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2019-11-09 21:29:50

Altus Group Limited (OTC:ASGTF) Q3 2019 Earnings Conference Call November 7, 2019 5:00 PM ET

Company Participants

Camilla Bartosiewicz – Vice President-Investor Relations

Angelo Bartolini – Chief Financial Officer

Bob Courteau – Chief Executive Officer

Carl Farrell – President

Conference Call Participants

Yuri Lynk – Canaccord Genuity

Richard Tse – National Bank Financial

Maggie MacDougall – Cormark

Stephen MacLeod – BMO Capital Markets

Deepak Kaushal – GMP Securities

Paul Treiber – RBC Capital Markets

Operator

Good afternoon, ladies and gentlemen. Welcome to Altus Group’s Third Quarter 2019 Financial Results Conference Call. During the presentation all participants will be in listen-only mode. As a reminder, this conference is being recorded.

I would now like to turn the conference over to Ms. Camilla Bartosiewicz. Please go ahead.

Camilla Bartosiewicz

Thank you, Michael. Good afternoon, everyone, and welcome to Altus Group’s Third Quarter Results Conference Call and webcast for the period ended September 30, 2019. For reference, our earnings results news release was issued after market close this afternoon and is also posted on our website, along with our interim MD&A and financial statements. Please visit altusgroup.com for these documents and for more information.

On today’s call, we’ll begin with an overview of our performance, including a discussion of our financial results and noteworthy developments. We’ll finish by taking questions from analysts and institutional investors. If we miss anyone, please call me directly after the public call concludes.

Joining us today is Bob Courteau, Chief Executive Officer; and Angelo Bartolini, Chief Financial Officer; and we also have Carl Farrell, President on the line joining us live from London as he’s currently there for our Annual ARGUS Connect European Client Conference.

Before we get started, please be advised that some of our statements today may contain forward-looking information. Various factors and assumptions were applied or taken into consideration in arriving at the forward-looking information that do not take into account the fact of events announced today.

There are also numerous risks and uncertainties that could cause actual results to differ materially from those set out or implied by such statements. These are all described in our filings on SEDAR. Our responses to questions should also be considered in the context of the disclosure in those materials.

Also, please be reminded that Altus Group uses certain non-GAAP, non-IFRS measures as indicators of our financial and operational performance. Readers are cautioned that they are not defined performance measures under IFRS and may differ from similar computations as reported by other similar entities. And accordingly, may not be comparable to financial measures as reported by those companies.

We believe that these measures are useful supplemental measures that may assist investors in assessing their investment in our shares and provide more insight into our performance.

And with that, I’ll now turn it over to Angelo, who will start with a review of our financial performance.

Angelo Bartolini

Thank you, Camilla, and thank you all for joining us on the call and webcast this afternoon. In an effort to keep the prepared remarks brief, I’ll begin with the consolidated financial review of our performance in the third quarter, and then drill into business segment performance.

Overall, we are very pleased with the sustained double-digit top line and earnings growth in the third quarter, driven largely by another strong quarter at Property Tax and by robust performance at Altus Analytics.

Consolidated revenues grew 14% to $137 million, driven primarily by 27% revenue growth at Property Tax and 14% growth at Altus Analytics. Our Valuations and Cost Advisory segment posted a single-digit improvement, while Geomatics was down on a comparative basis.

Consolidated adjusted EBITDA was up 20% to $19.8 million for the quarter, reflecting the strong earnings performance at Property Tax. Consolidated profit in accordance with IFRS was $5 million, and $0.13 per share basic and $0.12 per share diluted. Adjusted earnings per share for the quarter were $0.30 compared to $0.22 last year. And highlighting our strong cash generation during the quarter, cash from operating activities were $23.3 million.

Moving on to the segment review, at Altus Analytics revenues were $50.4 million, up sequentially 7.2% and 14% over last year. The noteworthy drivers were Appraisal Management solutions, where we continue to see existing customers adding more assets on our platform, new customer wins and growing revenues from international markets.

Software services grew mainly due to the acquisition of One11 in July this year. And overall, higher software revenues as a result of growing subscription and maintenance revenues supported by a resilient 97% maintenance renewal rates for ARGUS Enterprise. Acquisition growth represents 9% of the 14% revenue growth in the quarter.

The cloud and subscription pricing strategy we presented in June is well underway and on track. As of early Q3, new customers to AE can only purchase cloud licenses on a subscription basis. In addition, sales of the EstateMaster and Developer have also shifted to subscription pricing. Obviously, as we have discussed in June, this shift is currently having an impact on recorded revenues, as compared to prior year when most sales were on a perpetual basis.

I’ll also point out that starting in January 2020, all software sales will be on a subscription basis. Thus, add-on sales of AE on-prem licenses to existing customers will also shift to subscription terms. This change will have a modest impact to overall revenues, as we had outlined in June, but more importantly, will be positively contributing on an economic basis to ongoing recurring revenues.

On recurring revenues for the third quarter, where measurement of contract values for software subscriptions are recognized ratably over the contract term, were up 12% to $38.3 million. I’ll point out that this is the fifth consecutive quarter that our recurring revenues were up in the double digits.

Adjusted EBITDA was $10.4 million for the quarter, up 3.2%. The margin came in at 21%, in-line with our expectations as the transition to cloud and subscription pricing began in the quarter. Product development spend, which we saw rising over the course of the past two years in order to build our cloud products has now began to flatten out. Overall spend should now grow proportionate with our revenue growth.

As a result, margins are expected to remain at consistent levels going into 2020, given the impact of cloud and subscription pricing and begin to rebound in 2020. Again, as we showed in our June presentation.

For the balance of the year, we are on track with the guidance we have provided. We expect revenue growth for the full year in the range of 7% to 12%; recurring revenues, 16% to 19%; and adjusted EBITDA margin, 17% to 20%.

Moving on to our CRE Consulting segment, revenues rose 17% to $76.4 million and adjusted EBITDA rose by 66% to $18.6 million, driven primarily by the continued strength of Property Tax. In fact, Property Tax revenues were up 27% to $49.3 million, and earnings were up 105% to $14.8 million.

Performance was especially strong in Canada and the UK. In the UK, operations benefited from the continuing settlement of 2017 list cases from a healthy backlog and from a healthy backlog in Canada. The growth in revenues was driven by a rebound in case settlements in Ontario as well as robust performance in Manitoba and Québec.

Our outlook for the year for Property Tax remains solid. We’re on track with the expectations of appeal settlements. Our expectations remains that we will have a gradual pickup in appeal settlements in both Ontario and the UK for the remainder of the year, building into 2020.

Also, given the backlog of cases, it is expected that a significant number of appeal settlements would likely spill over into the next cycle. As we have stated previously, we continue to expect record revenue year for 2019, which sets us up very well going into 2020.

Moving on to the other business segments. Valuation and Cost Advisory performed as expected, with solid growth coming from our Canadian valuations practice. We expect to see steady performance and stable margins as we move forward. At Geomatics, revenue and earnings were down, reflecting the ongoing macro challenges in that space and specifically reduced activity levels. Nonetheless, the business is on stable footing, and we are well positioned to remain profitable.

Finally, in our corporate division, corporate costs trended higher, consistent with earlier statements that they would increase as we continue to scale our business and as a result of higher accruals of variable compensation.

At the end of the quarter, our balance sheet remained strong. Bank debt stood at $146 million, representing a funded debt-to-EBITDA ratio of 1.72 times, a notable improvement from Q2 when it was 1.9 times.

Our cash position at end of the quarter was $56 million. As noted in our MD&A, our credit facilities mature at the end of April next year. We’re currently in the process of reviewing our credit agreements and expect to negotiate a renewed facility well in advance of maturity.

And with that, I’ll now turn it over to Bob.

Bob Courteau

Thanks for that summary, Angelo, and good afternoon, everyone. We’re really pleased with the sustained double-digit top line and earnings growth in the third quarter, and we’re especially pleased with the operational progress.

Q3 was a pivotal transition quarter for our Altus Analytics business, and we’re tracking on plan. And at Property Tax in Q3, we’re seeing the acceleration of case settlements in Ontario and the U.K. and the rest of the business is performing well, so we’re moving nicely through the backlog per our expectations.

Let me start with Altus Analytics. Overall, we had a healthy performance as Q3 was the first quarter of our transition where new subscription pricing came into effect for all new customers for our ARGUS software business.

As we discussed in our investor call early in the summer, 2019 is the first phase of our transition to a full subscription-based model for our software business. Our hybrid strategy is intended to be customer-friendly and minimize customer disruption.

Unlike past quarters, in Q3, new customers can only buy on subscription terms. And while we continue to allow existing customers to buy conventional perpetual licenses, we’ve started to see a shift for those add-on sales are also come in on subscription terms which is a good precursor to 2020, when all software sales will be on subscription terms starting in January.

During these two quarters of the first phase, Q3 and Q4, we have a few things that we’re trying to accomplish. Initiation of the transition of clients to the cloud, the operationalization of our cloud infrastructure, conditioning all of our clients on the new pricing model, and building our cloud customer and subscription backlog for 2020.

We’re making very good progress against all four of these initiatives and the cloud pipeline for 2020 is building nicely, including a good mix of volume from smaller-sized transactions and some larger deals that are planned to take advantage of what ARGUS on the cloud offers.

Client interest in ARGUS Enterprise on the cloud is solid, and the conversations we’re having with clients validates our view that it’s a question of when and not if clients recognize the value, and we’re really not getting any pushback.

In fact, the market is moving towards subscription pricing and cloud licensing, so this move is not surprising to them as they’re seeing it from other vendors as well. Having just launched the first cloud-enabled version of ARGUS Enterprise three months ago, we’re very encouraged by the feedback and experience from the numerous clients who are now on our cloud platform.

Consistent with our plans for the pace of this transition, the early adopters have been largely from the small and medium business size client base, which we refer to as SMB, and comprised of both net new customers but also numerous existing clients who proactively wanted to migrate over.

Recall that we have a very focused approach this year by segmenting our customer base, leading with migrating some of our current smaller customers. That being said, we’re also enjoying very positive engagement with a larger, more influential firms who will help drive adoption through the ecosystem, but also have more complex environment and longer sales cycles. They do get the value.

The drivers for cloud adoption have interestingly been based more on the value proposition of the cloud, primarily on having a centralized database they can access from any computer. With the cost savings related to reduced IT infrastructure, simply a positive outcome for all of our clients.

Without a doubt, everyone sees the strategic value and importance of running their operations on the cloud, and our clients are seeing value from the enhanced investment, visibility through more extensive collaboration across our teams and better utilization of their data.

And even more simply, there’s an ease with the ability to be able to access all of your AE files from any computer which enriches data access, reusability, sharing and the contribution of data to your company’s workflows and to the industry workflows.

Some early examples, one is an existing customer and proactively manage – wanted to migrate to the cloud, a New York-based asset management firm with approximately 25 users. Their primary reasons for moving to cloud were a more efficient deployment, data collaboration with their team and elimination of allocated server space and software management. This is a very short sales cycle once they saw the compelling value of ARGUS Cloud.

Another example, a company from the West Coast, a customer that is net new to ARGUS, although the team has used ARGUS previously in their career, recently bought several license on a multi-year contract. This particular company has a cloud-only strategy, and they represent the new generation of firms who are forward-thinking in how they operate and who see value in cloud software, a centralized database, access to their data and the ability to access this data from any computer.

With the majority of our transactions have been in the SMB space and are relatively small in dollar terms and number of users, roughly one third have been multi-year deals as customer aim to lock in current pricing and make a long-term commitment to the platform.

And pretty cool, geographically, these transactions have been from all over the world. Primarily, of course, from the U.S., but also extending to other markets in the world, including Singapore, Germany, Australia, South America, Ireland and the U.K. ARGUS is a truly global solution.

Our expectation to the larger organizations per the plan we presented in June is that they will start to move to a cloud over environment over time as those transactions are more complex, and there are more considerations on their IT needs.

But for the larger organizations, being on the cloud and being able to leverage all of their data is an absolute strategic priority. And based on the conversations we’re having with our largest clients, there is solid interest and will to move, with many customers already operating a cloud-only strategy.

We have some sizable deals in the pipeline, and we feel confident the migration of our existing customer base will accelerate in 2020. Further, we expect today’s announcement of the launch of the API toolkit will be a big incentive in the consideration. And I’ll give you a little bit about that in a second.

Overall, I’ll just say that we’re tracking per plan, and we’re very encouraged by our results from the third quarter. Our cloud pipeline to support 2020 is building, and we’re on track with the plan. As one small indicator, I’ll just say that we added more cloud customers in the first three months since it was launched than we did in the first year of ARGUS On Demand.

We’ve had take up from new clients but also many migrations from existing clients who proactively wanted to move over. These are good early signs.

Operationally, Carl can elaborate further during the Q&A session, but we’re also in good shape. The sales force is ready, marketing and product development teams are geared up, and we gained some good experience during the quarter on supporting our cloud customers by way of our own migration to cloud through our services businesses, including Appraisal Management and evaluation groups and through our initial cloud customers.

Today’s announcement at ARGUS Connect in London about the API product is a particularly important one to our customers. As the global CRE industry continues to be challenged with disparate systems and disjointed workflows, resulting in data complexities, ARGUS API will provide greater access to and integration of the important CRE data between ARGUS solutions and a variety of third-party sources, data sets and applications.

Simply, it will allow customers to easily connect ARGUS Enterprise workflows and data of their own systems as well as to other software systems and third-party data. This will be a stand-alone product and available only to those on the cloud. And we expect that this will also help facilitate cloud adoption.

Touching briefly on our Appraisal Management solutions, as Angelo mentioned, they had a very good quarter. This remains an attractive growth opportunity for us, and we’re making some general enhancements to our data exchange workflow software to include some of the new functionality that we expect will drive both client value and improve our internal workflows.

And also, by integrating with ARGUS Cloud and moving all of our internal database to ARGUS Cloud, you’ve heard me say this before, this offering increasingly converges with our ARGUS transactions.

So all to say, we’re making a great shift to be an enterprise company as defined by global adoption of ARGUS Cloud as a data and valuation standard, commitment by our customers to a full stack of solutions from valuation to portfolio and fund analysis, broadened and overlapping integration with Appraisal Management and our data solutions offerings, global partnerships with the largest CRE service providers, differentiated solutions that support the major commercial real estate workflows and large global transactions, which will lead to ARGUS as the standard platform for global asset and investment management.

Overall, we feel really good about the next phase of growth for our Altus Analytics business and our ability to get back on the path to long-term steady double-digit top line and profitable growth at expanded margins. Despite some of the short-term impact of the transition, the cloud subscription business is a better business, and it will absolutely fuel the drive towards Rule of 40 performance in the future.

And our cloud subscription strategy will help facilitate that. The market fundamentals remain exceptionally attractive and support our growth ambitions, and we’re well positioned for the opportunity ahead especially with our cloud strategy, which allows us to improve the economic value of our contracts.

A couple of comments on CRE Consulting. As Angelo covered off, Property Tax had another great quarter and revenues are rebounding following a period of case settlement delays. The high majority of revenues, which were based on a contingency and, therefore, directly hitting the bottom line. We’re very pleased with the 30% margin in the quarter, which speaks to the overall high-value of the business.

Year-to-date margins are tracking around 33%. We’re seeing good sequential improvements across all of our different internal metrics, and all indications are consistent with our expectations. We’ll spend more time on this business at our upcoming Investor Day.

As you’ve heard us say before, this business has a great growth runway ahead, with strong momentum going into 2020. This also provides us with a good backdrop for our consolidated performance while we transition our Altus Analytics business in 2019 and 2020.

Our other services business, Cost and Valuation Advisory and Geomatics are exceptionally well-run and stable contributors to our growth and profitability. So in closing, I’d just like to reiterate that we remain in growth mode, we’re energized by the market opportunity ahead of us, we have a solid track record of execution, significant market differentiation, plenty of room for growth.

And quite frankly, we’ve only scratched the surface. And we have innovation in every one of our businesses. And most importantly, we have the best people in the industry. And we proved it again, and Carl will talk a little bit about this when we get into the Q&As.

At ARGUS Connect in London, we had an amazing turnout, positive client feedback and found ourselves in a place where not only have we put our business in really good place in North America, but made it a global business.

As many of you are aware, we’ll be hosting an Investor Day on December 11 in Toronto, where we look forward to providing you with a more detailed view of our operations and additional insights into the key initiatives that will drive value creation. If you’re interested in attending in person, please get in touch with Camilla.

And with that said, let’s open it up for questions, please.

Question-and-Answer Session

Operator

[Operator Instructions] And the first question is from Yuri Lynk at Canaccord Genuity. Please go ahead your line is now open.

Yuri Lynk

Hi good evening guys.

Bob Courteau

Hey Yuri.

Yuri Lynk

Good first step in this transition, Bob. You’re, obviously, positioning yourself to be more embedded in your clients’ operations, the API rollout is part of that. And I think there’s a data monetization play there as well. Any pushback from your clients in terms of their willingness to continue to share their data and perhaps share more of it with you in the future?

Bob Courteau

Yes. No, I think people are really focused or are happy with our approach, which is a customer-first approach, where they have choice. And so on cloud, we believe we’ll have great acceptability. On data and I’ll let Carl jump in here as well, on data, I think what we’ve got actually is a bunch of partners and industry players now starting to imagine how we can create really interesting new offerings together.

And so I would say that, of course, there will be some of our competitors out there that have some anxiety, but customers and partners, absolutely not. I think it’s really positive. And Carl, maybe you can use that as a segue to talk about reaction in London and your thoughts on this.

Carl Farrell

Yes. I mean, we announced today to a full house here in London. Our EMEA Connect is our third one. I gave the keynote announcement on the API. It was extremely well received. We’ve got into a lot of buzz afterwards, lots of conversations, the ability now to interact with different workflows, our workflows or the client workflows, bringing all the data together, utilizing APIs.

Our customers have been asking for this kind of transparency and seamless connection for quite a while. So it resonated extremely well. And I’d say a lots of the conversations went into the corner there after on the breakout sessions.

I’ll just comment on the question about the data. To my knowledge, all the customers we’ve had so far, I don’t think anyone has pushed back on data aggregation and data sharing, which was very similar to our experience with AOD.

Yuri Lynk

Okay. That’s great color. Clarification on the recurring revenue growth of 12%, did One11 contribute to that 12%? Or is that an organic-type figure?

Bob Courteau

No, that’s organic, and it’s not recurring in nature, Yuri.

Carl Farrell

One11 is not recurring.

Bob Courteau

Correct.

Camilla Bartosiewicz

Yes. That’s captured into services, yes.

Carl Farrell

I would call it.

Yuri Lynk

Okay. I just wanted to double-check that. And then last one from me, I’ll turn it over. Bob, anything on – any update on the M&A outlook in tax? Is that still – are you guys still on the lookout for any opportunity?

Bob Courteau

Yes. I would say the activity has picked up in the U.S., and there’s lots of opportunities out there. And I think more so on the small side right now. And as part of our strategy to make sure that we have opportunities there. So, I would guess, in 2020, we’ll see some activity around that.

Yuri Lynk

I’ll turn it over guys, thanks.

Camilla Bartosiewicz

Thanks, Yuri.

Operator

Thank you. The next question is from Richard Tse at National Bank Financial. Please go ahead your line is now open.

Richard Tse

Yes, thank you. So it seems like you guys are being pretty aggressive on this shift to cloud, which is great. The question I have is that on the cost side, how should we look about like – look at costs going forward into 2020? Because it seems like it’s going to be a fairly sizable undertaking. So should we expect costs higher or stay flat? Just some color on that would be helpful.

Bob Courteau

Well, I think, consistent with what have said in the past, we see the development costs flattening out. One new factor to play in with cloud is that you actually see cost increase with yours, right? So there’s a natural infrastructure growth that comes along with that that we would factor in. But usually, you can do it in a way where it matches the revenue.

And then, we’re going to – we made a lot of the investments already in this transition that really – that are already caught in our cost base. The next place where we’ll have some pretty good decisions is if we’re right and as we go out to 2020 into 2021, and this starts to become the standard as we become an enterprise company around large deals, we could start ramping-up our sales force again as we go into 2020.

But it should go up with revenue. It would mean that we have turned the corner, and we have established a demand for those type of deals, right? So, I think we’re on track per previous guidance. Angelo, would you add anything to that?

Angelo Bartolini

Well, I agree. In fact, just to echo the point on the sales efforts, a focus for us for 2020 is now the large enterprise platform deals that will combine a number of our solutions together. And again, so in terms of additional costs with respect to delivery, sales and marketing, that would be sort of proportionate to what we would expect from a revenue increase.

Richard Tse

Okay. And clearly, you guys have had some success in converting some of these SMB customers to your subscription. What do you think the biggest obstacle is going to be for some of your larger enterprise customers? Is there something that they’re sort of signaling to you that you guys need to address whatever it is before we sort of make that move? Any commentary on that would be helpful as well.

Bob Courteau

Well, there’s two constituencies, there is the large service providers that are global. I would say that we’re in pretty good conversations with a number of the key ones. And some of that driven by the fact that there’s going to be demand from customers for cloud files. And so not unlike when we first brought out ARGUS Enterprise, we’re having similar conversations about how they prepare themselves to do that. And that’s strategic and important.

And why it’s kind of interesting with that community, every one of them is also trying to get their data strategy together, and we can be an important partner for them. And then with the larger end-user customers, like our pipeline has really picked up here in the last six months and particularly, the last quarter, as we’ve got out and talking to these clients because they see how cloud, the use of data, the other tools that we are offering can really help their business, and drive some of their digital transformations.

And finally, the adoption of cloud from an infrastructure perspective is becoming – it is normal now. And so for that reason, we don’t see the pushback that you might have had six, seven years ago by doing this. So, now it’s just about sales execution in my mind.

Richard Tse

Okay. And just one last one from me, sort of following on Yuri’s question. How do you sort of see acquisitions play into the growth strategy, not on the tax side but on the Altus Analytics side? Is it sort of niche tuck-ins that you’re trying to pick up tax? Or is it sort of maybe build out of channel? Any commentary there would help as well, thanks.

Bob Courteau

We’ll always look for tuck-ins that are innovative. And not unlike what we did with Voyanta, which is a great acquisition, and Taliance. We are in such an amazing position in the core stack or platform, right? So, there are not a lot of stuff worth buying. We’re seeing the assets trade and people investing in that category. But we’re good. Like, there’s nothing out there that we would buy.

So, a lot of what Carl has been doing is focusing on adjacencies. We’re talking to interesting data companies now that that’s becoming core to where we’re going to take the business. And we’ve seen some things in the credit markets and debt markets that could be interesting as customers. Like what you’re seeing with the PE firms, the banks and some of the core real estate companies, is we’re seeing a big shift towards them setting up debt funds.

And it’s the same customer that we support on the equity funds through our RVA business that are now getting us to deal with debt. So we like that category. We’re doing some work around it. And there are some opportunities there.

Richard Tse

That was great. Thanks, guys.

Operator

Thank you. The next question is from Maggie MacDougall of Cormark. Please go ahead your line is now open.

Maggie MacDougall

Hi.

Bob Courteau

Hi, Maggie.

Angelo Bartolini

Hey, Maggie.

Maggie MacDougall

So, I just wanted to touch on the corporate costs growth, such partially due to bonus accruals and then also investment to support growth. Just wondering if you could perhaps give a little bit of idea in terms of magnitude of buckets and then the nature of the investment.

Angelo Bartolini

Maggie, it’s Angelo. So for the quarter, most of it reflects sort of the increase in our profitability and the bonuses that would be related. So as you know, they’re kind of throughout the year parked in the corporate bucket, and then at fourth quarter is when we allocate them out. So that’s the bulk of it. But over the course of the year, we have made some additional investments in some of our areas to support growth, particularly in the IT area, support the infrastructure, support the security aspects of our networks and applications.

And so we don’t break it out. We’re flat-lining those types of expenditures as well. And really, what’s going to drive anything either up or down is more of the sort of variability to earnings that would have bonuses sort of attached to them.

Maggie MacDougall

Okay. In your call in the summer and your June presentation, you talked about the percentage of clients that you had to transition over to the cloud. I think it was around 15%. Are you able to give us an updated number with regards to that metric?

Bob Courteau

It’s one of the metrics that we’re looking at, and we’re going to talk some more about that at our Investor Day. I told that one data point on how ARGUS On Demand compared to cloud. The way I’d answer it is we’re not too worried about achieving that metric. That’s probably the best way to answer it. And that could cause us to want to share that metric with you at some point, so.

Maggie MacDougall

I see. Okay. And then a bit of a follow-on question, I guess, just trying to understand how to think about the cadence of movement into the cloud. The API announcement is, obviously, significant this morning as a tool for your customers. And I’m wondering if you’ve got any clients that expressed to you a likelihood to wait to convert until that tool is ready to go.

Bob Courteau

Well, Carl, why don’t you do that one?

Carl Farrell

So, I think we’ve had many clients express the desire for the tool in the future, but we’ve had no clients holding back because of the tool. We took a very cautious approach to how we wanted clients to move. I think Bob mentioned it in his opening that we segmented the customer base, deliberately went after smaller clients first, and we’re now beginning to talk to our larger clients. As Bob said, it’s a little bit more work for them as they consider moving to the cloud because of their infrastructure.

But some of the key things that we did to facilitate our larger clients, they can take all the historic data with them, the different versions of the models when we took with them into the clouds. And I think we mentioned before, our intention to allow them to be able to convert the modifications and rewriting them into the cloud as well. All those things are available to our larger clients now, and you’ll see our larger clients want to move a little bit quicker because of that.

Maggie MacDougall

Okay. And then just one final question from me. You talked about the largest contributors to Property Tax’s top line growth being UK performance, the rebound in Ontario and then strengths in Manitoba and Quebec. And are you able to give us an idea whether it was one of those factors more than the other? In other words, I’m just trying to understand has the Ontario rebound been particularly strong. I know that your UK business has been performing very well. Just trying to figure out where things are falling out for you in tax.

Bob Courteau

So I’ll probably say it this way. The performance in Ontario has got back to sort of normal close rates for the amount of appeals that we’re carrying. It’s not excessive. It’s just coming into a good normal close rates, which is good, we’re happy with that. The UK had a similarly good quarter. But I think more, we’ll probably start talking about the business in a much more broad sense. Because the U.S. had a great quarter, the balance across some of the adjacent product areas like NP rates in the U.K. was good. So I actually, we talk about 2020 as being the strong year, and we do it with confidence. And it’s not on the backs of just the return of Ontario and the U.K. All of our businesses are really starting to perform.

And frankly, I might get this a bit wrong, Angelo, keep me honest here. But right now, we see that we’ve got about an evenly balanced business between the UK, Canada and the U.S. And because of all the fascination with Ontario and the UK, the U.S. has not been tracked all that well, but they’re having a great year. And we feel like it’s going to have a really nice finish here.

So more and more, and we’ll talk about this at the Investor Day, we got a business that is getting to where I wanted it to be, and that is lots of different appeal cycles and lots of different markets. And we have growth available to us from really driving an industry strategy, from driving a major account strategy and a volume strategy. And so we have a really, really nice opportunity in front of us and we’re getting market share growth in every one of those markets.

Maggie MacDougall

Do you get the sense that you’re taking share from the smaller players or the larger guys?

Bob Courteau

Yes. A 100% in the UK large and small. In the U.S., it’s just flat out organic growth in the industries we support plus the investments we made in a couple of states. And in the U.S., one of the interesting trends or sorry, in Canada, one of the interesting trends is that people are getting out of the in-house business. We can show them these large real estate owners, we can show them our ability to deliver savings at a much higher level than they have without the internal cost.

The other interesting thing and we didn’t talk about this, but the team in Alberta, which covers the Western markets from Ontario to BC, has in the last year, put a real focus on mid-market, like going after volume. And I was out there a few weeks ago – a couple of weeks ago, and they took me through their numbers and it’s phenomenal. So, we’re getting share in the secondary markets as well.

So, I guess it’s in pretty good shape. Like, we got a really nice run in front of us. And the more successful you get, the more you make investments in technology, share gives you pricing power. So, all the things that we’ve been talking about are starting to materialize now.

Maggie MacDougall

Okay, thanks very much.

Camilla Bartosiewicz

Thanks, Maggie.

Bob Courteau

Thanks.

Operator

Thank you. The next question is from Stephen MacLeod at BMO Capital Markets. Please go ahead your line is now open.

Stephen MacLeod

Thank you, good evening.

Bob Courteau

Hey, Stephen.

Carl Farrell

Hi.

Stephen MacLeod

I just wanted to just follow-up a little bit on One11. The contribution in the quarter was a bit higher than what I was looking for. I’m just wondering, can you give a little bit of color around what you expect from that business on a full-year basis?

Bob Courteau

Yes. You want to do that, Carl, or?

Carl Farrell

I’m just trying to recall the numbers in my head on what we’re allowed to say.

Angelo Bartolini

I’ll jump in. No, those are kind of the levels that we’re expecting, Stephen. And the type of engagements that we have are sort of lengthy-type engagements. There’s a nice steady flow to them. So yes, we could expect some nice even kind of numbers. That’s what you’re seeing is what we can expect.

Bob Courteau

But we didn’t buy One11 for the revenue. We bought One11 to accelerate the move to an enterprise company. And I can guarantee you that Carl will be happy to tell you about how great that’s going. So Carl, go for it.

Carl Farrell

Yes. I mean, these guys are integral to our move to enterprise sales. The knowledge that the team bring from One11 about the CRE marketplace, the other software vendors in the marketplace. I mean, they’re experts in software selection, they implement all the key technologies actually outside of Altus, ERD, VTS, MRI and others.

So that they have some very detailed understanding of how we would integrate to these other technologies as we go forward. And they continue to attract a lot of attention from our large clients who want strategy advice, data strategy advice. All these offerings basically, wraparound the way we’re going into much more of an enterprise solution. So they’re supporting our push into this world extremely well.

And they continue to basically secure contracts along the way at the pace they have previously to a length and a difference in the scale that we didn’t do that historically. And our software – sorry, our services business is very aligned around that software. This is a totally different business.

But as Bob said, we didn’t ask them to join our company for that. We asked them to help us go forward in the enterprise world. And it’s gone extremely well. In fact, here in London at Connect, I was shocked at how many people basically sought them out for conversations.

Stephen MacLeod

That’s good color. Thank you. And then just on the Property Tax business. One thing you did talk about, and we’re sort of seeing it now, we’re seeing that ramp up in the settlements in the back half of this year as expected, you sort of referenced the next settlement cycle. And I was just wondering if you could provide a little bit more color around where we are in the major cycles in Ontario and the UK and when you expect the next cycle to sort of pick-up?

Bob Courteau

Do you want to do that, Angelo?

Angelo Bartolini

We’re right now, this is, we are currently in the third year in terms of Ontario and the UK. As it stands in the UK, this is a four year cycle, although there’s a bit of a question mark whether it will go back to a five year. But anyways, so we continue to expect a very long pipeline. So we have a strong pipeline with lots of backlog and it will likely spill over into the next cycle.

So we’re continuing - 2021, 2022 is likely you’re going to see a lot of 2017 settlements. And that’s likely going to happen with Ontario as well. And with the ramp starting up in 2021, we’ll just – typically, they have a little bit of a – you’ve got to go through a process of building that new pipeline, getting the appeals in the system. But with the overflow, we should sort of see a nice sort of steady flow to our revenue streams. So that’s how we see it right now, Stephen.

Bob Courteau

We must have now seven or eight jurisdictions that do an annual cycle now, right? And so they’re not susceptible to that three, four, five years cycle. By the way, the longer the cycle, they can be incredibly profitable because you create that. So look, I think one of the things that we want to do at the Investor Day is to share with you how this thing moves, like how it unfolds in the future and particularly, by our success.

We keep talking about Ontario and the UK, we have to remember, one of the things that we did in the UK that gets clouded over with this idea that they slowed down the completion of appeals is we made a big investment after we bought CVS in sales capacity, in resources to go after market share.

And that is really what’s going to drive the big opportunity as we go into the next cycle. If we can go from 20% to 30% share, which is our stated goal, that really, really puts the next cycle in a really good place. And again, we continue to grow in Canada and the U.S.

So, more and more, you’ll hear us talk about how the business is performing as a whole unit. Obviously, Ontario and UK will be big parts of it. But we feel very good about how this business could perform over the next three to five years.

Stephen MacLeod

Okay. That’s great. And then just finally, you talked about the initial push in subscription going to your SMB clients. Do you think about it in terms of the penetration of that client base? Or is it, you sort of get a critical mass and then it sounds like you want to move on to the next, to the bigger set of clients, but you’ll still maybe penetrate further into the SMBs? Is that the right way to think about it?

Bob Courteau

No. We think about it as managing three distinct markets. It’s SMB, larger clients in the region. So, what are we going to do with large clients in Germany, France, Canada, the U.S., Europe, Singapore, and then large global transactions. And we’ve set up our structure, our sales organization, our go-to-market around those segments separately.

And to be able to process the volume we did in the first quarter as we stand up our cloud business is a reflection of that strategy. And that, Carl architected that as part of our go-to-market strategy, we brought some really smart people in. And that’s why we were able to do more sales revenue in one quarter than what we did with AOD, now that’s probably four years ago when we didn’t have that kind of infrastructure in place. And so we’re going to optimize all three of those areas.

Stephen MacLeod

Okay, that is great. Thank you very much.

Operator

Thank you. The next question is from Deepak Kaushal at GMP Securities. Please go ahead your line is now open.

Deepak Kaushal

Hey guys, good evening. Thanks, for taking my questions.

Camilla Bartosiewicz

Hi, Deepak.

Deepak Kaushal

Bob, I get the message loud and clear, you don’t want to focus on any specific regions any more in taxes, more of a broader type business.

Bob Courteau

No. I am okay.

Deepak Kaushal

But I do have one last question on UK tax, if I may.

Bob Courteau

Yes, go for it.

Deepak Kaushal

It’s just kind of the curiosity, because there were some new slower noise recently about the UK cutting off tax claims. I know it was quashed for this cycle, but some people still see it as a risk for next cycle. What’s going on there? And is this related to Brexit and the whole uncertainty and the need for the government to hang on more cash? Can you talk about any kind of risk around the – political risk around and what’s going on in that market?

Bob Courteau

Look, we did a pretty big deep dive on that, including Alex Probyn meeting with the government. And look, we can’t control how the House is going to run their business, but we’re not anxious about that problem right now. We are looking at how they are going about trying to get the next cycle approved inside the House, and that is – they’ve had a couple of delays already on that.

And by the way, if it comes to be that they can’t get it passed, it’s actually a positive thing for us because we’ll be able to continue to bill our customers for another year of the cycle. And I’m not – I wouldn’t put that into your models because we think they’ll get something done. But I’d be – I think if I had to guess, I think there’s more probability on the upside than the downside around that in the UK.

Deepak Kaushal

Okay. And then on the tax side. Is broader Europe, Continental Europe, an opportunity for you there? Is that something you guys are thinking of or looking at?

Bob Courteau

You know what, we think we have really good opportunities in the market. It’s a different tax system over there. There’s a couple of Germany and one part of Northern Europe is looking at moving towards a similar tax system that you have in the UK and in North America, but it’s early. We have tremendous growth in front of us and pretty cool adjacencies that we can go after in the markets we serve. And I think we’re in a period here where we’re going to leverage the investments we’ve already made before we start another one.

Deepak Kaushal

Okay. Great. And I do have one more kind of macro question for you. And it’s probably less directly related to your business, given where you guys are with your cloud strategy and software strategy. But when you talk to your global enterprise customers, your global systems service providers and some other key players in the industry, what are they saying to you? What are you hearing from them in terms of macro uncertainty, impacts on their end businesses and what they’re thinking about going to year-end, going into next year? Any kind of insights or thoughts you can share on that?

Bob Courteau

So this isn’t a sound bite kind of answer, like it’s a little bit like this. This is a professional investment class now. It’s global and it has the complexity of different asset classes in different geographies. And the one thing I would say is that I don’t think there is one of our customers thinking that next year they’re going to reduce their focus on real estate across all the asset classes that they’re supporting.

And particularly for pension funds, you’re seeing even a double-down factor, where they’re investing directly now in real estate. They see it as an asset class that can support their business model. You’re seeing that with insurance as well, where it’s the one asset class that you could create certainty of income around even in a very difficult period.

And then it becomes a little more complex because you start thinking about it as what’s the right city, what’s the right market, what are the right asset classes. And what I like about all of that is it’s more and more becoming a professional investment class. They need the tools. They need the data. They need to be able to do this on a global basis. And that plays to our strength.

But I honestly – if you went to a conference on real estate, you would hear about the risk of retail or what is WeWorks mean or what’s the right way to deal with tenant experience. You might even hear about whether energy-based economies are going to be difficult for real estate just like we’ve had in Calgary. But you don’t hear anybody saying that they’re going, they’re cutting back on real estate as an investment class.

Deepak Kaushal

Okay. Well, I appreciate your thoughts on that. Sorry, Carl. Go ahead.

Carl Farrell

As I can reinforce Bob’s comments that here at our Connect conference, we had several customers present today who just talked about the robustness of the industry, more available capital too, more investments going into different asset classes, the volume and the demand that’s there, the scarcity of assets to buy at a global level. Even with certain uncertainties, they’re still very optimistic about the next several years.

Deepak Kaushal

Okay. That’s helpful. No, I appreciate the thoughts on that. It’s kind of a question that I’ve had in a broader macro sense. But I’ll pass the line. I look forward to seeing you guys December 11.

Bob Courteau

All right. Thank you.

Camilla Bartosiewicz

Thank you, Deepak.

Operator

Thank you. The next question is from Paul Treiber at RBC Capital Markets. Please go ahead your line is now open.

Paul Treiber

Good afternoon guys. In the prepared remarks, you mentioned growing interest in the cloud outside of North America. Previously, you had a sales strategy to ramp ARGUS on the license side, at least in those markets. How is the pipeline both for license outside of North America, I guess, with existing clients? And then what’s been the interest in those new markets for the cloud?

Bob Courteau

Well, look, it’s a game-changer when we go into markets like Germany and France, because not only do we bring the most-advanced modeling and forecasting tool in the market, but we bring it in a modern platform, right? So – by the way, you get the benefit of that.

At the other end of the spectrum, our biggest customers are talking about global valuation equals global data. The large investors that are looking at models on a global basis want to be able to compare an investment opportunity for an office building or a multi-family in Singapore to London to New York, and that’s what we do. That’s the whole idea.

And then we follow that success into the market because they’re one of our largest customers. We’ve talked about some of the large German customers that we’ve landed in the past. If they’re using our tools to run their global business, that generally gets seen as the best tool in the industry. And so we want to go deep in those markets as well. So that’s the whole strategy, is to create tech envy and follow it up with good software.

Carl Farrell

And the other point, obviously, I mean, the point that we’re going into these new markets, we’re only selling cloud subscriptions. As we said before, there’s been really no pushback as we’ve entered these new markets. The reception activity has been extremely good. And even now clients in those markets, which have existing perpetual licenses, are asking for subscription licenses. So it’s been quite positive.

Paul Treiber

And there’s two months left in the end of the year and before the license will no longer be available. I asked this last quarter, but I’m hoping you have a better sense in terms of your pipeline. But what’s your thoughts in terms of demand for license heading into Q4? Do you think there’s a possible you may see a flurry of orders before it goes – before it’s no longer available?

Bob Courteau

We’re going to find...

Carl Farrell

There’s a potential.

Bob Courteau

Probably going to try and push that.

Carl Farrell

Yes. We’re still going to try and push them to subscription as much as we can. I mean, it’s a natural reaction when you make an announcement like this, but the benefits are outweighing a lot of these situations. So, the benefit has been really, really well received. So from my perspective, I don’t think we’re going to see that much of a difference of a push towards license.

Bob Courteau

Yes. Because even if you do that, you’re creating a two step process, right? So you double-down on buying a bunch of ARGUS Enterprise licenses to protect your environment now because you want to pay upfront, right? Because we’ll still sell ARGUS Enterprise on-premise next year just to make sure that people understand and clarify that. But we’ll only sell it as a subscription solution, which by rights could be argued as more expensive.

So there will be – to your point, there will be potentially some interest in doing that. But we’re conditioning our sales force to get the value out there with subscription. And honestly, for us, Paul, we believe that building our subscription backlog is more important than making the next quarter.

Paul Treiber

Yes, I know that’s a good strategy you have. Just lastly, in terms of Property Tax, just to clarify some of your comments. You obviously had a record year this year. And then you said 2020 would be a strong year. Should we interpret strong as continued growth? Or is there a possibility that 2019 is like a high – or near-term high watermark?

Bob Courteau

No. Growth.

Paul Treiber

Growth. Okay. It’s good to clarify.

Bob Courteau

I mean, just like – just to get everybody on the same page. We’re going to have a strong second quarter again, stronger than last year’s second quarter, because of the annuity billing and the general across-the-board strengthening of our business.

Paul Treiber

Okay, thanks for clarifying that.

Bob Courteau

Thanks, Paul.

Operator

Thank you. [Operator Instructions] Ms. Bartosiewicz, there are no further questions. I would like to turn the conference back over to you now.

Camilla Bartosiewicz

Okay. Go ahead, Bob.

Bob Courteau

Okay. Well, thank you for joining us. And we’re hoping to see all of you at our Investor Day. And if you don’t have an invitation, give Camilla a call, and we’re going to hope to have a great turnout. Thanks so much. Goodbye.

Camilla Bartosiewicz

Thanks, everyone.

Carl Farrell

Bye-bye.

Operator

Thank you. Ladies and gentlemen, this concludes today’s conference call. Should you have further questions, please contact Camilla Bartosiewicz at Office Group at 416-641-9773. That number again 416-641-9773. We thank you for your participation and ask that you please disconnect your lines at this time.


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