Altus Group Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 9, 2023

There are 12 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. My name is Sheryl, and I will be your conference operator today. At this time, I would like to welcome everyone to the Altus Group Q3 2023 Results Conference Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

I would now like to turn the call over to Carmela Bartosevich. Please go ahead.

Speaker 1

Thank you, operator. Good afternoon, everyone, and welcome to Altus Group's 3rd quarter results conference call and webcast for the period ended September 30, 2023. The news release announcing our results was issued after market close this afternoon and is posted on our Web to the CEDAR profile along with our MD and A and interim financial statements. A presentation to accompany our prepared remarks This conference call has also been posted to our website under the Investor Relations section. Joining us today are CEO, Jim Hannon and our CFO, Pavan Chagra.

Speaker 1

We'll start with some prepared remarks, and then we'll move right into the Q and A session. If we miss any questions, please contact me directly by e mail. Some of our remarks today on this call may contain forward looking information. Forward looking information is based on assumptions and therefore subject to risks and uncertainties that could cause actual results to differ materially from those projected. These assumptions, Risks and uncertainties are detailed in our forward looking statements disclaimer in today's materials.

Speaker 1

Please be reminded that Altice Group views discern non GAAP to financial measures, non GAAP ratios, total segment measures, capital management measures and supplementary and other financial measures as defined in National Instrument 52,112. We believe that these measures may assist investors to investors in assessing investment in our shares as they provide additional insights into our performance. Readers are cautioned that they are not to the performance measures that do not have any standardized meaning under IFRS and may differ from similar computation as reported by other similar entities and accordingly may not be comparable to financial measures as reported by those entities. These measures should not be considered in isolation or as a substitute for financial measures prepared in accordance with IFRS. An explanation of these measures is detailed in today's IR materials, including the news release, presentation, MD and A and in our other filings the Canadian Securities Regulators.

Speaker 1

I would also like to point out that unless otherwise specified, all growth rates we refer to on this call today will be on a constant currency basis over the same period in 2022. Ken, over to you, Jim.

Speaker 2

Thanks, Kavila, and thank you everyone for joining us today. I'd like to take a minute to discuss our recent M and A activity, which occurred subsequent to the close of the Q3. Very pleased that this week we were able to announce the acquisitions of REVS, formerly part of Citus RERC and Forberry, 2 highly regarded players in commercial real estate. Not only have we complemented the breadth of our offers for our clients, but most importantly, We've expanded the Altus team with exceptional talent from both Forberry and ReDS. We're excited to have them join the smart, dedicated, to passionate folks already here at Altice.

Speaker 2

Commercial real estate valuation is at the core of what we do here at Altice Group. Over the past several years, We've been quite selective with our deployment of capital towards acquisitions. We have consistently messaged that we're focused on opportunities in our core businesses and in our core geographic markets, which include Canada, U. S, U. K, France, Germany and Australia.

Speaker 2

And we've stated that we would be looking for the opportunities that are quickly accretive and that allow us to delever back to the low 2s in about 2 years. Finally, we look for businesses led by teams that see the power of working together with Altus Group to offer clients the best expert services, technology and data available in the industry. Both of these acquisitions meet our criteria. With that as context, Bhavan will now walk you through the results

Speaker 3

in the quarter, and then I'll

Speaker 2

come back on to provide some perspectives on performance and strategy.

Speaker 4

Over to you, Bob.

Speaker 5

Thank you, Jim, and good afternoon to everyone on the call. Our financial performance in the Q3 was steady, underscoring the stability of our business model. Beginning with our consolidated third quarter results, pointed out, unless specified, Growth rates

Speaker 2

I will

Speaker 5

be referencing are on a constant currency basis. Our consolidated revenue experienced a modest increase over last year. Analytics continues to exhibit steady growth even as we proceed through one of the slowest commercial real estate transaction levels in over a decade. Appraisal and Development Advisory are maintaining stable performance and following the strong performance in the first half of the year, Property tax growth slowed, but remained strongly positioned for long term growth. Adjusted EBITDA It was down 13.8%.

Speaker 5

Profit was $900,000 marking a 31.8% increase year to date, who are down sequentially on modest revenue growth and higher financing costs. Adjusted EPS came in at $0.33 Free cash flow stood at $34,100,000 our highest level on record and represents a 96.5% year over year increase. As a function of catch up in our Q3 results from our higher working capital balances in the first half with our transition to our new ERP system. We are fully operational on our new ERP system and our record results highlight our ongoing focus on driving higher free cash flow conversion and EBITDA. Turning to our business segment performance.

Speaker 5

At Analytics, we continue to deliver top line growth and margin expansion. Total revenue was up 4.6% and recurring revenue was up 9.2%. Growth in Analytics continues to benefit from our ongoing transition to cloud subscriptions, valuation management solution asset expansion and new bookings. Adjusted EBITDA is growing driven by higher revenues and improved operating leverage. Our recurring revenue base continues to steadily build year over year.

Speaker 5

At $87,000,000 in the quarter, Recurring revenues were up 9.2% and now represent 90% of the total year to date revenues. This provides us with a stable revenue base even in this current macroeconomic environment. As you're aware, Many of our solutions are considered mission critical with relatively high switching costs. With the year to date commercial real estate transactions down 55% versus 2022. We are pleased with the resiliency of our recurring revenue model.

Speaker 5

To continue to invest in our business to drive operational efficiencies and build skills that we're well positioned for when the market conditions improve. With respect to the sequential change from Q2, this primarily reflects some seasonality at valuation management solutions. Now turning to margins. We remain focused on optimizing our cost structure to drive sustainable improvements across the business. Our margins continue to expand, up 60 basis points over last year and up 4 80 basis points year to date.

Speaker 5

The improved run rate reflects our focus on achieving our target operating model across all P and L line items. Turning to property tax. Our revenue came in 4.1% below last year. To U. S.

Speaker 5

And U. K. Practices posted year over year revenue growth, offset by a decline in Canada with the Ontario Cycle Selection and Extension is impacting growth. With the postponement at the Ontario reassessment for the 2024 year. Growth in Ontario is expected to be muted through 2024.

Speaker 5

Our U. K. Backlog of high quality appeals continues to grow throughout the year and will drive additional revenue in Q4 and throughout to the valuation office agency is working through a bottleneck of checks and challenges associated with the end of the to the 2017 list. We are deploying technology from our iFanLink software to drive efficiency in the U. S.

Speaker 5

Additionally, we've increased our service delivery capacity by expanding our global service center in India. Property tax adjusted EBITDA reflects lower revenues as well as increased expenditures related to compensation and investments in our technology infrastructure to improve our property tax processes and drive future market expansion. And finally, the Appraisal and Development Advisory revenue was steady. The appraisals practice was in line with last year. Development Advisory was nominally down.

Speaker 5

Turning to our balance sheet, we finished the quarter with a to cash position of $44,700,000 and with $314,100,000 in bank debt. The funded debt to EBITDA leverage ratio is defined in our credit agreement was 2.08 times well below our limit of 4.5 times. Applying our cash, the net debt to adjusted EBITDA leverage ratio was 1.98x. As Jim discussed at the opening of the call in relation to the upcoming acquisitions of Brevs and Forwarded. We have obtained a commitment from our lenders to amend and increase our borrowing capacity under the bank credit facilities as required.

Speaker 5

Regarding our capital allocation priorities, We will continue to invest in organic growth via technology, service delivery and go to market investments, pay down debt and maintain financial flexibility for M and A and stock repurchases as demonstrated in Q3. Back to you, Jim. Thanks, Todd.

Speaker 2

The Ulta team continues to improve the fundamentals of the business as we proceed for a protracted pullback in commercial real estate capital deployment. We rebalanced investments across business units and P and L line items. We continue to invest in improving our operations to increase productivity and drive operating leverage. Our cash flow from operations Significantly improved in the Q3 with the deployment and adoption of our new ERP system. We've returned capital to investors through the repurchase of our shares as we believe our own stock represents compelling investment opportunity.

Speaker 2

And this week's acquisition announcements demonstrate our focus on expanding core capabilities in core markets. Now focusing back on our key performance indicators. Our ongoing transition to ARGUS Cloud is tracking the plan. We ended the quarter with 72% of our ARGUS Enterprise users contracted on the cloud, a steady improvement from 55% a year ago. The adoption percentage will move in step functions as several major clients convert to cloud in line with the termination date of their existing contracts.

Speaker 2

The cloud conversion should be substantially complete near the end of fiscal 2024. Turning to new bookings, this metric captures incremental new business growth. Unlike recurring revenue, the timing of bookings can fluctuate, particularly in this current macroeconomic environment. That said, though down from prior peaks, we're still adding new business in this market. New bookings are holding steady in the low $20,000,000 range in line with 2021.

Speaker 2

As a matter of fact, slightly better than 2021. While there is significant cash on the sidelines that has been raised for CRE Investments, bid ask spreads are still high and transaction activity is still muted. CRE investors are still in price discovery and aren't deploying capital at the same levels as recent years. The commercial real estate industry is navigating a cycle not seen in over a decade. And now with additional geopolitical conflicts, uncertainty remains regarding the global economy as we head into next year.

Speaker 2

Our revenue models have proven to be resilient, to organic growth is tied to capital deployment. Now let's discuss the rest and Forberry acquisitions with some more detail. To offer a bit more background on the 2 transactions. Forberry will provide us with a CRE valuation software that addresses capabilities required in the Asia Pacific region. Forberry is complementary to Armistice Enterprise and software is widely adopted in the region serving over 200 firms and over 2,000 users.

Speaker 2

The REMS acquisition to expand our valuation management solutions capabilities and add to our recurring revenue base. Revis has been consistently growing its top to the double digits and expects to generate approximately CAD 63,600,000 in revenue and CAD 19,500,000 in normalized EBITDA for fiscal 2023. That's based on their projections. Together, we believe we're creating a best in class to Valuation Intelligence. Reps will add significant talent and with market expertise and credential value professionals to our team, including a sizable service delivery hub in India, where we too have been growing our global service center.

Speaker 2

This will fast track our productivity at a lower cost to serve and provide us with built in scalability to support our existing and new clients as the market recovers. We are confident in our investment thesis on both of these acquisitions. First, we believe both will elevate the value we deliver to our clients. 2nd, strong strategic fit, both are in the current CRE valuation, both in our Tier 1 geographic markets, Both have recurring revenue models with solutions that are deeply embedded in client workflows. Additionally, Both businesses bring significant asset intelligence, which as you know is core to our long term growth strategy to deliver advanced analytics.

Speaker 2

With the Altus Performance Platform Foundation in place, we can now more efficiently integrate new capabilities. Finally, each brings a sizable installed base, the type of buyer personas we're targeting for advanced analytics. There's attractive cross sell and up sell opportunities with both Rebs and Forberry. Post close, Our funded debt to adjusted EBITDA leverage ratio will be well below our 4.5% maximum capacity limit. Given the expected growth in existing strong cash to close.

Speaker 2

We have a path to steadily delever to our target 2 to 2.5 times range by the end of 2025. To wrap up, While we cannot control macro market forces, we are managing what is under our control. That includes driving towards operational excellence, maximizing our operating leverage and strategically positioning ourselves for the opportunity to serve the industry with advanced analytics. Our year to date results in this dynamic market speak to our execution. Analytics recurring revenue is up 15.7%.

Speaker 2

Analytics margins were up 480 basis points. We're adding over $20,000,000 each quarter in new bookings with analytics. We're delivering on our cloud transition plans. Then the impact of the U. K.

Speaker 2

Annuity reset in Q2, tax is up 9.8% and profit is up 31.8%. Our improved operating foundation sets us up for strong cash generation. This fuels organic investments as we continue to enhance the Altus performance platform, invest in Office Labs, to improve service delivery and deploy technology to improve our own processes and it funds our capital deployment strategies including M and A. The market will eventually turn and when it does, it will also coincide with heightened demand for advanced analytics. As capital deployment increases, CRE professionals will need extra advice and data driven intelligence to drive faster, better decisions.

Speaker 2

We will continue to prudently invest to capitalize on the opportunities ahead. Okay, let's open it up for questions. Operator?

Operator

We will pause for just a moment to compile the Q and A roster. Your first question comes from the line of Daniel Chan with TD Cowen. Daniel, your line is open.

Speaker 6

Hi, good afternoon. Jim, it looks like the RES acquisition comes with a fairly sizable team. How much of their revenue would you say is tied to technology versus consulting services associated with labor outsourcing.

Speaker 2

This is the res business is very analogous to our BMS business in analytics. So that said, it's heavily reliant on technology. Clients have had significant input into the technology roadmap at Reims as well as in Altus. So they are completely tied together, those two elements.

Speaker 6

Okay. That's helpful. And it sounds like they have a lot of institutional customers. So just curious, you mentioned that You're expecting a lot of revenue synergies. Is it from new customers, complementary sets of customers coming in?

Speaker 6

Is it services? Just Any thoughts on what's going to drive or accelerate some of that double digit growth that they're already experiencing?

Speaker 2

Sure. It's they were exploring a similar path that we were, except that we had as Allscripts significantly more asset level data in ARGUS Enterprise across all of ARGUS Enterprise. So it just widens the install base. There are complementary customer sets that the REVS team were successful in penetrating. And They've established so well with lenders and the rest team is particularly skilled at daily valuations, which is something that we do, but not at the same scale.

Speaker 2

So it's extremely complementary.

Speaker 6

Great. Thank you. And just one more, if I may. The recurring the new bookings were down year over year. How much of that is due to strong VMS bookings in the year ago quarter?

Speaker 6

And maybe can you just comment on how the software

Speaker 2

Right. We don't break out the bookings other than recurring. But yes, there is the slowdown in the capital deployment and like the capital raise. So Again, as an investment area continue to raise capital in Q3, not at the same pace as Q2, but there still is new capital flowing in. So that is really what's driving the bookings is as our clients take a pause and get There's a significant amount of Tri Capital that they have on the sidelines deployed before they go raise new funds.

Speaker 5

Yes. And Daniel, just maybe to add to Jim's comment, what we're really looking at this year is consistency in our bookings and the fact that we're maintaining an above $20,000,000 range kind of a demarcation. As you know, as we've talked about several times, Bookings is accretive to a recurring revenue model when you upload churn. And so it's a positive indicator for us at least in light of the market And in light of what we're seeing happening across the sector, we're maintaining a very consistent level of bookings.

Speaker 7

That's helpful. Thank you so much.

Operator

Your next question comes from the line of Yuri Lynk with Conoco Genuity. Your line is open.

Speaker 8

Hey, good evening, guys.

Operator

Hi, Yuri.

Speaker 8

Just back to the REVS acquisition. I mean, the last few acquisitions you've made have been very focused on bulking up to your analytics and data offering. And this one, maybe I'm wrong, but this one appears to be more of a to professional service business with maybe some tech. So my first question is, is there any change in Strategic tact here with this acquisition. And secondly, Just in terms of valuation, I mean, it seems based on what you paid for it, that would be at the very low end in terms of the valuation multiple that most people put on the analytics business.

Speaker 8

So

Speaker 2

how do

Speaker 8

we think about that going forward?

Speaker 5

Right.

Speaker 2

The res business and the BMS business, the incremental contribution margin from both sides. So whether sorry legacy base or the new base is it looks to have a similar profile to data analytics margins. So these are very tech heavy expert service businesses, which allow for significantly higher margins than other types of services business because of the amount of leverage we get out of the deck. And As we've been saying and as the rest team has demonstrated, there's leverage in acquiring Not just wage arbitrage with the mobile service center approach, but really talented people in those markets to complement our teams. So it's that combination of GSD and technology deployment and that technology being embedded in the client workflows that make these businesses very sticky, Mission critical and high contribution margin.

Speaker 2

So for every incremental dollar, a Significant amount drops to the bottom line.

Speaker 4

Okay.

Speaker 2

So Yuri, to your point on The multiple that we paid, that's why we are we feel quite good about this acquisition. It was the right timing in the right market conditions to pick up an absolutely fantastic asset. And as far as strategic change, there's absolutely no strategic change. It's selling advanced analytics into the most sophisticated investors in commercial real estate and that is our installed base for VMS and that is the rest installed base.

Speaker 8

Okay. How did you come across revs? Were they a competitor? Was this a business That was put up for sale and any color on that? Was it a competitive auction type situation?

Speaker 2

Rebs has been a formidable competitor for years. The teams have known each other and my team has the legacy team has had greatly spread for the rest team over the years. And as we said, they've been able to take parts of the market that Have been complementary to us. So we've had our swim lanes. But yes, it's complementary.

Speaker 2

We've known the business for quite a while and they were running through they did run a process to sell it, atasitis, to CarbonNow.

Speaker 8

Okay. I'll turn it over. Thanks.

Operator

Your next question comes from the line of Kevin with Scotiabank. Kevin, your line is open.

Speaker 9

Hey there. Good evening. Just another question on revs. I know you run across them quite often. I'm trying to think of some of For instance, though, daily valuation, do they target different types of CRE assets in any way, different verticals?

Speaker 9

Is there anything in their business that might, VMS has some seasonality in your business? Is there anything in their business model that might to smooth out some of that seasonality. I'm just trying to think of any other differences here of them versus you.

Speaker 2

The risk is expected the markets that they've been winning in and Pension funds is a specific area where the REPS team has been quite successful versus all of this. The daily valuation again is skill sets that we've been automating And they've done a great job building out. As far as the asset types, There's overlap because we both focus on everything other than really residential, except where residential represents a commercial real estate asset thesis. So we but besides that, There's overlap, our core, if we look at our top, let's say, 30 clients and we look at their top clients, There is a different asset mix in the client portfolios, but the way the fundamental of Performing valuations of both companies cover that.

Speaker 9

Yes. Okay.

Speaker 5

Kevin, There are heavily recurring revenue model as well to you that have long term contracts with clients as well to address your issue in regards to smoothing out seasonality.

Speaker 9

Okay. That's helpful. Kind of to my next question, just so does their recurring Revenue then like your recurring revenue is a mix of Argus and then VMS. So theirs would look like essentially like your VMS business, what you would define as recurring revenue in that regard, correct?

Speaker 2

Correct, which is long term contracts. On the seasonality, the question there is, You still like the Revlon has similar profile where you have your annual valuations that will provide a spike in Q4, let's say, versus Q1. And then to the Q2 the June 30th quarter, you have your semi annuals. So You can just you can follow the quarters and see year end and mid year you are going to we will have higher volumes. So As we talked about the business, we talked about price times volume times frequency and frequency for both businesses to increases in Q2 and Q4.

Speaker 5

Okay.

Speaker 9

And then I guess for modeling, if we're looking at that recurring revenue to a line that was sort of down a little bit quarter over quarter. As we think about to your next point there on Q4, some seasonality, does that Should it tick up? I guess another way to think about this question is, is there a way for us to think about your recurring base to Split between Argus and then VMS, just trying to get some comfort around sort of how to think about like a good base for the business and then you layer on VMS on Any color there?

Speaker 2

Yes. The ARGUS looks like a typical SaaS to business where it's straight ratable by month. And Yes. The Q4 is exactly the answer to the last question, which is in Q4, we're going to see frequency spike up for BMS. The thing to keep in mind is as there's seasonality, right, so these are to fully recurring revenue models.

Speaker 2

They do have seasonality that the retention, the Stickiness of these offers in BMS, whether it's our BMS business or the reps new business, These are highly, highly sticky businesses with net retention rates over 100%.

Speaker 9

Got you. Okay, understood. Just the last one for me then. As we look to 2024 and Cloud migration, you've got about just under 30% of the way to go. How do we think about just the strict uplift just strictly from the remainder moving to the cloud and turns on any sort of pricing, this is before up Sales or the other data analytics offers on top, just is there any benefit?

Speaker 9

Can you help us understand how much more you could get in 2024, just on the migration of cloud alone. Thanks.

Speaker 2

The cloud migration for a Standard Time, so if they're paying basic maintenance, they are we've had maintenance pricing increasing over the years. So they're probably in that 1500 to 2000 range per user And the cloud will drive, again, depending on the life cycle of the client, At this point, it will drive about a 50% increase per user For so maybe not a minute, but you do it, the 30% left. But Jeff, I'm trying to not answer that we're not giving guidance for 2024. So I'm trying to give you as much color on that. But obviously, we have the adoption curves worked out when crossover, when slowdown in growth from cloudless.

Speaker 2

But As I said in my earlier remarks, that transition will take us towards the all the way towards the end of 2024.

Speaker 9

And do you think are the big chunkier ones closer towards the second half? Is that how to think about it?

Speaker 2

Yes, they're spread out some there's a couple that The contract expired in 2025, but those clients are already talking to us because There are partners in their ecosystem, many of them most of them have moved already. So they get into compatibility issues if they're They can't get the same collaboration functionality that they get. If they're not in cloud, they can't to collaborate with others in the ecosystem as efficiently. So we expect that, like I said, the majority of it will be complete in

Speaker 9

2024. Okay, got it. That's helpful. Thanks a lot. I'll pass the line.

Operator

Your next question comes from the line of Seventh with BMO. Your line is open.

Speaker 7

Great. Thank you. Good evening. Lots of great color so far, so thank you. But I just wanted to follow-up on a couple of things, specifically as it relates to revs.

Speaker 7

I was wondering if you could give just a little bit more color around strategically what parts of the market Does REVS give you access to that you otherwise wouldn't have been able to conquer on your own given the strength of your existing BMS platform. Like I'm just trying to understand what sort of the client crossover is, or more specifically, what part of the market you can get to. You mentioned pension funds, but I thought you already had a handful of pension funds pension fund clients already. So just hoping to get some more color on that.

Speaker 2

Yes. So Steve, the key takeaway here is that, as I said, our VMS business, the Rev's VMS business It's extremely sticky because it's in the workflows of those clients As they're building out their the rest team has a fantastic roadmap for technology. Going forward that We'd say right now, I'd say we have the advantage. They're building out a platform. We're building out the APP.

Speaker 2

There's opportunity in there to converge to get some synergies out of the 2 businesses. But it's some of the functionality like we talked about such as daily evaluations where they are ahead of us. And we get into some of the state run pension funds, Those types of areas, the reps team has absolutely fantastic reputation. It's hard to to place that we overcome that on new business. And it was To the earlier question, we got given the multiple of the business and the synergies, it was to the right time to try to put these businesses together.

Speaker 7

Okay. Okay. Are you able to give a better sense of what the revenue synergies could look like?

Speaker 2

As we said, it's the I'm not going to give the exact number that we've baked in to our thesis, but If you just go to our overall strategy, the advanced analytics strategy that we've been discussing is targeted at our VMS client base. So this gives us a broader base to take the new capabilities that we're building and cross sell into. So this is the Rev's client persona is the exact persona for Advanced Analytics as separate companies. We wouldn't necessarily been offering Advanced Analytics to the Rev's client base, although many of them are our artist enterprise clients. So there's a synergy there in the Office Performance platform, but this is all about expanding our client base so that we can bring the Advanced Analytics into both customer bases.

Speaker 7

Okay. I see. I see. Okay. Thank you.

Speaker 7

And then just in terms of the funding behind the deal and just some of the math. Can you just give a little bit of color or maybe something offline, but just around what kind of rate that is associated with the incremental leverage you're taking on. And then do you have a number for what your pro form a net debt to EBITDA might look like? I know you said it's below certain level, but I'm just wondering if you can if there's anything to be more specific?

Speaker 5

Yes. So we have a very strong to the partner group associated with our covenants. So our pricing remains relatively similar to what we had existing for the duration of our term, which again speaks to the confidence that the lenders have in our model and the

Speaker 7

Okay. And then on pro form a net

Speaker 2

to do that, like we're looking at

Speaker 7

a number kind of in 3.5x, is that reasonable?

Speaker 5

Yes. As Jim mentioned, our covenant allows us to go to 4.5x. And even when you factor in our own working capital requirements in Q1, we're going to be well below the 4 point We're going to continue to have our focus on free cash flow generation. We have a very strong organic growth model. The acquisitions are accretive to our growth, and so we're going to be able to deleverage very quickly back to roughly the levels that we're sitting at now in over the course

Speaker 2

of the next 18 months. Okay,

Speaker 7

great. And then I'm just going to shift gears entirely to tax. And just wondering if the Ontario cycle timing sort of weighed on the numbers this quarter and it sounds like it's going to continue. Can you just remind us how big Ontario is of the tax business.

Speaker 5

It's a good portion of the Canada revenues and it's a portion by at least a double digit portion of total tax revenues. With that said, we have a position across many different provinces across Canada, which allows us to balance off the offsets that you may see in a particular cycle, but for sure it is a meaningful part of our Canada number. We've got a very strong position in the U. S. There's a lot of white space for us to continue to grow there.

Speaker 5

And obviously, as we get deeper into the renewal into the new cycle within the U. K, we're going to continue to build on that So from a portfolio perspective, despite the fact that Ontario is being pushed out, And we do have offsets across the portfolio, give us comfort to be able to manage it from a global tax portfolio perspective.

Speaker 7

Okay. That's great. Thank you.

Speaker 2

Steve, the other thing we've done is we've Our folks in Ontario have been fantastic about working across the other provinces, Right. So as we're seeing growth in particularly in Western Canada, we've been able to accordion our resources up and down based on the cycle that any one of the provinces is in, at any given time.

Speaker 7

Okay, great. Thank you.

Operator

Your next question comes from the line of Richard with National Bank Financial. Please go ahead.

Speaker 10

Yes. Thank you. I had

Speaker 3

a question on the bookings. Last quarter when you had the nice rebound in bookings, I got the impression here that you felt reasonably confident that the business sort of had normalized a bit. So I'm just trying to understand what has sort of happened that we've seen a bit of a reversion in that bookings. I get that there's a bit of volatility, but it seems to be a bit more pronounced than we had been expecting.

Speaker 2

I think if you go back and you look at my and Pubben's comments, you'll see that Yes, there was we think Q1 completely was an overreaction. In Q2, there was a lot of exuberance that we were absolutely saying, It's the same market guys. And in Q3, it's the same market. There's lumpiness to big contracts and the timing so that when you do to quarter over quarter versus the prior year, right? This is kind of going back to the old world of term contracts in software Where you boom, you have a big 3 year contract, then you would.

Speaker 2

Then you have a big 3 year or 5 year contract, then you would. That's kind of the bookings Story here, we feel like we've been in the same environment since March, like Clearly, March with SVB changed the trajectory of CRE, But in Q2, we said it feels the same as it did in March, and we're saying in Q3, it feels the same. So we're in that price discovery mode. Bookings are lumpy. And That lumpiness gets masked when there's a tremendous amount of capital flowing into commercial real estate as an asset class.

Speaker 2

When there isn't a lot of new capital coming in, you can see the lumpiness a little more clearly.

Speaker 5

Yes. And maybe just to add to that, again, just as a point of reference, I think that it's the consistency in our bookings number that we've seen over the course of the 9 months that gives us confidence that clients are still to committing pricing, locking in resources for our services. And so it's really the consistency in our total bookings levels that continues to to the level of comfort. Again, in a recurring revenue model where you have a high level of client retention As you have mentioned, the critical solutions that you're offering clients, some things are additive. It's just a matter of timing

Speaker 2

We don't publish a backlog number, but the way to academically think about this is our backlog for BMS continues to increase nicely.

Speaker 3

Okay. Thanks. That's helpful. Obviously, we're still trying to get a better understanding of this ReLift business. Is there or can you talk to any degree of customer overlap?

Speaker 3

Because obviously, you've got a broad portfolio. So and I know that Part of the strategy of the revenue synergies potentially, but maybe talk about that.

Speaker 2

If you're asking is there revenue breakage because of overlap, There is not, other than Rev's itself was a to a smaller artist client, because artist is the standard in the industry, As you know, but the client bases are very complementary. Do we have common clients? We do where we might serve different portfolios at the same client. But again, the revenue This is all additive.

Speaker 3

Okay. And then what's been sort of the growth rate of revs over the past, call it, 3 or 5 years, I mean, can I get a run rate just to get some historical perspective on that business?

Speaker 2

It's double digit teens.

Speaker 3

Okay. So basically the current run rate that you published? Yes.

Speaker 2

Okay. All right. Thank you. Clearly, like as capital was flowing in, they had peaks as well, but The business is growing similarly to ours.

Speaker 1

Thanks, Richard.

Operator

Your next question comes from the line of Paul Treiber with RBC Capital Markets. Your line is open.

Speaker 4

Thanks very much and good afternoon.

Speaker 10

Just want to switch gears to Forbury for a couple of questions. Could you there's no disclosure on the size. Can you sort

Speaker 5

of put the magnitude of

Speaker 10

it in perspective for us?

Speaker 2

Yes. Paul, it's a smaller acquisition, gives us a nice ARR bump, but sort of this way, it's below the materiality to the threshold of what we would disclose.

Speaker 5

I think we published there about headcount of around in the 30s. So that's in I should give you relative size and scale, but they've got a pretty good base of clients in the Asia Pacific, Australia region that was to our attractive test.

Speaker 2

It's a similar profile to our Rethink acquisition on the tax side.

Speaker 4

Okay. That's helpful.

Speaker 5

We can ballpark it. The Strategy, so giving you the Asia Pacific footprint, how

Speaker 10

do we think about like the product integration strategy? I mean, when you migrate those customers eventually over to Argus Cloud, you run it separately. How do you think about that?

Speaker 2

The APP allows us to take various applications and tie the datasets together. So the where we have the data rights with the clients, we will be able to ingest the data into the APP. One of the features that has made for very successful in the region is a to simpler user interface. So you can think of it AE and Forberry Kind of like Excel where I'm sure Microsoft can make changes to the interfaces of Excel, but you have so many users They know how to go in and work with the application. So we're not going to be forcing clients to make any drastic to changes other than through our Knowledge Graph technology, which we picked up with the Reonomy acquisition, we'll be able to connect the data across the various applications.

Speaker 2

For the last I've been here now going on 3 years from when I came into the analytics business. Each year we've looked at the investments required to have a fit for purpose product, making AE fit for purpose for the Australian market. And each year, we've de prioritized because Forberry Was so formidable in the region that by the time we did the development, built the functionality, built the go to market, Got through the sales cycle sold through Forberry. This has made tremendously more sense to just acquire the leader in the market.

Speaker 10

That's good perspective. Just Last question, just in regards to REVS, just trying to look up more information on it. Is that the same business that Citus acquired in 2014, the one that was founded in 1931.

Speaker 2

I don't have that history at my fingertips. Sorry, Paul. As you guys can see, it's been a busy week here. Yes.

Speaker 1

It would have been founded about 20 years ago, but it's been in the market for about a decade.

Speaker 4

Okay. That's helpful.

Speaker 5

I'll send you the link to

Speaker 1

the website if that helps.

Speaker 4

Yes. Thank you all personally.

Operator

Your next question comes from the line of Gavin Fairweather with Cormark Securities. Your line is open.

Speaker 10

Hey, good afternoon. Just on reps, curious when you modeled it, how to what extent were other kind of cost synergies between the two organizations or enhancing the margin of your existing BMS business through kind of scale and their efficiency. Like to what part of what extent was that part of your investment thesis?

Speaker 2

There are synergies, particularly in system development. As I said, Some of the Rev's future roadmap is absolutely fantastic. And we're looking forward to bringing that together as The reps team was building out what they call BMS Next. And as we were building out the next generation of the BMS platform on the ATP for us. So there's absolutely synergies there.

Speaker 2

This will accelerate our GFC, they again built a fantastic team there. So that brings us forward as far as having scalability And we're leveraging the GSE across all of our businesses, particularly the tax business as a special focus for us right now on leveraging more offshore capabilities.

Speaker 10

Got it. And just a quick, maybe clarification. Can you just help us understand kind of the process to close? I think you said first half of next year.

Speaker 2

Yes. So again, one of the things so we have our own estimates. This deal Obviously, we need regulatory approval. So there's no joint planning that we can do on with the rest team until we clear regulatory hurdles. Even to the point where like the client data, we had to keep it A clean room, so where our market facing folks and even myself and Pubben Can't really rip through their client base, but our VMS team on an anonymized basis was able to go through to all of that.

Speaker 2

And obviously, our legal teams have been through all of the customer contracts on a named basis. But we're not at the point where we can do joint planning on synergies or to market until we get that regulatory approval behind us.

Speaker 10

Got it. That's it for me. Thank you.

Operator

Your next question comes from the line of Christian with 8 Capital. Christian, your line is open.

Speaker 4

Hi, good evening. I'll ask one more question on revs. You just touched on the acquisition closing and to your first half of next year, some of the planning to occur after that. But as we think about the integration, the business models, the pricing strategies, Is there a big lift to get everything under one umbrella at Altus? Is that the plan to integrate branding in the go to market?

Speaker 4

Or do to Envision keeping the entities sort of separate, owning their own domains, portfolios for the 1st bit until it's a more natural sort of integration.

Speaker 2

Great. Thanks, Christian. It's again from We can't really lay out go to market plans or certainly are not factoring in pricing at this point until we get through regulatory approvals and then we can start looking at those types of items. What is really attractive to us again is being able to to upsell the revs base with advanced analytics.

Speaker 4

Okay. That's helpful. And I'll ask one more question, on the core business. When we think of the model price times volume times frequency and 0 in on volume there. Is it safe to assume the number of assets is flattish with the lack of Transaction activity are slightly down quarter to quarter or how is that trended?

Speaker 4

Is there any color you could provide around that direction there?

Speaker 2

Our number of assets are up because we do have bookings from earlier in the year and prior years that have those assets are coming online. So it's not at the same growth curve that it was over the last couple of years, But the number the total number of assets that we're servicing in the quarter is up and on an annual basis, it's still up significantly.

Speaker 4

That's great to hear. Thanks Thanks for

Speaker 2

taking my questions. Our revenue continues to grow based on prior bookings and we'll continue to do so for the foreseeable future because we are still adding bookings each quarter.

Speaker 5

Yes, it's really Christian, just to hear price tends volume and frequency, really frequency implication as it related to this quarter?

Speaker 2

Versus last quarter. First of last quarter, correct. Right. The midyear valuations that you don't get in Q3, We expect that to pick up in Q4, just from a volume and a frequency basis.

Speaker 4

Understood. Thanks for clarifying.

Speaker 2

So Christian, hitting that from a different angle, When transactions aren't occurring, our clients are also not taking their asset accounts down, Right. There's natural attrition and puts and takes as our clients trade portfolios. But in general, this is why we use the word resilient so often around our revenue model. The clients aren't reducing Our seats, they're not adding at the same level, but they're not reducing. We have the cloud conversion that will continue through 2024.

Speaker 2

And on the VMS side, as clients hold those assets, they need valuations on them. In some cases, frequency evaluation is going up as LPs want to understand the market better.

Speaker 4

A lot of factors at play. Thanks for all the color and good to see volume turning in the right direction. Thanks. Thank you.

Operator

Your next question comes from Scott Fletcher. Scott, Your line is open.

Speaker 11

Hi, good evening. Margins at ReDS look like they're strong at over 30%. Can you give us an idea of how those levels compare to your VMS business? And if they are stronger, what do you attribute that strength to? And can you replicate it going forward?

Speaker 2

We have more scale in our business, let me put it that way. So our margins are a bit better. What I really focus on, what I've been focused on with the analytics business since I got here is incremental contribution margin leverage. And that's what I'm saying. When I look at that from My history in data analytics and the deployment of technology that we have, our incremental leverage Looks like your standard P and L, like to think about standard gross margins for a data and analytics company.

Speaker 2

That's what the BMS margin profile looks like. So So, Amit, there's opportunities to combine lift the margins, absolutely. And as the market comes back, as we'll see accelerated margin expansion.

Speaker 11

Okay, thanks. And then I just want to finish by re asking a question earlier in the call that I think I might have missed. Can you give us an idea on a pro form a basis, how much of the analytics Recurring line is ZMS versus the ARGUS Enterprise Business?

Speaker 2

Okay. All right.

Operator

Thanks, Scott. Your last question comes from the line of Stephen Fagan with BMO. Your line is open.

Speaker 7

Great. I just had a quick follow-up. Just in terms of the purchase price, you talked about there's an acquisition related tax benefit. Is that something you expect to realize immediately? And I guess how much visibility do

Speaker 8

you have into that coming to

Speaker 2

fruition. That's a present value number That we're showing so that it's EBITDA is not exact proxy for the cash flow implications to this deal, which is why we thought it was important to at least give a flavor for what the tax step up benefit was going to be for us.

Operator

Okay. That concludes the Q and A session. I will now turn the call back over to Jim.

Speaker 2

All right. Well, we appreciate everyone On the call, it's been an exciting week here at Altus Group. For our new colleagues, I'd like to say welcome. We're really excited. We're looking forward to getting both of these acquisitions closed.

Speaker 2

Great set of questions from the analysts tonight. Thank you. And I appreciate that we do have a regulatory hurdle to clear and then I will be able to provide additional clarity once we get past that and we can really start joint planning with the rest team. On the Forberry side, it's not just the recurring revenue that we picked up, it's that Absolutely fantastic reputation in the Asia region. It's a lot of our existing North American clients have operations in that region and use Forberry, so we're really excited to pick up that team.

Speaker 2

It's not just the financials, but it's a great product team that will complement skill sets of the to great technologists that we already have in office. So thank you very much for your time and look forward to speaking to all of you soon.

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Key Takeaways

  • Acquisitions: After Q3 close, Altus Group announced the purchases of REVS and Forberry to enhance its commercial real estate valuation capabilities, expand its talent pool and recurring revenue in key markets, and support its goal of deleveraging to the low-2x range within two years.
  • Q3 financial results: Consolidated revenue saw modest constant-currency growth, adjusted EBITDA fell 13.8%, net profit rose 31.8% year-to-date, and record free cash flow surged 96.5% to $34.1 million, driven by ERP system adoption.
  • Analytics segment strength: Analytics revenue increased 4.6%, recurring revenue was up 9.2% (now 90% of segment revenues), margins expanded by 60 bps, cloud adoption reached 72% of Argus users, and new bookings held steady at approximately $20 million per quarter.
  • Property tax and advisory: Property tax revenue declined 4.1% due to Ontario reassessment delays offset by US and UK growth, with ongoing investments in technology and service capacity; Appraisal & Development Advisory performance remained stable.
  • Balance sheet and capital allocation: The company ended Q3 with $44.7 million in cash, $314.1 million in debt (net debt/EBITDA of 1.98x), well below its 4.5x covenant limit, and will continue to fund organic growth, debt reduction, M&A and share repurchases.
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Earnings Conference Call
Altus Group Q3 2023
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