous second and third quarter, driven by the COVID surge. And so their fourth quarter versus the third quarter is down about $30 million of revenue. And they are still up quite a bit year-over-year and we're hopeful that happens, right, if the COVID surge gets worse then Verathon will sell more products, but we're hoping that doesn't happen. So, that's what's all included in our guidance for Q4.

Operator

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

Allison Poliniak -- Wells Fargo Securities, LLC. -- Analyst

Hi, guys. Good morning.

Neil Hunn -- President and Chief Executive Officer

Good morning, Allison.

Allison Poliniak -- Wells Fargo Securities, LLC. -- Analyst

Just want to go to your comments around iTrade and Foundry, understanding COVID 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 there?

Neil Hunn -- President and Chief Executive Officer

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's just balances a little bit towards the negative. The renewal rates for the more institutional side have been fine, there is not -- they're not dropping off. Obviously, the contract sizes have gotten all 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 is 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 is a couple 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 -- Wells Fargo Securities, LLC. -- 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 as incremental challenges or delays there?

Neil Hunn -- President and Chief Executive Officer

I would say, no. I mean, if you -- on the municipal side the -- on TransCore, no. I mean the bidding activity, the -- sort of the sales pipeline, the TransCore are quite good. There are large -- a number of projects that are sort of in the process are being awarded now. So that's a good leading indicator. The municipal budgets at Neptune are largely intact and then renewed and sort of dollars are being spent against them on that municipal side. So, no, I mean I think we feel pretty good about the spending that's -- the budgets that are out there to be spent across the municipal parts of our business.

Robert Crisci -- Executive Vice President and Chief Financial Officer

Yeah. 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

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

Christopher Glynn -- Oppenheimer & Co. Inc. -- Analyst

Yeah, thanks. Good morning.

Neil Hunn -- President and Chief Executive Officer

Good morning, Christopher.

Christopher Glynn -- Oppenheimer & Co. Inc. -- Analyst

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 Chief Executive Officer

So, I'd characterize Sunquest, hey, they have had just a great year. They are actually going to be up a little bit in EBITDA this year versus last year based on all the activities going on around COVID and a little bit of strength we're seeing in the diagnostic, the molecular part of their business, the new product offering and some public health offerings they have as well.

That said, I think, we still got, I sort of view this year as a pause in the longer-term trend. I would expect that business to have faced a little bit maybe a year or so, maybe a -- it's hard to pinpoint it precisely but call it a year to two of headwinds and it will normalize, stabilize and back into sort of a maybe a low single-digit organic growth sort of business.

Christopher Glynn -- Oppenheimer & Co. Inc. -- Analyst

Okay. And as you're focused on debt reduction in the next year, year and a half, would we still anticipate some EPSis or WELIS type of additions to existing platforms?

Neil Hunn -- President and Chief Executive Officer

It was going to be -- the bar is very high for those, it wouldn't surprise me, that said, if there was a little bit -- a little bit of bolt-on activity, but our principal focus here is to deleverage for the next year or so.

Operator

Our next question will come from Steve Tusa with J.P. Morgan. Please go ahead.

Stephen Tusa -- J.P. Morgan -- Analyst

Hey, guys. Good morning.

Neil Hunn -- President and Chief Executive Officer

Good morning, Steve.

Robert Crisci -- Executive Vice President and Chief Financial Officer

Good morning.

Stephen Tusa -- J.P. Morgan -- 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 three buckets performed in the quarter.

Robert Crisci -- Executive Vice President and Chief Financial Officer

Yeah. 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 is some declines there and that's what we get 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 sub should start to come back.

Stephen Tusa -- J.P. Morgan -- Analyst

So, I guess, shouldn't that be dilutive to margins for you guys, is it -- aren't licensed the higher margin than the recurring side?

Neil Hunn -- President and Chief Executive Officer

Yeah, I mean, there perpetual...

Robert Crisci -- Executive Vice President and Chief Financial Officer

Not services.

Neil Hunn -- President and Chief Executive Officer

Yeah, perpetual licenses are high margin, services is the lowest margin part of a software business and recurring revenue was quite high, as you know. Also these, not just us, pretty much every business on the planet, their cost structure is lower this year because of the COVID, you just couldn't spend money on travel and customer meetings and things like that. So that became a natural offset to some of the perpetual headwinds.

Operator

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

Jeff Hou -- Barclays -- Analyst

Hey, good morning, everyone. This is Jeff Hou [Phonetic] on for Julian.

Neil Hunn -- President and Chief Executive Officer

Hey, good morning.

Jeff Hou -- Barclays -- Analyst

Maybe just asking on you guys mentioned the short-cycle businesses being a bit of recovery here. Any -- is there any color you can give on sort of how the cadence of that has looked? Were 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 Chief Executive Officer

Yeah. Appreciate the questions. It's such a small part of our business. We reported and talked about last quarters is the consumable piece we're starting to pick up that continued -- the strength of that continued through the quarter. And then we saw some pickup of the capital spending, particularly at our Struers business. I think the pace throughout the quarter was just improving a little bit sequentially through the quarter. I mean, it was pretty straightforward for us.

Robert Crisci -- Executive Vice President and Chief Financial Officer

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

Jeff Hou -- Barclays -- Analyst

Thanks, guys. And then, Rob, you touched on it earlier, but obviously we're seeing COVID cases and hospitalization rates kind of going up over the past week or two. How does this kind of lineup with the Q4 outlook and sort of the expectations for the medical businesses that are benefiting from COVID, the ones that are sort of -- would benefit from more normalization?

Robert Crisci -- Executive Vice President and Chief Financial Officer

Yeah. 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 in our laboratory software platform and they're all at the front lines of fighting this thing. And so there would be some give and take if COVID surge and you had more hospitalizations. And I don't think it's happened yet if that's started to happen and those businesses would probably do more and then that could hurt other areas. So, it's great 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 that, Neil?

Neil Hunn -- President and Chief Executive Officer

No.

Robert Crisci -- Executive Vice President and Chief Financial Officer

Okay.

Operator

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

Scott Davis -- Melius Research -- Analyst

Hey, good morning, guys.

Neil Hunn -- President and Chief Executive Officer

Good morning.

Robert Crisci -- Executive Vice President and Chief Financial Officer

Good morning, Scott.

Scott Davis -- Melius Research -- Analyst

What you -- I'm sure you guys have seen the news with all these new SPACs coming out, seems to be literally hundreds of them but or many of them, I should say, is there any concern that that's going to provide a new competitor for you guys or do you think you are too niche for really that type of a vehicle?

Neil Hunn -- President and Chief Executive Officer

Yeah. So, we've spent a little bit of time on this. We've got some -- we studied it with some advisors on this very question, Scott, is as a new competitor emerging for capital deployment? And our conclusion to that is, no. And the reason is that a SPAC, the seller is obviously doing a backdoor IPO. The seller is getting a percentage of their proceeds at closing, not the whole thing. And then you also -- there's other factors around the business dynamic and the leadership team and the ability for it to be a public company that investors have appetite for. And so principally no, could there be one or two on the fringe, maybe but it's not like a full on competitor relative to our capital deployment.

And, by the way, SPACs have been around in big volume for the last three or four years, it's obviously increased a bit here. There'll be a lot of the SPAC money that doesn't get deployed and recycled. It's just because you raised, it doesn't mean that the deal is going to happen. And so it's not a totally new phenomenon, it’s just catching some obviously mainstream media right now.

Scott Davis -- Melius Research -- Analyst

Yeah. Makes sense. I'm glad you've studied it, But a question about Vertafore, the SaaS versus perpetual are obviously higher than most of the other software businesses you have, is there a particular reason why that product sells better into a SaaS versus perpetual or is it -- how do you go to market and how do you price it? Is it the product or is it the pricing? I guess, is kind of the question.

Neil Hunn -- President and Chief Executive Officer

Well, I think, it's that they started the journey to migrating the SaaS earlier than many of our other businesses. So that you just got to the point where they have about 80% deployed in SaaS and a little over 90% recurring to their revenue stream, where, for instance, Deltek is midstream and that conversion going that way by the way. I mean, Deltek is 75% recurring, pushing to 80% this year. And it will get fast forward five years it will look more like Mike Deltek. And then companies like CBORD, Aderant, PowerPlan are just beginning that migration.

Again, all of this paced by our customers, our customers decide when they're ready to go to the cloud and when the value -- and when the timing is right for them. And because of that pacing it elongates over multiple years. We don't run sort of any of this Adobe risk where you have a -- the J-curve and go backwards before you go forwards. And as we said many, many times, this is all a net growth driver for us as you migrate the maintenance part up to the cloud, you get an uplift on that. And then, obviously you're selling net new SaaS licenses which drive your recurring revenue base up. I think it's just that Vertafore started earlier in this process than some of our other companies.

Operator

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

Joseph Giordano -- Cowen and Company -- Analyst

Hey, guys. Good morning.

Neil Hunn -- President and Chief Executive Officer

Good morning, Joe.

Joseph Giordano -- Cowen and Company -- Analyst

I just wanted to understand the puts and takes in the guide here, so like you beat the midpoint of your prior guide by $0.22, you're raising the full-year by $0.45. How much of that incremental is from the deals and how would we think about like the core guidance ex the M&A versus what it was three months ago?

Robert Crisci -- Executive Vice President and Chief Financial Officer

Yeah. So, think of the deals is $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 is $0.04, $0.05 from tax. There is 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 at 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.

Joseph Giordano -- Cowen and Company -- Analyst

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

Neil Hunn -- President and Chief Executive Officer

Yeah. It's often -- it's a frequent question around elections for Deltek that goes back a lot of years, many elections. And what -- the short answer is either administration, either way is fine for Deltek. The principal reason for that is these government subcontractors just gravitate towards the rapid or fast occurrence of government spending. And so, for instance, with Obama, it was healthcare; if Biden wins, it's infrastructure, that will just migrate into that -- where that spending is. There might be a few incremental sort of subcontractors, government subcontractors that might show up in infrastructure, though it might be a little bit incrementally beneficial for Deltek, but not a meaningful growth driver. We're -- the great thing about this business is it does well in almost any government spending environment because as you know, government spending always increases.

Operator

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

Blake Gendron -- Wolfe Research -- Analyst

Thanks. Good morning. So, you'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.

Robert Crisci -- Executive Vice President and Chief Financial Officer

Yeah. So, the other medical products businesses that aren't Verathon, right, have been down this year quite a bit. So, really double digits and that's starting to moderate a little bit in the fourth quarter whether or not they're going to be probably more flattish year-over-year, and then they would grow quite a bit coming out of that, right. These are the businesses, as Neil mentioned, that grow mid single-digit organically like clockwork literally going back 10 years. And so as you get more procedures happening then those businesses become -- get back to normal and probably have some catch-up as well.

Neil Hunn -- President and Chief Executive Officer

Yeah. 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 -- were [Phonetic] 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 -- Wolfe Research -- 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 Chief Executive Officer

Yeah. So, a couple of things on ConstructConnect, the business has spent -- the team there has spent really three years building the software capability that's part of the workflow of both general contractors and subcontractors and building product manufacturers is no longer just a content business essentially identifying leads for new projects. Really working to drive habitualization of the software and the daily workflow of all the users.

And so when you get into an environment like the one we're in, the environment opens up, meaning there is more people that are looking for work, so they come to ConstructConnect and buy the first product. The cross-sell into some of the workflow products now have -- we actually have the ability to do it and we're seeing decent and better than decent attach rates of multiple products and importantly then we're seeing what we hope to see which is the increase of the daily use.

And so we think the long-term retention rates will be higher. We think this is going to continue for quite some time. I mean, ConstructConnect services sub 10% of the market and there is 90% of the market is amended and that market is the one that's that unvended market is the one that is coming to ConstructConnect, an environment like this.

Operator

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

Zack Moxcey -- Vice President, Investor Relations

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

Operator

[Operator Closing Remarks]

Duration: 49 minutes

Call participants:

Zack Moxcey -- Vice President, Investor Relations

Neil Hunn -- President and Chief Executive Officer

Robert Crisci -- Executive Vice President and Chief Financial Officer

Deane Dray -- RBC Capital Markets -- Analyst

Allison Poliniak -- Wells Fargo Securities, LLC. -- Analyst

Christopher Glynn -- Oppenheimer & Co. Inc. -- Analyst

Stephen Tusa -- J.P. Morgan -- Analyst

Jeff Hou -- Barclays -- Analyst

Scott Davis -- Melius Research -- Analyst

Joseph Giordano -- Cowen and Company -- Analyst

Blake Gendron -- Wolfe Research -- Analyst

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