The Roper Technologies’ Fourth Quarter 2019 Financial Results Conference Call will now begin. Today's conference is being recorded. I will now turn the call over to Zack Moxcey.

Good morning. And thank you all for joining us as we discuss the fourth quarter and full year financial results for Roper Technologies. 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 and year primarily on an adjusted non-GAAP basis. Reconciliations between GAAP and adjusted measures can be found in our press release and in the appendix of this presentation on our website. For the fourth quarter, the difference between our GAAP results and adjusted results consists of the following items: amortization of acquisition-related intangible assets; purchase accounting adjustments to acquire deferred revenue; and lastly, a gain on sale related to the divestiture of Gatan. 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?

Thanks, Zack, and good morning, everyone. As usual, we'll start with our fourth quarter consolidated highlights. We'll then turn to discuss our Q4 results on a segment basis. I'll then turn the call over to Rob to review our full year financial results. Then I'll walk us through the full year details and next year's outlook on a segment-by-segment basis followed by our consolidated full year and Q1 2020 guidance. I'll conclude with a brief summary prior to turning the call over to your questions. Next slide, please. Q4 for Roper was a very solid quarter. Revenue grew 1% organically and came in at $1.4 billion with positive organic growth in three of our four segments and this was largely based on the strength of our software franchises, our medical product and RF product businesses and Neptune. As a partial offset to this growth, we did see our short-cycle industrial and upstream oil and gas businesses decline as expected in the quarter. However, margin performance for the quarter was really fantastic. Gross margins grew 60 basis points to 64.1% and EBITDA grew 4% to $518 million, which represented an EBITDA margin of 37%, a record for Roper. Also in the quarter, DEPS grew 5% and our free cash flow of $453 million was 32% of revenue. That's free cash flow of 32% of revenue for the quarter. This margin performance in the face of short-cycle industrial and oil and gas headwinds, it's a perfect proof point regarding Roper’s business model. One that is comprised of niche-oriented businesses with highly variable cost structures that have aligned management teams and incentive systems that enable nimble and swift execution based on the prevailing market conditions. Performance across the enterprise is excellent this year. I'd like to thank each of our business leaders and…

Thanks Neil. Good morning everyone. So turning to Page 8 and looking at our full year income statement performance. Full year organic growth for 2019 was 3%, which was at the low end of our initial organic guidance against a difficult comp of 8% organic growth in 2018. Total revenue growth was also 3%. We had a one point FX headwind and also the impact of the acquisition as well as the divestiture of our Scientific Imaging businesses and Gatan within the year. Our two segments that are primarily software, Application Software and Network Software & Systems, both finished in line with our initial guidance with mid single-digit organic growth for the year. For our largest product segment, Measurement & Analytical Solutions, our medical products businesses, and Neptune had another very strong year of organic growth. While we did have some declines in our short-cycle industrial businesses, which lower the overall organic growth of the segment to 2% for 2019. Lastly, our smallest segment, Process Technologies declined 4% organically for the year, in line with our initial guidance and that was primarily due to the weakness in upstream oil and gas as you had expected. As Neil mentioned for the fourth quarter, we really had outstanding margin execution by our business leaders throughout 2019, driving very strong operating leverage while we're continuing to invest for future growth. If you look at the margins, gross margin for the year, up 70 basis points to 63.9%, EBITDA margin increased to 110 basis points up to a record 35.8% and that drove 7% EBITDA growth for the year. Our tax rate was lower in 2019 at about 19%. So you add all that up, we had a double-digit adjusted DEPS growth of 10% up to $13.5 for the year so really, overall, a…

Thanks Rob. Let's turn to the full year 2019 highlights for our Application Software segment. For the year, revenue came in at $1.589 billion, which represented an increase of 4% on an organic basis and EBITDA was $636 million, an increase of 10% versus the prior year and EBITDA margins were 40.0%. Deltek turned in a great year. Revenues increased mid single-digits on an organic basis and this growth was balanced across both markets, GovCon and Professional Services, as well as across the perpetual and SaaS offerings. Also during the year, Deltek’s product and solution portfolio was meaningfully enhanced. On an organic basis, the company released an ITAR-compliant GovCon SaaS offering and started gaining meaningful traction with its VantagePoint product, the company’s newer professional services SaaS ERP solution. In addition to this organic innovation, Deltek onboarded and integrated two acquisitions, ComputerEase and Avitru both targeted to meaningfully enhance their architectural engineering and construction offer. Aderant had a stellar year. This time last year, we talked about product innovation and Aderant, specifically about three newer SaaS products, based on the market traction of these products, especially their e-billing and mid-law SaaS solutions and combined with Aderant's continued ability to take share in the large law space, Aderant posted double-digit organic growth in the year. Also, in the fourth quarter, we acquired Bellefield Systems for Aderant, which enhances their SaaS solutions targeting the front office of law firms, specifically focused on professional service automation, compliance and timekeeping. As we turn to PowerPlan, we saw double-digit increases in their recurring revenues in the year. These recurring revenue increases were offset by expected declines in their service revenue, which were largely tied to lease accounting product implementation sold and delivered throughout 2018. Strata continues to be a star within Roper, having tremendous organic growth…

Thank you. [Operator Instructions] Your first question will come from Deane Dray with RBC Capital Markets.

Thank you. Good morning, everyone.

Hey, good morning.

Because the New York City congestion tolling project is such a high-profile installation for you all, I'd be interested in hearing some more color on how this installation compares to the others that you've done in, let's say, London and Stockholm. Just from a sense of degree of difficulty of the installation, is there any, like, new software? New camera systems? Or is this basically similar to what you've done in these other successful installations?

Sure, Deane. So let me first start by saying the congestion pricing infrastructure in those other two cities is not us. So those are not our projects. That said, the technology that's being used in the New York City project is, for the most part, the exact same technology that's been used in any of our larger tolling infrastructure projects. It's the same core hardware. It's the same core software. Certainly, there'll be some tweaks that are needed in the software for the specific application that's being used by MTA in this instance. But the scale of this project is not actually close to the largest that we've deployed. So the team feels quite confident in the technical ability to do it. Further, our customer, MTA has been – is a great partner. And all the sort of the process steps to be able to construct in New York City have largely already been approved. And so it really is just down to executing the project over the course of this year.

Got it. And then just some more color on the expected – the margin progression for 2020 for the project. It looks like it's starting more into the second quarter. But typically, do you see lower margin early in the project, on the installation, more upfront costs, and just – and then higher margin in the back quarters? Just what's the expectation here, the base case?

Yes. Deane, I think that's right. I think you're just getting started with the project here in the first quarter. So we think you'd assume you'd have a little bit less – well, we know we have a little bit less revenue recognition, probably a little bit lower margin, and as we move on throughout the year, both of those will increase quite a bit.

Got it. And then just last one for me on Deltek. Could you just provide some color or context around the pushouts on the perpetual deals. You said it got pushed into 2020. Is this a first quarter or second quarter? And just what are the – some color around the customer decisions there?

Sure. So a couple of things on Deltek. We talked about how their bookings, on an ACV basis, we're quite strong all year, with strength ending the year in the high teens in Q4. So the competing and winning in the marketplace has remained robust throughout the year. Specific to the revenue recognition, it's really a combination of two things here in Q4, being – one is, the company has announced its intention to release an ITAR-compliant version of their cost point product, which is the GovCon ERP product, which really essentially enables that product to be hosted in the cloud and deploy it in the SaaS environment. So there are a couple of deals signed in Q4 taking advantage of that offering. And so that's a great trend for the business because the recurring revenue will increase quite meaningfully as that becomes more – gains more traction. That, combined with the fact that a couple – a handful of meaningfully sized perpetual deals pushed. And so if in the hypothetical world, if the ITAR-compliant SaaS product was not there, likely, these customers would have bought perpetual version. And then Deltek's would have been right in line. So it's really a combination of the SaaS offering gaining traction and a couple of deals pushing into the first or second quarter next year.

Thank you.

You’re welcome.

And your next question will come from Christopher Glynn with Oppenheimer.

Thank you, good morning. As you're positioning for substantial allocation as you referenced a few times for this year. Just curious, look back at a few of the larger ones, iPipeline, Foundry, PowerPlan, around management retention, other key metrics on onboarding and anything in particular around those recent deals that's evolving. How you evaluate trade-offs with new opportunities as you're kind of shopping criteria evolves over time.

So the criteria for capital deployment really has not changed that much. It's always been rooted in finding businesses that have better cash returns than our existing. Over the arc of 20 years, that's gone from industrial products to medical products, the more software. The second criteria is always having a management team that is fundamentally focused on building the business versus transacting. And then finally, businesses that share the characteristics that all 45 of our businesses do, right, niche, leadership position, ability to invest in themselves to grow, high recurring revenues, high gross margins, et cetera. So those criteria have not changed at all and it won't change going forward. The recent acquisitions that you referenced, certainly the ones really from Deltek, ConstructConnect, Aderant, PowerPlan, Foundry, iPipeline, the larger ones from 2016 forward, have met all those criteria, and the businesses are performing at or maybe modestly above our initial expectations.

Okay. And then just curious, in the pipeline, the more actionable end of it as you see it, what's kind of the mix between bolt-ons versus platform opportunities?

Yes. The vast majority of our deployment will be on platform ideas. Occasionally, we'll do bolt-ons or tuck-ins as they strategically warrant in the business. It's not a budget. If you just look over our arc of time, about 10% of the capital deployed, it's been in bolt-ons, but it's just been a by-product of how it's unfolded. It's certainly not a budget or a planning number going forward. But my bid will be somewhere in that plus or minus ballpark.

Got you. Thank you.

You’re welcome.

And your next question will come from Robert McCarthy with Stephens.

Good morning, everyone. The first question I have is free cash flow as a percentage of sales for Process Technologies. Do you happen to have that metric or that percentage?

We don't. The free cash flow number is a corporate number with all the corporate interest tax, et cetera. So we don't look at it in that way. I would say the business level cash flow. So if you look at sort of EBITDA to revenue, subtracting their CapEx is pretty darn close to their EBITDA because the CapEx is not a big number. And then from a working capital perspective, there's not huge movement there. So it's still a very high number. I can't give you an exact free cash flow number for the…

Okay. But it screens very well in free cash flow by definition then?

Absolutely.

Absolutely.

Okay. Fair point. And then if you look at your outlook, excluding the drag from process, what do you think you would have grown this year organically?

So process for the year was minus 4%. So you're talking 12% of the company. So we would add a – probably a point or 2, just doing the math at the top of my head…

And then in 2020, probably something similar or even higher? Right?

That's right.

Okay. And then moving on to TransCore. From that perspective, could you just remind us to level set our expectations in the out-years? How you're thinking about the initial deployment revenue and then conceptually the step-down from there, just so we get our modeling directionally correct in the out-years.

Yes. So there's the 200 or so incremental revenue this year. And then there will be some recurring from the project, probably in the $50 million to $60 million range into next year and then into the next several years. So that would then leave the rest of TransCore, and a lot of other projects we're working on, to pick up some of that slack, which they're working hard on already today.

Right. And then last question is really around M&A. Obviously, I think Danaher announced today decent results after a preannouncement, and then I think rebaseline for more – even more favorable financing environment for underwriting one of the deals. So clearly, a pretty attractive environment, which you alluded to on the call in terms of the capital markets and debt for funding these deals. And you talked about the mission bolt-ons. I mean, you look at Neptune, good growth, a great franchise. There is a sense that the smart metering, while albeit at a low rate of growth, maybe in the low single digits, could be very sustainable for a long period of time. And there is some sense that transmission and distribution spending could be entering a higher level of visible spending just given PG&E and some of the return profile of AMI. Is it possible for you guys to think about building around that more than software? Is the utility end market an attractive space? Or how would you think about that?

Yes. So Neptune, as you know, is 100% focused in the water meter business, and that's where they're going to be. They're not going to stray to gas or electric meters. And more importantly, it's really water meters in North America, where pressure rates are higher than the rest of the world. So it's a pretty complicated device metering application, both mechanical and ultrasonic. So the company is going to stay focused there. That said, the company now for at least three years has been investing in its software applications and capability because now the readers are being read more frequently. And so there's more use cases that are being developed about what you do with that data around leak detection or shutoff or whatever our customers ask for, Neptune is working to build. The shutoff is a hard case, but leak detection is a good case, for instance, in terms of value to the end user. So they – to that end, they opened an innovation center three years or so ago in Atlanta to attract better talent than they could in their existing locations in more rural Alabama. So it's been a part of the strategy, and I suspect it will remain part of the strategy for quite some time.

Thanks for the questions.

Thank you.

Your next question will come from Steve Tusa with JPMorgan.

Hey, guys. Good morning.

Hey, good morning.

You mentioned PowerPlan saw some solid growth in a part of its business. What did ultimately PowerPlan grow for the year in total?

Yes, PowerPlan for the year was down a little bit. We think it will be up in 2020 full year, including the first quarter.

Okay. And then ConstructConnect as well, did that grow this year?

It did.

Yes, it grew in 2019.

Is that like low singles or something like that or?

Correct.

Yes, low single.

And then lastly, just for the – just for modeling purposes, I know you have the Gatan sale headwind on revenue next year. What are the – what's the carryover acquisition-related tailwind that we should add to kind of that organic growth outlook? So on a reported basis?

Yes. So I've got – so from an EBITDA standpoint, there's about $70 million of EBITDA from the acquisitions. That's an add and then you take away about $50 million of EBITDA from Gatan. So it's a net around $20 million of EBITDA.

And then on sales?

Yes. On sales, it's going to be – I don't have the exact number. I'll have to follow-up with you on that, but it's going to be roughly – you have it, Shannon?

Yes. It nested on 0.

Yes. It nested 0 on revenue.

0 on – 0 carryover with – including Gatan?

Yes. Yes. Because the Gatan is a lower margin.

Okay. And then, sorry, one last one. Just on first quarter organic, you mentioned that there is some TransCore impact, because you talked about first quarter growth in that segment, ex-TransCore. I guess, ex-TransCore in the first quarter, is it 2 to 3, 1 to 2? Or is it not even that, like, meaningful on an enterprise basis?

It's not too meaningful. There's some incremental revenue from TransCore there in the first quarter. But it's not a big add to the first quarter. And as I think you know, Q1 last year was 6% organic. So they're really – it's just a matter of the comps. If you look at the software businesses, for example, it's just the comps that the – is the only difference as we move forward throughout the year.

Got it. Thanks a lot. Appreciate it.

Thanks.

Your next question will come from Richard Eastman with Baird.

Yes. Good morning. Thanks for the questions. Just could you possibly just give some commentary around the profit associated with the MTA contract? And then what's – what might be the cadence there? I mean, is that a – just an EBIT or EBITDA contribution from that contract? And is it – does it scale up meaningfully as the revenue grows there? Or is – just some feel for what that could add, so I can get kind of a sense per share on a quarterly basis, given our revenue assumptions.

Yes. So I think as you're aware, the TransCore business margin is below the Roper average. And so this business is going to be in that range. And I think the margins do improve after the first quarter moving forward. Exactly how linear that's going to be, is difficult to predict, as Neil mentioned, given what goes on with the project, but it certainly will get a little bit better after the first quarter, and it's probably going to be relatively consistent throughout the rest of the year as our – is our best estimate as we sit here today.

So okay. So it comes in at TransCore's average contribution?

Correct.

That's correct.

Okay.

That's correct. And it'll be a little more profitable in the back three quarters in the first quarter, but it's not something where it's breakeven Q1, 10% Q2 and 40% in Q4. It's not anything like that at all.

And you referenced this just a couple of minutes ago. I think somebody asked a similar question around – so $200 million is still the right expectation around year one this year, and then I think on a previous call, it was maybe $50 million to finish off the project in year two. But then the other $250 million of the contract essentially was years three to seven on a service contract. Is that still kind of roughly the schedule?

Yes. That's correct. Yes, so there's like, what we've said $50 million recurring after 2020 goes on for five years, and we would hope it would go on many years after that as you get a chance to renew the maintenance part.

Right. Okay. And then just a second follow-up question around Roper's core EBITDA. Fantastic year from the margin perspective for the full 2019. The puts and takes here, maybe a little bit around MTA contract as well as your commentary around a minus mid-single-digit growth for the Process Tech piece of the business in 2020. What might be a reasonable assumption in basis points for targeted EBITDA margin expansion for Roper in 2020? Would a reasonable target be 50 or?

Yes so – Yes. No. I think embedded in our initial guidance as it normally is, is that EBITDA margins will be roughly flat year-over-year. There's maybe a little bit of an increase. But certainly, the TransCore project is a negative. And then some declines in those more cyclical businesses is generally a negative to your margin. And the flip side of that is excellent growth at the software businesses, which is a net positive. And if you add all those things together, our initial signs model has the EBITDA margins about flat year-over-year, and we'll work to do a little bit better than that.

Okay. And then, if you mind, could I just sneak one more in, please. Just the transportation business within network software, that – the freight matching business is just another tremendous year in a tough – fairly tough trucking industry, I guess, if you will. Is that a countercyclical business as things get tough in the trucking industry, we're looking to optimize our assets there by matching freight? And just maybe explain that business a little bit and then maybe what the prospects are for 2020.

Sure. I'll take that one, Rick. So first, DAT, let's define what they are. It's full truckload, spot market North America freight match, right. So it is a niche industry. There's captive, there's contracted and there's spot markets. But what we have observed here over the last really two or three years with DAT is their network strength, right, it's a – their relative market share is three-ish versus their competitor, right. So their network is three times the size their next largest competitor. That network strength has proven to play well when the trucking markets are super hot and when they weak. So step back from that, why is that, right. So if you're a carrier, and it is a very hot market. The carrier is going to want to be very selective in their routes. Maybe they're going from Kansas City, Chicago, and they want to go right back to Kansas City. So they're going to be a network participant to be able to select specifically what they want. So you see active participation. And then conversely, the brokers are looking for the capacity. When things lighten up, the truckers are looking for work, right. So they become less selective. And so the value proposition of participating in the network on both sides of the network in both market conditions tend to be quite robust.

Okay. And outlook for 2020? I mean, do we kind of sustain the current growth rate? Or do we settle down? It's just there's – it seems around the fringes, there's more competition in that space, but you guys have maneuvered quite well there.

Yes. There is – there really isn't more competition in the freight matching space. That said, this company has done so well for a number of years. We do expect the growth to moderate a bit in 2020.

Just based on the activity in the market is the only thing driving that.

That said, we expected this business to moderate for the last few years as well and they've outlasted our expectations.

Okay. Very good. Thank you.

Yes.

And your next question will come from Julian Mitchell with Barclays.

Thanks a lot. Maybe just trying to keep my questions a little briefer. Maybe starting with the Software-as-a-Service model. You've spent some time in the prepared remarks discussing that. Just wondered with that strength in Q4, what's the overall scale of your SaaS business now within Roper? And relating to the profitability on that, I think in Q2, you'd had a SaaS kind of mix surge and that had hurt margins in Application Software. Q4, it seems like SaaS did very well again, and may be contributing positively to the margin mix. So maybe help us understand the margin dynamics as that SaaS share of sales expands.

Yes. So we're still about even in between the SaaS revenue and the traditional on-prem license maintenance revenue within our software businesses. And from a margin perspective, there really isn't that large of a difference in terms of EBITDA margin between those two business models for our businesses. It's – where the variability happens, as Neil mentioned, is when you get a new license win in a quarter, all that revenue is recognized immediately. If you get a new SaaS win in a quarter, that revenue is recognized over the next 12 months and beyond. So that's the only difference. But from a margin standpoint, there isn't a lot of change within the two models.

Yes, I think the 2Q point you're referencing is Deltek had two very large perpetual deals in 2Q of 2018, which drove outsized margin and that's very specific. So it's a very hard comp coming over in 2Q of 2019, if my memory serves correct.

Thank you. And then maybe for Neil. You mentioned talent development in your prepared remarks. Maybe expand a little bit what you're hoping to see from those group executive roles this year? And also, I think, a bit more of a push on organic growth is underway at Roper. In that context, maybe just if you could highlight what the R&D spending was in 2019? I know we'll see it in the K, but maybe how you see the cadence of R&D developing?

Sure. All right. If these are short questions, Julian, and I'd hate to hear a long one. So I'll try to hit the talent, the group, the organic and the R&D. So I'll hit the organic first. So we said that it's my intention objective to position the company, reporting of my businesses to execute our organic growth strategy that's been a little bit better in the past. That said, this is going to take time because we want to do it structurally. We want to do it – we're playing the long game. And importantly, we're going to only do it to the extent that CRI accretive. And so this is going to take a long time. And success, by the way, is measured by 50 or 100 basis points more of organic growth, not doubling the organic growth profile because these businesses are built for defensibility, yet we haven't met a Roper business that's optimized its organic growth algorithm. And so we believe there's long-term, I'll emphasize long-term, potential there. Now we're going to do that through the group executives, engaging with our teams, principally on three things: how to develop strategy, how to execute strategy and how to run a talent offense. And so we can spend more time later sort of unpacking that because it's a passion of ours here to do that. But we believe sort of the right strategy with the right strategic enablement, with putting the right field – the right team on the field, will yield great results for our shareholders over a long arc of time. Specific to your R&D spend. In 2020, for the software businesses, but basically both software segments. We're planning on 70 or 80 basis points more spend in R&D. So when you multiply that through, it's $20 million or $25 million of incremental spend in R&D relative to the revenue and that sort of spread across where the best opportunities are in each one of the businesses. And that – we'd expect that pace to – I can't tell you if it's that exact number of basis points each year, but expect that number to continue to increase over time as it naturally does in software businesses. And that is embedded in everything Rob mentioned earlier about margins being flat for the year and margins that – everything he talked about. So that's my view on your question and happy to follow-up as needed later.

Great, thank you.

Your next question will come from Joe Ritchie with Goldman Sachs.

Thanks. Good morning, everyone.

Good morning, Joe.

So Neil, you mentioned the headwinds in Sunquest continuing into 2020. Can you just elaborate a little bit more on whether – what kind of impact it's going to have 2020? And specifically, whether – what you're doing to mitigate some of that within Sunquest?

Yes. So the headwind is the same headwind the business has experienced for quite some time. It's – it is, unfortunately, like slow motion and tectonically playing out because our customers, when they make a decision to leave three years ago. It takes them three years to leave. And so there's no new information. It's just taking this time to play out. The mitigating fact is we've decided, is we continue to invest in the products of this business, right. So we've invested in internationalization of the product. We are investing in the molecular genetic capabilities. We're investing in the integration of the fluid tissue and genetic molecular labs, and that continues and will continue. And so it's – we just have to let this one competitive headwind play itself out of the course of the next year.

Okay. Got it. And then just a real quick one. On ComputerEase and iPipeline, the growth expected for 2020, is it supposed to be similar to the organic growth for the rest of the segment?

Well, yes, I think when we announced iPipeline, we felt really good about that being a high single-digit organic grower and nothing has changed to our opinion on that.

And ComputerEase?

Yes, that's a smaller add-on to Deltek. And it's probably mid single-digit organic grower or maybe better.

Okay, thanks guys.

Thanks.

Next question will come from Jeff Sprague with Vertical Research.

Thanks and good morning. I promise, I will be brief. Just on TransCore, back to that. I just want to understand how the cash flow actually works on the project. Would you expect to receive ratable cash flow because you're doing the work? Or would this be a very back-end loaded? And maybe even kind of a 2021 kind of cash event for the business?

That sounds like the same questions we asked our management team during this project run out. So we do feel that – we do feel the cash flows to be pretty well aligned with our earnings on the project. We've worked hard with that. We have a great partner that's working with us to make sure that, that happens. And so we do feel good about the cash coming in sort of in line with the EBITDA. Now certainly, you could see some payments in 2021 after the project is ended. So we'll see what happens but we're working hard to make sure the cash comes in on time.

And just on Neptune, is there anything programmatic going on in 2020? Big localities or anything that's driving the business? Or it's just kind of more steady as she goes kind of penetration push?

Steady as she goes. Neptune's strategy has been actually focused on the medium and smaller municipalities. That's what their strength has been and will continue to be.

Great, thank you.

You’re welcome.

Our next question will come from Joe Giordano with Cowen.

Yes, good morning.

Good morning, Joe.

Good morning, Joe.

So just on TransCore, what's the risk that, that deal leads into 2021 that the deployment actually takes longer or it gets started late?

It's already started.

It's already started. Yes. So the – it's a big project. It's got some complexity associated with it. So it certainly has a possibility of some of that bleeds into 2021. That said, let me be very clear, our customer has told us the infrastructure needs to be ready by December 31, 2020. And that's the project plan. That's the resources that are being deployed because that will then, in turn, enable the MTA to decide when and how they want to introduce the tolling. So our part of the project is to be completed by the end of the year per our customers' demand.

Okay, fair enough. And then how should we think about – absent forward M&A that I'm sure you'll do, but if we just strip that out, how do we think about the forward margin opportunity in the application network? Like how much of a drag on margins are the current new – relatively new business in there? And just how should we think about the floor opportunity to expand from already pretty high levels?

Yes. So I wouldn't view the new businesses as a drag at all. I mean, they're all generally in line with the margins – EBITDA margins, right. Yes. I'm always speaking in terms of EBITDA margins and Shannon is correcting me – sometimes correcting me that the analyst think in terms of OP a lot of times. But from an EBITDA margin perspective, very consistent and there's no reason why they should go backwards. As Neil mentioned, I mean, we're always spending a lot in R&D. We're growing R&D, and you – and it's easy to do that when you have businesses that come in at a high contribution margins. There's plenty of dollars to invest in R&D and talent and people and everything, and that's really how these businesses grow. So we're continuing to do that. So I wouldn't see any sort of a margin headwind for these businesses any time into the future.

How should we think about them expanding? Like just normal kind of just capturing an incremental on the growth? Is there like…

Yes. It's incremental on the growth, right. I mean, when you have EBITDA margins in that 40% range, that's a very healthy software business that continually invests to grow. So I think that if it expands, great, but it's really about growing more at current margins.

Yes, fair enough. Thanks guys.

Yes.

And your next question will come from Robert McCarthy with Stephens.

My questions have been answered. Thank you.

You’re welcome.

And your next question will come from Steve Tusa with J.P. Morgan.

Hey guys. Sorry, just a quick follow-up. Anything moving around on like cash conversion? I know that with the TransCore deal coming through, maybe it's a bit of a different cash profile early on. Anything – any dynamics there we have to be aware of for cash conversion or cash margin in 2020?

Yes. No. Thanks, Steve, for the question. I was preparing for it. I'm glad you got back on and asked. Yes. No, we definitely feel free cash flow….

Somebody pinged me to add – just want me to ask about this – usually a follow up but here we go.

You saved the day. Yes. No, I think if you look at our overall guide, free cash flow should grow double digits based on our guide in 2020. And then, obviously, as we do acquisitions, that should be further accretive to that. So that's sort of how we see it as of today. So no, there's no headwinds on cash flow.

I guess, your free cash flow this year grew a little bit less than that. What is the – is there anything unique kind of year-to-year that drives an acceleration of that?

Yes. So what balances around, right, so if you're looking at conversion to adjusted net earnings, what balances around the most is tax payments and cash tax versus GAAP tax. And so that's been a headwind the last couple of years with a lot more cash tax payments. And also, as I mentioned in the pre – in the scripted comments around TransCore, it didn't have a very good cash year around some projects last year, and then some of the product businesses weren't great. So I think as we sit – from a working capital standpoint, I think that we've got some additional room to improve. And so then that will be beneficial to cash flow next year and beyond. Everything else is very structural from a high cash conversion standpoint.

Okay, great. Thanks a lot. Appreciate it.

Thank you.

Thank you.

And that will end our question-and-answer session for this call. We now return back to management for closing remarks.

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

That does conclude our call for today. Thank you for your participation. You may now disconnect.