Roper Technologies, Inc. (ROP) Q1 2020 Results - Earnings Call
Roper Technologies, Inc. (NYSE:ROP) Q1 2020 Earnings Conference Call April 28, 2020 8:00 AM ET
Company Participants
Zack Moxcey - Vice President-Investor Relations
Neil Hunn - President & Chief Executive Officer
Rob Crisci - Executive Vice President & Chief Financial Officer
Conference Call Participants
Deane Dray - RBC Capital Markets
Steve Tusa - JPMorgan
Joe Giordano - Cowen
Alex Blanton - Clear Harbor Asset Management
Robert McCarthy - Stephens
Operator
[Abrupt Start]
…each business continues to make no regrets investments in innovation and talent, all of which have a mind eye towards an offensive-oriented posture upon recovery. Also important and often under discussed is our direct channel access in the vast majority of our companies. Rarely does Roper have a business that relies on third parties or distributors for market access.
Given this, we remain engaged with our customers in good times and bad. We learn, we adapt, most importantly, we stay connected. This typically enables market share capture in difficult times and accelerated benefits during the recovery cycle. And in all times, our leaders keep an intense focus on cash.
Having worked through this process over the last several weeks, I'm incredibly proud of how our leaders have reacted and managed through the current situation. And I'd like to thank each and everyone for the work, hard decisions and difficult conversations you have had to endure. Thank you.
As we turn to our first quarter segment results, I'll start with our application software segment. Briefly, a quick run-through of Q1, which was quite strong. Revenues were $405 million, up 5% on an organic basis. EBITDA was $156 million or 38.6% of revenue. The quarter was highlighted by continued strength at Deltek for consistent factors: strength in GovCon execution, nice wins at the enterprise level and certain professional service markets and continued cloud or SaaS adoption.
However, based on the impact of C19 sheltering, Deltek did see a slowing in perpetual deal activity during the last couple of weeks in the quarter. Power plant was also strong in the quarter. The sales pipeline build that we discussed in prior quarters executed nicely. CBORD and Strata were strong.
In CBORD's case, due to their integrated security and subscription-based software sold into higher-ed markets, and for Strata, much of the same, continued solid sales execution and adoption of their hospital-based cost accounting and financial planning solutions. As we turn to outlook considerations, we want to provide an overview of the business model drivers for the businesses in this segment.
To start, about 10% of the revenues in this segment are derived from perpetual software licenses. Within this bucket of revenue, new sales are derived principally from three sources: new logos; add-on product sales to existing customers; and finally, seat or volume expansions. Given the current economic outlook, we expect the vast majority of new logo sales to meaningfully slow down for the balance of the year.
However, we do expect some volume of add-on product bookings to continue. Typically, during economic slowdowns, some level of selling activity does occur within this bucket of license revenue. These types of projects are smaller dollar and sold and delivered remotely.
The next bucket of revenues are tied to service delivery. Service revenues arise from two sources: new product implementations or existing product upgrades. The first bucket is tied directly to new license sales, either new logos or add-ons. The second bucket or services upgrade, run independent of new license activity.
The services book of business runs off a six to 12-month backlog. To date, the vast majority of our service projects continue, albeit at a slower pace, given both our customers and our delivery teams are adjusting to working remotely. We expect this revenue stream to be minimally impacted during the course of the year.
Finally, the remaining 70% of revenue is tied to recurring maintenance or SaaS-based revenues. Our companies in this segment, service end markets that are expected to perform relatively well versus a broader economy, government contractors, law firms, healthcare and education. Given we mostly serve larger enterprises and less affected end markets, we do expect retention rates to remain high.
Now let's turn to the next slide to discuss some specific business impacts. Our application software businesses have proven to be extremely durable and consistent organic growers and will continue to do so once customer access and activities begin to come back online. However, in an environment where we essentially – where essentially all businesses on a global basis are closed, these businesses will be modestly impacted.
As we look at Deltek specifically, we expect the government contractor market to continue to perform well. New lead generation and pipeline build have continued during the last few weeks. On the other hand, we do expect a slowdown in new logo bookings and their professional service markets as the companies they serve are in meaningfully impacted segments and tend to be SMB sized. PS revenue and retention should perform well across both GovCon and Professional Service markets.
Turning to Aderant, PowerPlan and CBORD, we believe these businesses will be impacted in a similar fashion. We expect some net new logo bookings to slow for the next few quarters as these businesses tend to rely on face-to-face interactions to drive enterprise level new logo sales. These activities will likely be limited for the remainder of 2020.
The smaller, add-on type product sales are expected to maintain at some level, albeit at a lower level of sales activity. All three of these businesses have done a fantastic job of shifting their implementation and service activities to be remotely delivered. Recurring revenue retention should perform well.
As we look at our four businesses, we sell into the hospital setting, we are experiencing and expect to continue to experience limited physical access to hospitals. Also, given the financial duress, most U.S. health systems are facing, we expect hospital capital spending to be meaningfully down in 2020.
That said, labs are extremely busy improving their value to the world over right now. Our teams have been busy enabling all the new COVID-19 tests and will continue to do so. As a direct result to COVID-19, the Sunquest project in Queensland has been canceled.
Strata should continue to grow, albeit at a slower pace. We expect continued strong demand for Strata solution, which help hospitals identify and manage costs and help model and execute financial plans.
Finally, we do anticipate a possible acceleration to the cloud on the back end of the current environment. As customers have had to implement their DR plans, they are likely returning with an increased appetite to offload and remote it management of their core systems. Time will tell.
Next slide, please. Turning to our network segment. Q1 revenues grew 9% organically to $441 million. EBITDA was $185 million or 42% of revenue, a solid quarter, indeed. TransCore's work for the congestion pricing infrastructure project continued in the quarter as it has been deemed essential work by the state of New York.
Network software was strong and highlighted by iTrade and DAT. iTrade grew high single digits on the back of strong renewal and cross-sell activity. DAT continued to expand our network and successfully completed the market launch of rate forecasting and book-it-now capabilities.
Finally, RF Ideas did very well due to their identity management solutions. For this segment, approximately 60% of the revenues are driven by our network software businesses, 85% of which are recurring. These businesses have very strong network effects and generally serve less impacted end markets such as healthcare, life insurance, logistics, food and media and entertainment. Given the core software functionality value and strong network benefits, we expect retention rates to hold up well across these businesses.
Relative to TransCore, as mentioned, the New York City congestion pricing infrastructure project continues and is deemed essential. Over the course of the last couple of weeks, New York State and the MTA budget moved the congestion pricing toll revenue into the operating budget versus the MTA capital budget.
Our view is that this modestly increases the urgency of this project. All this being said, we have pushed the project to the right a bit, moving approximately $25 million into early 2021. For the balance of TransCore, project activity continues and will continue, but we do expect some projects to be pushed into 2021.
Over a longer arc of time, the business case for all electronic tolling may accelerate as a result of the current health pandemic. Essentially, human to human contact paying a toll may be greatly reduced, if not eliminated. TransCore will be ready to execute if this demand driver accelerates.
Next slide, please. Turning to some company-specific impacts for the software businesses in our network segment. First, our DAT and ConstructConnect. Both of these businesses have subscription-based revenue models. Both have some exposure to small and medium sized businesses, but also work directly with large enterprises.
Both businesses have network benefits that typically exhibit countercyclical behavior. For example, and specific to ConstructConnect, the core product is a lead – is a project lead identification source. As more contractors look for fewer projects, they tend to enter our network to source and bid for new project business.
In the first three weeks in April, it's encouraging to see the ConstructConnect network expands modestly. For DAT, the brokers stay connected to the network and take advantage of lower spot rates versus contracted rates and carriers stay connected to find load volumes. iTrade is quite busy connecting food retailers . With an increasing number of grower shippers, we expect minimal disruption here.
iPipeline has been super active helping their life insurance customers adapt their products and their underwriting processes in this environment. The outlook remains stable here as well. Relative to foundry, content creation continues. There is a large pipeline of post-production work that is currently being processed as well as continued new animation content creation. As a potential early read for western production, Chinese live-action has restarted on a limited basis.
Finally, our alternate site healthcare businesses will perform relatively well but are not spared from some level of impact. Both SHP and SoftWriters customers are being impacted by the lack of hospital-based procedures and the associated outpatient recoveries. For instance, new starts of care for home health are down 30% to 35% versus a year ago. We expect these customers to likely pause buying new products until their patient volumes return. Retention, however, should remain high as our products are needed for cooperation’s.
And finally, MHA's revenues are tied to pharmaceutical utilization across long-term care settings. Starting now and likely for several quarters into the future, new admissions into long-term care settings will likely slow. However, this should only modestly impact the growth rate of MHA. Next slide, please.
Turning to our Measurement & Analytical Segment. Q1 revenues grew 3% organically to $365 million. EBITDA was $123 million or 33.6% of revenue. The quarter was highlighted by strong growth at Verathon amid the COVID-19 outbreak. Unrelated to C-19, Verathon saw continued traction in their new single-use bronchoscope products.
Additionally, Northern Digital and Neptune continued their solid string of growth. Also, we did experience declines, as expected, in our short-cycle industrial businesses with some further weakening in the quarter due to COVID-19.
Turning to the outlook. This segment can be analyzed across four areas: Verathon, other medical products, Neptune and industrial. At Verathon, we are experiencing truly unprecedented demand for their GlideScopeAmid products. Intubation procedures have skyrocketed due to COVID-19. Verathon's video intubation products enable the caregiver to intubate a patient with appropriate spatial distance from the patient, making the intubation procedure meaningfully less risky for the caregiver. The demand for these products is global and has been sustained since the middle of March.
Our other medical product businesses, which grow organically MSD like Clockwork in virtually all environments, are likely negatively impacted based on the global nature of historically lower hospital-based volumes and the associated economic impact. Hospitals have never been forced to defer all non-emergency cases.
Neptune is a very stable growth business due to the consistent required meter upgrade and replacements. Given the shelter in-place requirements, limited access to indoor meters and municipality budget uncertainties, some level of sales activity will likely push to the right with the most acute impact being in the second quarter.
Finally, our industrial businesses are negatively impacted and generally tied to industrial output. Our industrial products are critical to industrial production processes. There are some pockets of strength, Danisco, Party [ph] and Hansen, but for this group, our revenues for these businesses will be tied to the pacing of plant reopenings. And as a green shoot, we are seeing strong activity across Chinese end markets as our markets come back online.
Next slide, please. Turning to our Process Technologies segment. Revenues were $142 million in the quarter, down 10% on an organic basis. EBITDA was $46 million or 32.4% margins. This was a difficult quarter for these businesses, and we expect the outlook to remain extremely poor for the balance of 2020. We saw our upstream businesses decline in the high teens in the quarter. Also, CCC was weak based on the inability to perform field service work all related to C19. One bright spot in the quarter was Zetec, up mid-single digits based on growth from their new non-disruptive testing products.
The outlook for the balance of the year is going to be an extremely challenging one. About 60% of the segment's revenue and about 6% of Roper's revenue is related to oil and gas. We will be hit the hardest, down approximately 50% in the second quarter in our upstream business. For the year, upstream revenues will be less than $100 million or roughly 2% of Roper. We do not expect the recovery at all in 2020.
Our mid and downstream businesses are also meaningfully negatively impacted, but less so than our upstream businesses. Peso recovery here will be gated by CCC's ability to get into the field and perform field service work and the recovery of fuel refining for PAC.
Next slide, please. As we turn to our guidance, we are initiating DEPS guidance for 2Q in the range of $2.50 to $2.70 and updating our full year DEPS guidance to be between $11.60 and $12.60 per share. Embedded in this guidance model is an increased full year tax rate of 23%.
We built this model, as we always do, on a business by business, bottoms-up analysis. We have summarized the organic outlook for each segment for the second quarter and the full year with the underlying material assumptions. For application software, we see second quarter revenue down MSD, with full year revenue plus or minus low single digits. Where we settle for the full year is dependent upon the volume and timing of add-on perpetual deals, the pacing of services work and sustaining high recurring revenue retention rates.
For network systems, we've seen second quarter organic revenues up low single digits and full year up mid-single digits to possibly low double digits. The largest variable is the pacing of the New York congestion pricing project. For MAS, we see this segment down mid-single digits in the second quarter and flat to up mid-single digit for the year.
Principal factors for this segment are the sustained nature of Verathon's demand spike, the timing of medical procedures coming back online, the nature of water municipality budgets and the ramp of global industrial production. Finally, our process segment will be materially and negatively impacted. We expect 2Q revenues to be down at least 30% and full year down in the 20% to 25% range. Again, we do not expect recovery this year.
When you roll all this together, we expect our consolidated organic revenues to be down mid-single digits for the second quarter. And for the full year, organic revenues are expected to be plus or minus low single digits. Again, this is a remarkable testament to the durability of our businesses and business model.
Our teams did a good job responding to the demand shock and placing cost countermeasures in place, the vast majority of which being temporary. This enabled us to remain – this enables us to maintain high margins as we work through the demand shock retain virtually all no regrets investments and innovation and talent while preserving the operational flexibility to rebound quickly.
Now let's turn to our summary. We had a very solid Q1, really proud of the team here for these results. As we quickly pivot towards operating in a C19 world, our enterprise remains fully operational, and working from home is proving to be highly effective. So effective that we'll likely remain in this posture for quite some time. Our balance sheet is stronger than at any point in history, with $1 billion in cash and $2.5 billion of revolver capacity.
For the full year, we expect to have plus or minus flat organic revenue growth. We believe our portfolio of businesses and our governance processes are well suited to navigate this extremely difficult time. We will do so in a way that prudently balances short financial performance and cost countermeasures with that of long-term investments in innovation and talent. Our teams are keenly focused on market share gains, both now and upon recovery.
As we execute our strategy that focuses on long-term cash flow compounding, we will continue to patiently evaluate and pursue capital deployment opportunities. Our process is rigorous and disciplined. We do expect many attractive capital deployment opportunities to arise from the current economic situation. As our balance sheet is very well positioned, we will offensively deploy capital as the right opportunities are identified. Final slide, please.
As we prepare for your questions, I wanted to highlight a few examples of how Roper businesses are aiding in the fight against COVID-19. Our lab businesses enabled a new C-19 test to interface with lab information systems and provide results to doctors and patients.
iTrade is connecting new food trading relationships as food buying shifted almost entirely to grocers. Strata is using their AI tools to help hospitals have financial clarity in these uncertain times. And Verathon, as discussed, is truly on the front lines. I'm extraordinarily proud to be able to lead this organization.
Now let's turn to your questions.
Question-and-Answer Session
Operator
Operator: Thank you. We will now go to our question-and-answer portion of the call. [Operator Instructions] Our first question comes from Deane Dray of RBC Capital Markets.
Deane Dray
Thank you. Good morning, everyone.
Neil Hunn
Good morning, Dean.
Deane Dray
It's great to hear everyone's voice on the call. And I just want to thank you for all the additional color that you provided today on both the application software and network software business models in the mix. That was helpful. And that last slide on all the ways you're participating in the COVID defense, that was great to see as well.
So Neil, for the first question, it's the idea here is most companies are drawing on revolvers. You're obviously not doing that. You're at much stronger position. But keeping $1 billion in cash at the ready to deploy an M&A at the appropriate time, can you talk through the – when will be the appropriate time? Because will these – there be targets in distress that would be opportunistic? Because it typically takes a while for prices to reset in a downdraft like this. So maybe kind of set expectations on when and how you deploy M&A here? Thanks.
Neil Hunn
Sure. Appreciate the question. In any environment, it's hard to predict the timing of capital deployment because, as you know, it's lumpy. But a few comments. First, leading into the shutdown, leading into the middle of March, we were extraordinarily active and pause several things and believe at the right time, we can unpause those things.
Only time will tell there. But we stay in constant contact with the owners of those assets, the leadership team for those assets. And these were very late-stage sort of situations.
On the – but once we work through that, sort of, late-stage part of the pipeline, there continues to be some level of discussions between sponsors and ourselves. We've spent years developing relationships. We know the portfolio as well. And this is the time where those relationships matter the most, because it's unlikely that here in the next couple, three, four, five months, how long it is, that there's going to be broad-based sell-side processes.
But sponsors still have requirement to get liquidity back to their shareholders. And if there's one-off trades that make sense for both sides, we think those could happen. And then finally, they're more likely than not, we saw it in the last downturn in 2007, 2008, 2009 time frame as we studied that.
I wouldn't call them just – they're just – there are likely be some companies that are distressed from a capital structure point of view, not from an operating point of view, which gives them -- sort of, they put them in a pinch to where we're able to acquire nice assets, operating assets and meet all of our criteria, but they just have made some poor decisions or have some bad timing on their capital structure. So there's really -- it's the nature of where we sort of target might change modestly, because you're right, it does take typically a couple of quarters, plus or minus, for private valuations to reset to where public ones are.
Deane Dray
That's real helpful. And then a follow-up for Rob on working capital. You said that there was -- you might be seeing some delayed payments. Can you elaborate on that? And when you said you expect working capital to remain negative, was that a comment for quarterly or for the year? And how do you think the quarterly stacks out for -- in terms of being negative each quarter? Thanks.
Rob Crisci
Yeah. Good morning, Deane. Appreciate the question. It's always difficult to predict working capital, right? It's one of the toughest things to predict. We certainly know that there are some end markets, particularly acute care, healthcare, where if you call the news, there's going to be some challenges there where hospitals are slowing some payments, et cetera.
So difficult to predict each quarter. I will say that our customers overall were in very durable end markets. And so, we expect really no credit risk across all of our customers. So it's a matter of timing of payments. And when you have the huge deferred revenue balance, when you have management teams, they're really close to their customers. We feel really confident that the working capital position will remain very strong and negative throughout the year.
Deane Dray
That's very helpful. Thank you.
Neil Hunn
Yeah. Thank you.
Operator
Our next question today comes from Steve Tusa of JPMorgan.
Steve Tusa
Hey, guys. Good morning.
Neil Hunn
Good morning, Steve.
Rob Crisci
Good morning, Steve.
Steve Tusa
Thanks for all the detail. Every quarter, more successive detail on all the businesses. It's very helpful in helping us some industrial analysts understand these tech businesses. So I appreciate that. On the second quarter guide, the – it looks to me like your sales are down like $85 million -- $80 million to $90 million, just using kind of a mid-single-digit rate maybe. And – but the EPS decline of like $0.45 seems to be a pretty high decremental. Is that just kind of the nature of the business? How to – can you kind of just help us walk to kind of the profit performance there? Anything moving around mix wise?
Neil Hunn
Yeah. I'll start, and then I'll ask Rob to add any color. So obviously, the – this demand shop for every company came fast and deep, right? So we started feeling it across a few of our companies at the end of the quarter. And then obviously, it's sustained here through the first part of April. So a couple of comments. So first, when this happened, just from a planning perspective, we first – we didn't try to overreact or react too quickly. We first had to get everybody home, which took a week or two. We then took a week to 10 days to let our leaders really onboard and accept the reality of the demand shock. And then we started our planning process, which was really the first week or so in April.
So sometimes takes by. And so by the time you do the planning process in the second quarter and then start putting in the cost countermeasures, it was really just starting to layer in now against what we believe is going to be the steepest demand shock. And so when you put those two together, you just naturally get sort of the worst leverage, if you will, in 2Q and things stabilized from that point in time.
Rob Crisci
Yes. And I'll just add to that. We talked a lot about the perpetual license timing. And so when you're in the second quarter period where the economy is basically shut down for at least the first month of the quarter. So we're not assuming much, if any, license revenue. As you know, that comes at a really high margin. We do have the TransCore project continuing, which is lower margin. So you're really also looking at some mix impacts, adding on to what Neil said.
Neil Hunn
And then the final thing, Steve, so I should have mentioned at the onset is we're not adding back any of the restructuring costs. So that is a little bit of a headwind in the quarter as well.
Steve Tusa
Got it. How much is that again?
Neil Hunn
It's sub-$10 million.
Steve Tusa
Okay. That makes some sense. And then it's my understanding that in some of these software businesses, you see kind of perhaps a bit of a pause, but then that's kind of a quarterly variance. We're kind of used to some CapEx businesses that are kind of more annual cycles. So that – are you expecting kind of a push on revenues in application software from second quarter into third, so that you kind of have a bit of like pent-up revenue in the second half of the year, if you will? Is that how we should kind of think about this or not really?
Neil Hunn
So Steve, everything's certainly pushing to the right. We've not assumed that there's a – it's a 2Q push that comes back in 3Q. It's just everything sliding to the right. And to the extent what you describe happens, then that would lead us to be more on the higher side of our guidance than the lower side.
On the new logo sales, the new customers that are buying relatively high dollar transformational type IT projects, those are going to be pushed to the right for the balance of the year for the most part, right? Who's going to make a big IT investment right now, setting aside how our salespeople actually get to that customer and sell. But the smaller ticket items, the upgrades and the add-on products, that level of activity has actually been quite nice.
At Deltek, for instance, the top of the funnel here in the last three or four weeks, like this is the inquiries are up 30% to 35% versus a year ago. Now some of that is everybody's sitting at home doing Google searches, right? So the quality of that top of the funnel may not be as high. But what's been accepted as sales acceptance leads at Deltek has actually paced even a little bit ahead of last year. So the exact nature of how this thing is going to unfold because it's more of a shock than a cycle is yet to be seen.
Steve Tusa
Sorry, one more for you. Any impact to MHA? I know that obviously, nursing homes and those types of things are having a real hard time right now dealing with all of this in certain areas, kind of struggle to understand whether that's it's obviously negative in life, but whether it's negative or positive for your business. How does that work here with the stress in nursing homes?
Neil Hunn
Yeah. So certainly, the number of new admissions to the skilled nursing, or SNF, sort of, care setting is likely going to be paused for quite some time, right? We're not putting in the elderly population in that care setting. So that – because the census, if you will, in SNFs, is going to be impacted by that. That will have some, but it'd be a modest and slow building impact, negative impact to the growth rate for MHA.
What still happens, we're not seeing any meaningful discharges, right? The people that are in this setting for a long ark of time, they're not being pulled out because of what's going on. And this is just one of many growth drivers at MHA, right? You still have pricing that goes up. You still have pharmaceutical consumption per capita that goes up.
You still have the team building to put new products online. There still are new pharmacies that will start that we'll capture. So there's a handful of sort of consistent growth drivers. But certainly, census levels will moderate some in the skilled nursing facility, which will impact the growth rate of modestly of MHA.
Steve Tusa
Great. Thanks for the color guys. I appreciate it. Best of luck.
Operator
Our next question today comes from Julian Mitchell of Barclays.
Unidentified Analyst
Hey. Good morning, everyone. This is John for Julian. Maybe switching back to working capital first. Can you talk a bit on how the unearned revenue is going to kind of play with that expectation? How well has that been holding up? And how much of a headwind can that be with AS guided down for Q2?
Rob Crisci
Yeah, sure. This is Rob. The way deferred revenue works for our software businesses is, it's just the passage of time that needs to happen in order for the revenue to be recognized. And so, as I mentioned on the call, it is – when you have a renewal, then – and then that's the point at which you hope the customer renews or they don't. And generally, they do at very high 90% renewal rates. And those renewals are time throughout the year.
So as long as you maintain your recurring revenue, it's very, very steady. The deferred revenue continues to grow as the software businesses grow. A reminder, we're selling this software. It's really critical software systems across durable markets, like government contractors, mostly large enterprises to the customers. And so it's very, very steady. It gives you high levels of recurring revenue and high levels of cash flow. So we don't see any meaningful impact from that certainly in the short term.
Unidentified Analyst
Got it. And then I guess maybe on that guided decline for next quarter, it does sound like a big chunk of that is just push out of licensing and so on. But is there any impact from kind of the mix here moving much more towards license and service rather than perpetual just being down to 10% now kind of as you say?
Neil Hunn
Well, certainly, we expect the bucket of revenue of perpetual license revenue, the historical 10% number, that will be down. It will be impacted for the reasons that we talked about. The recurring won't be impacted in any meaningful way and the services backlog will work through the back -- the services teams to work through the backlog, as we've said. So I don't know if you have...
Rob Crisci
Yeah. And then, just, as you go through the guidance, keep in mind, we did increase the tax rate. So that's a big difference from prior guidance and if you're looking at last year versus this year. So the tax rate is a little bit higher. And then we are assuming relatively high deleveraging and process technologies, given all the declines there and that we're not assuming any sort of a rebound. And as Neil mentioned, we're taking specific cost actions as well that are flowing through. So those are all key drivers in the roll up.
Unidentified Analyst
Got it. Thanks, guys.
Neil Hunn
Thank you.
Operator
Our next question comes from Joe Giordano of Cowen. Please go ahead.
Joe Giordano
Hey, guys. Good morning.
Neil Hunn
Good morning.
Rob Crisci
Hey, Joe.
Joe Giordano
Hey, I apologize if you went through some of the stuff with kind of quadruple passing this morning a little bit. So for TransCore, I know you mentioned in the prepared remarks, you pushed some off into next year. I don't think that should be too surprising. But given some of the stuff that's been in the paper recently about necessary permits and issues with different government agencies, can you talk about what actually needs to happen before this is able to be before the actual hardware can be deployed?
Neil Hunn
Yes. The hardware is being deployed. The project is on track. It's on pace other than just pushing this $25 million in our planning assumptions into the Q1 of next year. What you may have read and what others have read is there – I think there is a distinct separation between the work that we're doing with our customer to put the infrastructure in, which is pacing for the reasons we said. It's now the revenue from this or the operating budget, not the capital budget because the MTA, obviously, revenues are way down, given what's going on.
And then what happened – governmental process to enable and structure the tolling itself. That's going to happen at a very – in part of next year, but the infrastructure work continues, and that's our planning assumption. All the signals and all the discussions, as you can imagine, we stay very, very close with this customer, and we're in the same posture on that together with a customer.
Joe Giordano
So does – I guess, would that put potentially like to push on some of the recurring revenue associated with this if there's some issue with like a go-live so you get your deployment and then there could be like a delay in when stuff actually goes on?
Neil Hunn
Yes, it could. If we ultimately don't go in, then the maintenance part would not turn on would be our planning assumption there. But I think there's a pretty high level of interest by all parties to see this project turn on.
Joe Giordano
Yes. Okay. And then again, you probably went through this a little bit. But on the software backlog that you have, like can you just talk me through how you're thinking about that in terms of whether it's a six-month or a year? Like what do you – what are you modeling in, in terms of like companies being smaller and needing less licenses and stuff like that?
Neil Hunn
So well, there's a couple of different questions embedded there.
Joe Giordano
Yes. I know.
Neil Hunn
So first – but first of all, you have to go company by company. So really, all we're talking about in our comments where we see a meaningful headwind on the license activities at our application software business. We went company-by-company on the network side. The recurring nature, they'll be impacted, but doesn't have the license activity because they're all SaaS businesses there.
So when you look at application software, it's really the combination of those companies there that are going to likely not have large new customer perpetual deals happen in this environment. The smaller products, the add-on projects, the upgrade projects, the increased functionality, the how do you turn on, do some SaaS conversions, right, during this process, during the current economic environment, the activity in the sales funnel suggests that's going to continue, but currently five or six weeks end of situation, we have to see how that continues. So that's on the license side.
On the services side, the services work results from selling licenses. So there'll still be some of that. And then there's a fair amount of upgrades that happened.
And actually, when times like this are actually a pretty decent time to upgrade systems, because you have maybe less people in the office and less user activity, so the IT staff to do what they need to do to get to a new version. Now we have to see if it actually plays out. But even if it doesn't, even if that has slowed, the services teams work off a six to 12-month services backlog of implementation, they basically have six to 12 months to replenish the backlog from new sales activities.
Unidentified Analyst
Perfect. So fair to say you're assuming that the big – like essentially like a zero and new big licensing and things like that for now.
Neil Hunn
Well, again, you've got to parse it out, right? It's very low large new logos assumed in the planning horizon. There is going to be some new licensing for the product add-ons. That's exactly right.
Unidentified Analyst
Okay. Fair enough. Thanks guys.
Neil Hunn
Yeah. Thank you.
Operator
Our next question comes from Alex Blanton of Clear Harbor Asset Management.
Alex Blanton
Good morning.
Neil Hunn
Alex, Good morning
Rob Crisci
Hey, Alex.
Neil Hunn
I hope you’re well.
Alex Blanton
Typically, during recessions, dominant companies like Roper gained market share, a lot of market share, in some cases, from weaker competitors. And it seems to me that, that would be true right now in spades. Could you comment on where you would expect the greatest cash effective Roper. You're gaining share from companies that get in trouble during this period.
Neil Hunn
I appreciate the question. No. It's a – we agree with your sentiment. History would suggest that's the case. When you have the operational readiness that we have, when you have the balance sheet that we have, when you have the cash flow that we have, sort of amount of those heartily needs allows us to very quickly pivot to play offense versus defense, and that's the posture that we're leaning, right?
We also talked in our prepared remarks about our direct channel access. So we're talking across all of our businesses every day with our customers. Where the opportunities are, it's incrementally, and I don't – I mean, it's in all the businesses. I don't want to sort of call out one business there where there's a disproportionate opportunity, because it's a structural opportunity with our business model that we have across the 45 businesses.
But we agree there is times to fulfill need right now when our competitors cannot fulfill a product that garners you sort of an opportunity to capture and keep that share of momentum building on that side of this thing. So we agree with the sentiment and we're alternatively leaning forward, but we've got to do that in a prudent way, given the current situation we all face.
Alex Blanton
Right. Then you mentioned that you keep in very close touch with your customers, so you can identify these opportunities when they arise.
Neil Hunn
That's correct.
Alex Blanton
I have one more question on your – on the acquisition outlook. You mentioned that there's a delay implementing some of the sellers, plans to sell the businesses, which is understandable. But could you characterize the backlog? You said it was a very full backlog or pipeline of acquisition opportunities. Could you expand on that a bit?
Neil Hunn
Sure. Sure.
Alex Blanton
Because you've got a highly talented…
Neil Hunn
Correct. There's always a lot of activity that happens in our pipeline. I've been here since 2011. For the first six or seven years is my responsibility to manage the pipeline, in addition to my operating responsibilities. And so just speaking over the whole time I've been here, there's a lot of activity.
What we're specifically commenting on earlier is there was very late-stage activity. Under exclusivity, most terms agreed to most diligence done a few deals that we just decided it was prudent to pause and take stock of the current situation. So there's a late-stage pipeline.
Now the things right behind that, most – every other process, sales process that was in the market has pulled for obvious reasons. And so we're going to have to lean into our knowledge of the existing sponsor relationships and relationships that we have to see if we can build funnel on a proprietary basis for the next couple of quarters.
And only time will tell if we're going to be able to successfully do that. And then from that point, private equity business models need to return capital to their Limiteds, and we expect that to continue once the new reality of the valuation regime, the leverage regime, all sort of land on us all.
Alex Blanton
Okay. Thank you.
Neil Hunn
Thank you.
Operator
Our next question comes from Robert McCarthy of Stephens.
Robert McCarthy
Thanks for fitting me guys. How are you doing today?
Neil Hunn
Great. Hope you are well?
Robert McCarthy
Good. Yes, just expanding on kind of the private equity on the acquisition environment. Obviously, a situation where as Deane suggested, prices are coming down. But I mean, could you see a phenomenon here of – as private equity has a lot of businesses that are probably highly impacted more than what their risk characteristics would have suggested that you could provide the ATM on some decent deals where they could get an exit, so there could be a liquidity premium to getting something out, returning it to Limiteds and you could still pick off some decent businesses at some reasonable valuations? Do you think there's a path forward for that? And maybe just expand more broadly about your acquisition capacity in cancer?
Neil Hunn
Yes. So on the capacity side, it's going to – it's $2 billion to $3 billion right now very easily. We're going to be prudent in how we deploy that and always be very mindful of the current situation we're in. Relative to the first part of your question, I think it depends on the sponsor, right? If you talk to some of these very large, highly successful sponsors who have raised eight to 15 funds and returned three to 5x, might after their Limiteds are going to have a lot of patients with them as they work through this.
So those assets and those portfolios, I think, waits a little longer. On the other hand, there's scores of more middle market sponsors that do not have that track record that probably exhibit the exact behavior that their outlying. And so only time will tell, but it's our job to identify those opportunities as they come up.
Robert McCarthy
Thank you for that. And then I guess in terms of thinking about the longer-term opportunity with CBORD and also TransCore mean obviously, episodically, companies have been talking about changing the regime for not only payments but also access, particularly given the light of the pandemic.
I mean, you're going to probably see a reconfiguration of security and access around motion as opposed to touch, just given the nature of sanitation and public hygiene, do you think that creates a bit of an opportunity for you in each of those businesses, or do you think it's a little bit too much of a nuance right now?
Neil Hunn
I think it does over the medium term, right? So there's the Seaboard, it's the work we've done with Apple for contactless sort of entry and security. I think also the way that in the near term, at least, universities are going to want to follow where the students are, and so we might be able to be assistants – assist them in that.
TransCore, we talked about the concept of handing cash and getting change back is likely going to end here at some point. And then also, RFID is a business we all talk a whole lot about. We talked about in the quarter -- I mean, in the quarter, they had a very strong quarter. They're all about contactless reading for identity access, for instance, in hospitals and health systems for secure print, right? So how do you actually go to a printer and get your materials off without having to touch it. So they enable those sorts of solutions from a product perspective.
Robert McCarthy
Thanks for your time.
Neil Hunn
Thank you.
Operator
That will end our question-and-answer session for this call. We would now like to turn the call back to Zack Moxcey for closing remarks.
Zack Moxcey
Thank you, everyone, for joining us today, and we look forward to speaking with you during our next earnings call.
