Roper Technologies Inc (ROP) Q4 2020 Earnings Call Transcript

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Roper Technologies Inc (ROP 0.15%)
Q4 2020 Earnings Call
Jan 29, 2021, 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 now like 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 fourth quarter and full-year financial results for Roper Technologies. We hope everyone is doing well.

Joining me on the call this morning are Neil Hunn, President and Chief Executive Officer; Rob Crisci, Executive Vice President and Chief Financial Officer; Jason Conley, Vice President 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've prepared slides to accompany today's call, which are available through the webcast and are also available on our website.

Now, if you'll please turn to slide two. We begin with our Safe Harbor statement. During the course of today's call, we will make forward-looking statements, which are subject to risks and uncertainties as described on this page in our press release and in our SEC filings. You should listen to today's call in the context of that information.

And now, please turn to slide three. Today, we will discuss our results for the quarter and year primarily on an adjusted non-GAAP basis. Reconciliations between GAAP and adjusted measures can be found in our press release and in the appendix of this presentation on our website. For the fourth quarter, the difference between our GAAP results and adjusted results consist of the following item: amortization of acquisition-related intangible assets; purchase accounting adjustments to acquired deferred revenue and related commission expense; and lastly, transaction-related expenses for completed acquisition.

And now, if you'll please turn to slide four, I'll 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, Zack, and good morning, everyone. Thanks for joining us, and we hope everyone is doing well. For today's agenda, we'll walk through our 2020 financials and operational highlights. Then, we'll turn to our 2020 segment detailed results and discuss our '21 segment-by-segment outlook, and end with our '21 enterprise guidance, prior to discussing your questions.

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

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

We continue to be benefited by having close intimate relationships with our customers. Most often, our software is mission critical to our customers' operations. In addition, we continue to strategically invest throughout our portfolio during the year. Based on our historical experience, we find times of market disruption, the best time to double down on innovation and market investments, which in turn will drive market share gains in the years to come. Finally, we are able to deploy $6 billion to further enhance Roper's Group of companies' headlines by our Vertafore acquisition. So when we look back on 2020, we highlight two key themes: First, we grew, cash flow increased 16% in the middle of a pandemic. And second, the quality of our enterprise continue to improve during the year. Net-net, we got bigger and better during 2020.

Let's turn to the next slide. Over the past five years, we highlight that our revenue grew at a 9% compounded rate, EBITDA at 10% and cash flow at 13%. We continue to grow and compound through macro economic cycles. Also, during the time period, the quality of our enterprise meaningfully improved. We are more software-focused with nearly two-thirds of our EBITDA coming from software, with higher levels of recurring revenue. Conversely, we are much less tied to cyclical end markets today, a little over 15% of our portfolio. Given our long-term strategy and these factors, we are a low risk enterprise. We compound cash flow through cycle and do so with multiple growth drivers across both organic and inorganic fronts. As we look to '21, we will continue our long-term stream of revenue and EBITDA and cash flow compounding.

So with that, let's turn to the next page and discuss the macro backdrop for '21. As we look to 2021, we are set up for a strong year. We expect revenue and EBITDA will grow well into the double digits likely in the mid-teens range with organic revenue growth in the mid-single digit plus range. This is on top of growth in 2020, the compounding continues. Breaking it down, our software businesses, both in our Application Software and Network segments are well positioned heading into '21. These businesses enter the year with momentum from strong retention and recurring revenue gains. They'll be further aided by growth in perpetual license as pipeline and customer activity are anticipated to recover to some extent.

Our non-Verathon medical product businesses are expected to return to a more normalized pattern of customer activity as healthcare facilities loosen restrictions. But since 2020 was well below trend, we expect above trend growth here. Of note, Verathon has a challenging comp. However, the reoccurring revenue base will remain strong, given the large volume of capital placements in 2020 and continued growth of their new single-use Bronchoscope business. We expect Neptune to recover and growing nicely as our customers especially in the Northeast US and Canada gain access to residential locations. We expect our industrial and process tech businesses to continue their quarterly improvements and return to growth after two years of macro headwinds.

Finally, 2021 will be meaningfully aided by the contribution from our 2020 cohort of acquisitions. To this end, we continue to work with a very full and high-quality M&A pipeline. We are committed to deleveraging, but we also remain active in building and maturing our pipe. So as I think back over the nearly 10 years I've been with Roper, I cannot think of a better set of tailwinds heading into a year. Clearly, lots to do and lots of execution in front of us, but we have a strong momentum heading into '21.

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

Robert Crisci -- Executive Vice President and Chief Financial Officer

Thanks, Neil. Good morning, everyone. Turning to page eight, while looking at our Q4 income statement performance. Total revenue increased 8%, as we eclipsed $1.5 billion of quarterly revenue for the first half. Organic revenue for the enterprise declined 2% versus prior year. EBITDA grew 7% in the quarter to a record $552 million. EBITDA margin was down 40 basis points versus prior year at 36.6%. Tax rate came in at 19.9%, a little lower than last year's 21.6%. So all-in, this resulted in adjusted diluted earnings per share of $3.56, which was above our guidance range.

Next slide. Turning to page nine, reviewing the Q4 results by segment. Neil will discuss the full-year 2020 segment performance in more detail later, so just touching on some of the Q4 highlights here by segment. Application Software grew 35% with the addition of Vertafore. Organic for the segment was minus 2% with mid single-digit recurring revenue growth continuing. Sharp declines in our CBORD & Horizon businesses, serving K-12 and higher education impacted the segment as many schools unfortunately remain closed. For Network Software & Systems, plus 2% organic growth with our software businesses, putting up a very solid plus 4% organic. The TransCore was flat versus prior year.

For Measurement & Analytical Solutions, plus 1% organic growth, as we start to see some sequential recovery at Neptune in our Industrial businesses. Segment margins were impacted a bit by the acceleration of some product and channel investments at Verathon as we discussed coming into the quarter, and it's really been exceptional year for Verathon overall. Lastly, for Process Technologies, a 21% organic decline, with margins holding up well at 31.3%. And once again here, we started to see some early signs of improvement after a couple of years of declines.

Next slide. So turning to page 10, looking at net working capital. Honestly, the slide mostly speaks for itself, ending the quarter with negative 8% net working capital as a percentage of Q4 annualized revenue. While there are certainly some seasonal trends, primarily around timing of the software renewals. They do typically benefit our Q4 performance. You can see here a meaningful improvement versus 2018, improving from negative 3.4% to negative 8% in 2020. Our asset light negative net working capital model drives our sustainable high cash conversion and fuels our cash flow compounding. Our people focus on what we all believe matters and our culture is built around growing the right way. Top line growth converts to cash flow and we are always mindful of the impact to our balance sheet.

Next slide. So turning to cash flow. Cash flow performance, as Neil mentioned, it was really pretty spectacular no matter how you look at it. Q4 free cash flow of $558 million, was 23% higher than last year and represented 37% of revenue. This excellent result was driven by the great working capital performance I just discussed, which is really across the enterprise along with meaningful cash contributions from Vertafore and the other recent acquisition. So for the full-year 2020, we generated $1.72 billion of operating cash flow and $1.67 billion of free cash flow. So to repeat, that's $1.7 billion of free cash flow in 2020. Truly a great year. Full-year free cash flow growth was 16% and our free cash flow conversion from EBITDA was a robust 84%. So really tremendous cash flow performance, and it was broad based and very durable.

Next slide. So turning to page 12, updating on our balance sheet. As Neil mentioned earlier, we ended the year with total capital deployment of approximately $6 billion, which included the EPSi acquisition that closed during the fourth quarter on October 15th. We were able to take advantage of attractive market conditions to complete and opportunistically fund this acquisition with a combination of internally generated cash flow proceeds from March 2019, Gatan divestiture and investment grade leverage. Overall, cost of financing was approximately 1%. Thanks to our excellent Q4 cash performance, we are off to a great start on our plan to quickly reduce leverage, paying down around $500 million since we closed the EPSi deal. Looking ahead, we plan to rapidly reduce leverage throughout 2021, taking advantage of our pre-payable revolver, which has a current balance of approximately $1.6 billion. Our solid investment grade balance sheet supports long-term cash flow compounding, which we are well positioned to continue.

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

Neil Hunn -- President and Chief Executive Officer

Thanks, Rob. Let's turn to our recap for 2020. To help orient you to this page, we're comparing our full-year outlook from last April to that of what actually happened. It's worth reminding everyone that we felt our businesses and our business model had the level of recurring revenue, customer intimacy and the business leadership required to guide in the face of the COVID uncertainty, both in terms of supply and demand. In aggregate, we thought our full-year organic revenues would be plus or minus flat, and we came in at down minus 1%.

The TransCore New York project is the primary reconciling item between being down a touch and being flat or slightly up. And more on this in a minute. We guided DEPS to be between $11.60 and $12.60 and came in at $12.74. Looking back on this, we are very proud of our team's ability to look forward and operate through the uncertainty of last year. Also, there is no better example of the durability of our model than this past year.

With that, let's walk through the macro drivers across each of our four segments. Relative to Application Software, this segment played out as anticipated and was up 1% on an organic basis for the year. Specifically, we saw recurring revenue up mid single-digits, aided by very strong retention rates as well as an acceleration to the cloud. As a reminder, recurring revenue in this segment is about 70% of our revenue stream. Perpetual revenues, about 10% of this segment's revenue were under pressure as expected. We saw this revenue stream down mid-teens as new logo opportunities and wins were pushed and delayed. That said, cross-selling activity remain active for much of 2020. Relative to services revenue, we anticipated some pressure tied to shifting to remote installs and having fewer new implementations, which are tied to new perpetual transactions. For 2020, we saw mid single-digit declines here principally tied to fewer new deals. Our teams did a wonderful job shifting to remote installs, a trend we anticipate will continue in large part on the back side of the pandemic.

As it relates to our Network segment, we expect the organic revenue for the year to be up mid singles to double-digits when, in fact, we grew 3% for the full year. Our Network Software businesses performed as anticipated, with recurring revenues growing low single-digits, again, benefited by high retention rates and high levels of recurring revenue. This segment underperformed our expectations primarily due to TransCore's New York congestion infrastructure project timing. In April, we expected approximately $75 million more in revenue from this project than actually occurred in 2020. More on this when we turn to the segment overview. But we expect this $75 million of pushed revenue to be recognized in '21.

It's also worth noting that the number of toll tag shipped last year were at historic lows, given the lower traffic volumes, but this was anticipated. For our MAS segment, we've talked all year about this being the tale of four situations, Verathon, other medical products, Neptune and Industrial. For the year, again back in April, we felt this group would be flat to up mid single-digits on an organic basis. We posted 1% growth. We feel very good about the execution across this group of companies. The primary reconciliation factor is a slower recovery ramp tied to our non-Verathon medical product businesses and Neptune. Specifically, we anticipated unprecedented demand for Verathon innovation product family. For the year, Verathon grew substantially as COVID accelerated the further adoption of video intubation as the preferred technology.

Our other medical product businesses, which grow mid single-digits like clockwork were down mid single-digits for the year tied directly to lower elective procedure volumes and limited hospital capital spending. Interestingly for Neptune, we highlighted municipal budget uncertainty in April. This proved generally to be a non-factor, as municipalities budgets were approved and available. However, the impact of the lockdowns, especially in the Northeast US and Canada had a prolonged impact on our customers' ability to do routine meter replacements. As a result, Neptune was down low double-digits for the year, slightly worse than our initial expectations. Finally, for this segment, we expected sharp industrial declines and that is what happened with these businesses being down low-double digits for the year. That said, we are seeing sequential quarterly improvements across both Neptune and our Industrial businesses.

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

Next slide please. For Application Software, where revenues here were $1.81 billion, up 1% organically, with EBITDA of $772 million. The broad macro activity for this segment has remained quite consistent for much of 2020. Specifically, we continue to see accelerating demand for our cloud solutions. This bodes well for our long-term recurring revenue growth and customer intimacy. At a business unit level, Deltek's GovCon business continues to be super solid and grow very nicely. But we did see some headwinds relative to their offerings that target the consulting, marketing services and AEC space. That said, recent customer activity and top of funnel activity suggest some market following is occurring. Aderant and PowerPlan delivered flat EBITDA in a year with nice recurring revenue gains. We experienced very nice growth across our lab software group, again doing our part to help fight the COVID war. Strata delivered double-digit organic growth and completed a strategic acquisition in EPSi. Notably, the combined business will analyze roughly half of the US hospital spend.

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

Now let's turn to our Network segment. Here, revenues were $1.74 billion, up 3% on an organic basis, with EBITDA of $732 million. Our Network Software businesses performed well during last year, growing low single-digits. Specifically, DAT was strong growing double-digits. DAT's network scale and innovation focus continues to enable very solid organic gains. ConstructConnect grew based on network utilization tied to a tighter construction labor market. iTrade, MHA and Foundry had some headwinds tied to their end markets being disrupted due to COVID. That said, each of these businesses had high retention rates and the networks remained very strong. iPipeline also performed well during their first year being with Roper, and completed two bolt-on acquisitions.

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

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

Now let's turn to our MAS segment, revenues for the year were $1.47 billion, up 1% on an organic basis, with EBITDA $508 million. Verathon was awesome in 2020. The business grew substantially based on unprecedented demand for their video intubation product line. Demand was global. Given Verathon's ability to fulfill this demand, we expect our meaningfully expanded installed base of GlideScope is to generate increased levels of reoccurring consumables pull through in the years to come. In addition, the first year of their single-use Bronchoscope release was successful. We believe we gained a substantial foothold in the market during the inaugural year of this product category. Our other med product businesses declined, but they started to see more normalized patient volumes toward the end of the year. Further, customer interactions are starting to resemble more normal levels of engagement.

Neptune declined low double-digits tied exclusively to our customers in the Northeastern US and Canada, not having access to indoor meters. Other regions were flat during 2020. Neptune's market share remained strong throughout the year. Finally, our industrial businesses were down, but have shown sequential improvements throughout the year. For Q1, we expect low single-digit organic growth for this segment with similar patterns to that of the fourth quarter.

Now let's turn to our final segment, Process Tech. Revenues for the year were $519 million, down 21% on an organic basis, with EBITDA of $156 million or 30% of revenue. Compared versus two years ago, these businesses are down about $90 million in EBITDA and yet maintained 30% EBITDA margins. Congrats and thanks to our leadership team for their continued exceptional execution. As a side note, Roper continue to compound despite these cyclical headwinds. That said, this segment is pretty straightforward and has been the same story all year. COVID has negatively impacted our oil and gas and short cycle businesses. Certainly, low oil prices did not help either. That said, we have seen some green shoots across this group as capital spending started to improve as we exited 2020. As we look to the first quarter, we expect declines to moderate in the first quarter to be in the 10% range. Importantly, we are easing comps as we enter the second quarter. Also, over the last couple of years, these businesses continue to make product and channel investments to be best positioned to fully capture the cyclical upswing. The next few years here should be pretty good.

Now let's turn to our guidance and the associated framework. While this slide is somewhat busy, we wanted to line up for you the key macro differences between our 2021 full-year outlook on a segment basis versus our actual 2020 results. In aggregate, we expect total revenue to increase in the mid-teens range with organic growth being in the mid single-digit plus area. As we look across the revenue streams for our Application Software segment, we expect mid singles growth. Specifically, we expect a slightly improved recurring revenue growth rate aided by last year's recurring momentum and an increased mix toward SaaS. We expect flat services revenues and mid single-digit plus growth in perpetual as we expect a modest market recovery and easing second half comps. Similarly, we expect mid single-digit organic growth in our Network segment, with our Network Software businesses growing mid-single digit plus. We expect TransCore to complete the New York project and see recovering tag sales, when combined, TransCore should grow mid singles for the year. We expect MAS to grow mid single-digits as well.

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

Neptune should be at high single-digits plus with easing restrictions and more access to indoor meter replacements. And finally, our industrial businesses should recover and grow in the high single-digit plus range after two years of declines. Our PT businesses are expected to be up high single-digit three-year based on the resumption of deferred projects and field maintenance as well as modest improvements in these end markets. So all in all, we expect organic revenues to increase mid single-digit plus and total revenue grow in the mid-teens range.

Let's turn to our guidance slide. Based on what we just outlined, when you roll everything together, we are establishing our 2021 full-year adjusted DEPS guidance to be in the range of $14.35 and $14.75. Our tax rate should be in the 21% to 22% range. For the first quarter, we are establishing adjusted DEPS guidance to be between $3.26 and $3.32. Of note, our guided Q1 adjusted DEPS is roughly 22% to 23% of our full year guidance range and is consistent with our long-term historical DEPS seasonality.

Now let's turn to our summary and get to your questions. What a year, none of us will ever forget 2020. Our business performed so very well last year. We grew revenue 3% in aggregate and only declined a single percent on an organic basis. EBITDA margins were steady at 35.8%, and cash flow grew 16% to $1.7 billion. This means we had cash flow margins of 30%. Just amazing. Given this performance, our business models ability to foresee these best performance, we stayed focused on executing our capital deployment strategy, which resulted in $6 billion of deployment on high quality, niche leading vertical software companies. There is no doubt the quality of our enterprise improved during 2020. Something we are incredibly proud to be able to say. Our recurring revenue grew mid-single digits. We increased innovation investments and increased the quality of our portfolio with our capital deployment spends.

So as we look to 2021, we feel we are incredibly well positioned. We expect strong organic growth, that'll be further augmented by contributions from our recent acquisitions. In 2021, we expect about two-thirds of our EBITDA to come from our software businesses, which provides us all the virtues of an increased mix toward recurring revenues. We will continue to focus on deleveraging our balance sheet, but we remain committed and focused on our long-term capital deployment strategy. To this end, our pipeline of M&A candidates is active, robust and has many high-quality opportunities. So as we look back over 2020, we are proud of our business models, durability and our leaders ability to successfully navigate last year's uncertainties. We are proud that we continue to be forward-leaning and strategic. We are proud that we improved our business last year with an increasing mix of growing recurring revenue and continued innovation focus. In short, we got bigger and better during 2020.

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

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

Questions and Answers:

Operator

We will now go to our question-and-answer portion of the call. [Operator Instructions] The first question today comes from Deane Dray of RBC Capital Markets. Please go ahead.

Deane M. Dray -- RBC Capital Markets, LLC -- Analyst

Thank you. Good morning, everyone.

Neil Hunn -- President and Chief Executive Officer

Hey, good morning, Deane.

Robert Crisci -- Executive Vice President and Chief Financial Officer

Good morning, Deane.

Deane M. Dray -- RBC Capital Markets, LLC -- Analyst

Hey, I really appreciate all the new disclosures you're providing here, especially pages 14 and 20, those bridges between your original guidance what you delivered, and then the organic bridge on '20 is really helpful. A lot of granularity there. And if we were to start, just because the New York City contract is such a high profile and it did have a swing factor. Can you give us a sense of how much -- just remind us of the revenue you're expecting for the year? How much of it could land in the first quarter? And just confirm, there has been no change in scope?

Neil Hunn -- President and Chief Executive Officer

Yeah, so -- hey, Dan, good morning. It's about $100 million for the full year, and in the first quarter we only have about $10 million [Phonetic] to $15 million [Phonetic] in there. As we mentioned, there is a bit of a pause. But now it's started up and running again and the scope is unchanged.

Deane M. Dray -- RBC Capital Markets, LLC -- Analyst

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

Neil Hunn -- President and Chief Executive Officer

Deane, I mean, I -- Deane, I'm not going to ask you to sort of rephrase the question. I want to make sure that we fully understand the question.

Deane M. Dray -- RBC Capital Markets, LLC -- Analyst

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

Neil Hunn -- President and Chief Executive Officer

Sure. Yeah. Okay. So, I appreciate the question. I think we understand it now. So the total perpetual revenue for our core businesses that the software businesses that have been in the portfolio for a while was down, obviously in 2020, we expect about the recovery in '21 to be about half of what we are down. We're seeing strength. We've seen continued strength all year in the perpetual -- in 2020 in the perpetual book of business and Deltek's GovCon business. As I talked about in the prepared remarks, we're seeing thawing [Phonetic] and some activity in their professional services end markets, that's encouraging. These are the architects, the engineers, the contractors and marketing services firms and consulting firms, those that book of business.

In addition, the other large parts of the perpetual book are at Aderant and PowerPlan. Aderant has its own unique set of competitive factors where the customers have to -- the customers that have not upgraded their software from -- the competitive customers have not upgraded their software have to upgrade and we're winning a large percentage of those. And so, all of that activity just got pushed to the right a bit. And that's somewhat encouraging and pipeline activity is positive there. And then PowerPlan's pipeline activity is full, it has a handful of large opportunities in it, which are obviously hard to predict the exact timing. But we actually like the pipeline build across the companies that have the primary book of perpetual business.

Deane M. Dray -- RBC Capital Markets, LLC -- Analyst

Okay, that's helpful. And just as my follow-up question will be for Rob. Do you have a specific deleveraging plans for the year that you could share with us in terms of where and how, you said you'd be paying down the revolver, but just are there specific goals that you can share for 2021?

Robert Crisci -- Executive Vice President and Chief Financial Officer

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

Operator

Your next question comes from Christopher Glynn of Oppenheimer. Please go ahead.

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

Yeah, thanks, good morning.

Neil Hunn -- President and Chief Executive Officer

Good morning.

Robert Crisci -- Executive Vice President and Chief Financial Officer

Good morning.

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

So congrats on all the capital allocation last year. I'm just curious, you've gotten a lot of inbounds after some of your sub-segment divisions, given you had some real emphasis on quality and fullness of the pipeline. There is certainly liquidity in the markets. So I'm wondering if your calculus is shifted toward any non-operating cash flow to fund the deleverage and trade, is it back end of the pipeline a little sooner?

Neil Hunn -- President and Chief Executive Officer

Yeah, I appreciate the question. We -- it's very routine for us to get inbounds. I've been here almost 10 years and there is a handful of what I would say, I would say meaningful and credible inbounds any given year. Like we said for years, though, it's just very difficult to make the math work, because when we sell a business, look -- just look back at a Gatan and you sell a business to a strategic buyer, we leak taxes and you have to redeploy it. It's just hard with the compounding orientation to make that math work. Certainly, the lower tax rate sort of helped during the Gatan timing. So yes, we get inbounds. I would not say the activity in the last few quarters is ramped up more than it's been. Over the decade I've been here. But, yeah, there are always -- there's always inbound inquiry.

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

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

Neil Hunn -- President and Chief Executive Officer

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

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

Understood. Thanks.

Neil Hunn -- President and Chief Executive Officer

You're welcome.

Operator

The next question is from Steve Tusa of J.P. Morgan. Please go ahead.

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

Hey guys, good morning.

Neil Hunn -- President and Chief Executive Officer

Hey, Steve.

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

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

Neil Hunn -- President and Chief Executive Officer

Vertafore was around 90% or so of both cash and EBITDA. And yeah, as I mentioned earlier, Steve, just great working capital performance across the portfolio, very broad based. You're getting your software renewals, which were very strong in the fourth quarter. You certainly have some benefit, right, from those more cyclical businesses being a little bit softer, right, and that lowers working capital overall. But just great working capital performance. Our cash taxes year-over-year were about flat. So it really was all on working capital.

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

Got it. And then within the guidance, I guess, you didn't really quite you don't usually guide for free cash flow for next year. I think you said $1.5 billion, is that -- is the $1.5 billion is after the dividend? And then does that include any of the tax benefit that you guys bought with Vertafore, the benefit of that?

Neil Hunn -- President and Chief Executive Officer

Yeah. So the $1.5 billion is the deleveraging numbers. That's an estimate. That's after paying dividends. So for next year, yeah, you're right, we don't guide free cash flow. We always have a very strong conversion. As you know, we expect that very high conversion to continue. As I mentioned, those working capital trends are very sustainable, right. It's the culture. It's type of businesses we buy. As the software businesses grow, their working capital continues to go down. So that all should continue. In terms of the tax attributes, yes, there are some tax attributes related Vertafore, which we disclosed a little over $100 million. So there'll be some benefit from that coming in '21. There is also like many other multi-industry and really all companies, right, we benefited some from deferral of payroll taxes. So that'll go back the other way next year as you're -- as you're starting to pay those payroll taxes again. So those are sort of -- those are sort of counter each other a little bit. But we feel great about cash flow next year, but we don't guide as you know.

Operator

Next question comes from Allison Poliniak, 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.

Robert Crisci -- Executive Vice President and Chief Financial Officer

Good morning, Allison.

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

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

Neil Hunn -- President and Chief Executive Officer

Well, I'll give you the -- It's Neil. I'll give you the headline. I'll let Rob sort of add his color on the back end. So it's not a, like a step function bump up, it is a sort of sequential improvement throughout the year. Obviously, when you roll past Q1, the comps get a whole lot easier. So that's part of what the last three quarters of the year will look like as well. When you look at it on a company-by-company -- sorry, segment-by-segment basis, just rolling through, basically it's the perpetual book of business and the associated services that come with that for Application Software that ramps back up. And network, they're really -- for the network businesses, it's a little bit of ramp back at Foundry, it's a little bit of ramp back at iTrade. But the other businesses were pretty steady as she goes, DAT, ConstructConnect, etc. TransCore stands by itself, it's tied principally to two things, one is the New York project completing; and second, the return of traffic volumes and the associated tags that go with them.

For the MAS segment, it's Neptune just sequentially coming back and importantly, getting the access to the indoor meters in Northeast US and Canada. I said in the prepared remarks, market share was super steady, maybe plus a little bit in that business last year. It's just access -- our customers getting access to do routine replacements. Verathon will have a difficult headwind because of the capital place we've talked about. The other medical product businesses just rotate up in a sequential basis.

And then finally, the industrial businesses do the same process is much like industrial, just a cyclical rebound, modestly higher oil prices help. But you have all this in the energy businesses. You have all this deferred maintenance has got to get done. There is a lot of -- there's a sort of -- there were some restocking orders in the fourth quarter there and then some pipeline activity, like we got to get it and do the maintenance, and a handful of these important customer. So that'd be sort of the color of the ramp, but no step function. But Rob, what would you add, if anything?

Robert Crisci -- Executive Vice President and Chief Financial Officer

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

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

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

Neil Hunn -- President and Chief Executive Officer

I would say no, and I think the -- I mean, obviously, there's going to be small pockets here and there. We're very -- most of our customers across the portfolio, most our enterprise level, a very small percentage of our software companies would be in the small-medium size, where it might be more subject to some sort of macro sort of headwinds or business uncertainty. I think the data point we point to is just the incredible cash flow. I mean, we've got paid by our customers, right, and so last year. And so what we do is just critical to what they do. And I don't think there's going to be --

Robert Crisci -- Executive Vice President and Chief Financial Officer

The pockets of areas that as we talked about, right, colleges and universities, most of those customers, we tend to have larger customers there. So we're not too worried about our schools being in financial trouble overall. And then on like the iTradeNetwork side, they have customers that are in the food area. So there is certainly could be an impact from some smaller restaurants and some of those issues in that market. But overall, not really a meaningful impact to us.

Operator

Your next question comes from Joe Giordano of Cowen. People go ahead.

Joseph Giordano -- Cowen and Company -- Analyst

Hey guys, good morning.

Neil Hunn -- President and Chief Executive Officer

Good morning, Joe.

Robert Crisci -- Executive Vice President and Chief Financial Officer

Good morning, Joe.

Joseph Giordano -- Cowen and Company -- Analyst

Hey, I'm in the market to refinance my mortgage at 1% blended. So can you guys help me out with that?

Neil Hunn -- President and Chief Executive Officer

I have a guy in Florida, and I never run through it. We won't count that as the question, by the way.

Joseph Giordano -- Cowen and Company -- Analyst

And then on networking capital, obviously, that keeps getting more and more negative and more interesting. But, like with the current portfolio, look, where is that -- where is like the maximum that that can get to without doing more deals into that further push it that way?

Neil Hunn -- President and Chief Executive Officer

Yeah. So I think if you go to our working capital page, page 10, you'll see all the benefit here, Q4 to Q4 was on the liability side, right. We're basically equal to on the asset side, which is that that indicates to us and we go business-by-business, it's structural and driven by an increasing mix toward software. So that's the first thing I'd say. Second is, when you look at the art of the possible, if you think about a business that is 100% SaaS recurring revenue that's prepaid a year ahead, let's say that you bill on January 1st and you take 90 days to get paid, that company is going to have 75% of its revenue. That's negative net working capital, right. And we certainly have a couple of businesses that don't quite get the 75%, but they approach 40% to 50%. So as we become more software and our legacy perpetual business becomes more SaaS, you're going to see this number get higher. Will it ever get to 40% to 50%? No, it won't. But it will keep inching higher, it should, over the next 5 to 10 years. We don't have a target, it's not that we're trying to drive the business to be X percent negative. We just have the incentive system and a culture that we get a little bit better every year on this metric.

Joseph Giordano -- Cowen and Company -- Analyst

That's definitely helpful to frame that out. Thanks. A follow-up would be on -- I'm sorry, on Vertafore. How is that business doing since you've been there? Have you noticed anything like kind of -- what kind of initial changes have been instituted, if any? And like, when we did our diligence that was definitely a market like where -- that business was a leader, but there was -- that whole market seemed right for some change there. And how are you guys approaching that? Are there upstarts that you look at? Is it an internal change that drives the market forward? Like how are you just approaching that business now?

Neil Hunn -- President and Chief Executive Officer

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

That said, the business is -- as in the piece of research you did we thought was quite good and reflective of ours. It's basically a duopoly. We share a market with one principal competitor on the agency side. Fortunately, for us, just after the business -- we acquired the business and closed, we won the largest deal in the market in the last three or four years and assured partners. There was a press release that went out a handful of weeks ago. So we're delighted about that. It's a slow ramp over a couple of years, a couple, three years. I think that's just an indication of the quality of the business that Vertafore and the products they have. But also the customer, in that case, was reassured by being -- by Vertafore being owned by Roper, who is just a long-term owner, that's not going to look to sell the business in a handful of years. And therefore, you can make the right investments.

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

Robert Crisci -- Executive Vice President and Chief Financial Officer

Hey, and Joe, just on the -- obviously, the company has performed very, very well since we own it. But just to clarify my last answer, the 90 [Phonetic] of EBITDA, that's since we own the business, there's a month in there as well. It wasn't all in the fourth quarter. But it was 90 of cash in the fourth quarter.

Operator

The next question comes from Blake Gendron of Wolfe Research. Please go ahead.

Blake Gendron -- Wolfe Research -- Analyst

Yeah, thanks. Good morning. I want to follow-up on that R&D comment, actually, kind of in the broader context of your portfolio. So COVID was disruptive for a number of reasons, structurally with the end markets and I would imagine competitively. In addition to Vertafore and maybe ramping R&D there, are there any opportunities to ramp R&D across some of the other business units, simply because there's new market opportunities as a result of the pandemic moving forward? I know it's hard for us to really fully appreciate all the changes that will stick structurally across all of your business units. But I'm just wondering if we should expect R&D to ramp a little bit across the portfolio, not just Vertafore?

Neil Hunn -- President and Chief Executive Officer

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

That said, obviously, innovation and R&D, more mostly a D-shop, mostly development across our Software businesses. You have seen and likely will continue to see a modest increase in R&D spend as a percent of revenue for years to come. In '19, it was about 7.5%; last year it was about a little over 8%. This coming year, probably going to add about 100 basis points, to be a little over 9%. There's Vertafore mix in there that they have a little bit higher percentage, as compared to some of our other businesses. But I think you will see and are seeing an increase in innovation there. So -- I'd sort of stop there. I mean, if you have any follow-ups, we're happy to do it. But the short answer is yes.

I guess there's one other thing. If you compare Roper's, the 8% or 9% of revenue that we spend in R&D compared to other software companies, it appears low. When you look at our Software businesses, we're right in line with the peers. We're between 10% and 15%, 17% depending on the company. The Application businesses tend to be on the higher side of that. The Network businesses tend to be on the lower side of that. And the reason the mix for Roper is low is because we have quite a bit of revenue in TransCore, MHA and others that effectively don't have any R&D in our business model. So it's always important to point out when we get asked a question about R&D.

Blake Gendron -- Wolfe Research -- Analyst

That's helpful to think about the framework there. I wanted to shift to Deltek. I thought it was interesting when you mentioned GovCon's stability versus maybe some of the professional services being impacted by COVID. The GovCon, I would imagine you're dealing with large enterprise customers. So we should expect it to be kind of stable in addition to just general government spending being stable? On the professional side, is it just a matter of reopening? Or is there anything we can think about with respect to customer size, large versus SMB? And then maybe end markets specifically that we should be looking at for the recovery? Is it just non-residential construction on the AEC side? How should we think about Deltek improvement in 2021 and beyond?

Neil Hunn -- President and Chief Executive Officer

I'll give you a gold star for getting like seven questions into one question. So I'm going to do our best to try to come -- tick through these. So on Deltek, it is -- it's important to note. It is a combination of large enterprise and the smaller end of the GovCon space that's been super strong throughout the year. It's not just been at the high end. And yes, we expect that to just continue, as the -- it's not tied to infrastructure, per se. These government contractors go toward the fast currents of government spend is. It's gone from military to educations, maybe infrastructure. They just go to where it is, that might drive some M&A activity, by the way, which is generally good for us.

On the Professional services side, the book of business here is broad. But if there are pockets of concentration, it's in architects, engineers and contractors. Obviously, the contractors, mostly non-res contractors, in this case, they are the ones that are a little bit worried, and they've sort of tightened up a little bit more. It's the architects and engineering firms that have shown some green shoots here in Q4. In addition, marketing services firms is a leading niche for Deltek, and those businesses also have started to fall. So I think that checked off your questions. If we missed one or two, we're happy to follow-up with you after the call.

Operator

The next question comes from Julian Mitchell of Barclays. Please go ahead.

Joao Carvalho -- Analyst -- Barclays

Hey, good morning everyone. This is Joao on for Julian.

Neil Hunn -- President and Chief Executive Officer

Hey, good morning.

Joao Carvalho -- Analyst -- Barclays

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

Robert Crisci -- Executive Vice President and Chief Financial Officer

Yeah. I mean, we can go through the segments in detail later on. But I mean, overall, our margins are relatively flat year-over-year in the guide. I think there's a little bit of a core decline in the margins, given a lot of the cost will come back post-COVID, travel and things that didn't happen, very modest decline there. And then the Vertafore revenue comes in at a higher margin. So overall, margins were relatively flat. And then we'd expect some improvement in the bottom sort of the more cyclical type stuff and process, we should get some nice bounce back as that starts to grow in margins.

Neil Hunn -- President and Chief Executive Officer

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

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

Joao Carvalho -- Analyst -- Barclays

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

Neil Hunn -- President and Chief Executive Officer

Yeah. I think -- so what you have here is a dynamic where the most -- first as a precursor. Most -- the vast majority, I should say of our services work in the Application segment are tied to new implementations, whether they're SaaS or on-premise. So if you look back and think through what happened sequentially in 2020, very quickly in the shutdown, the license activity, the perpetual activity slowed down. So you had low license activity, basically Q3 through Q4.

The services book of business has a little bit of a backlog, right. So the services were continued in Q2, continued a little bit in Q3, completed the in-flight projects. And then it sort of slowed down a handful of months behind the license activity. So when you comeback on this side, the license activity will pick up sooner, but then you got to -- and the services work will follow back behind it. So you've essentially had a slower ramp down and a slower ramp up for services. So that's why you see it flattish where you can see growth in the perpetual book.

Operator

Your next question comes from Alex Blanton of Clear Harbor Asset Management. Please go ahead.

Alex Blanton -- Clear Harbor Asset Management -- Analyst

Hi, good morning.

Robert Crisci -- Executive Vice President and Chief Financial Officer

Good morning, Alex.

Neil Hunn -- President and Chief Executive Officer

Good morning, Alex. Good to hear you.

Alex Blanton -- Clear Harbor Asset Management -- Analyst

I wanted to ask, could you characterize your acquisition intentions for 2021? You had said earlier that it would be primarily -- would be deleveraging for 12 months to 18 months. But today, you mentioned that you had a very active, robust pipeline of potential acquisitions with many opportunities, so has there been a change in your intentions there in terms of deleveraging? How would you characterize the acquisition outlook for this year?

Neil Hunn -- President and Chief Executive Officer

Thank you, Alex, for the question. So I would share two things with you. First is, maybe more than a couple of things. So we are active. The pipeline is active. We are spending time with others, learning businesses, spending time with all the sponsors that we have relationships with to understand what the cohort of opportunities looks like. Importantly, every sizable transaction that we've completed since 2016, we have had a chance to meet the management teams at least once, if not multiple times, anywhere between 6 months and 18 months before we completed the transaction. So the work that we're doing now is principally focused on that. These are getting to understand businesses well before they're ready to be transacted, right. So businesses we're meeting this month are likely going to be businesses that we may acquire at the end of this year, or into the first half of next year. So it's the early pipeline work is the first thing I would say.

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

Alex Blanton -- Clear Harbor Asset Management -- Analyst

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

Neil Hunn -- President and Chief Executive Officer

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

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: 61 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 M. Dray -- RBC Capital Markets, LLC -- Analyst

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

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

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

Joseph Giordano -- Cowen and Company -- Analyst

Blake Gendron -- Wolfe Research -- Analyst

Joao Carvalho -- Analyst -- Barclays

Alex Blanton -- Clear Harbor Asset Management -- Analyst

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