Altus Group Ltd

TSX:AIF

Earnings Call Transcript 2022-Q1

[Operator]

Welcome to the Altus Group First Quarter 2022 Financial Results Conference Call and Webcast. [Operator Instructions]

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

[Camilla Bartosiewicz, executive]

Thank you, Fati. Good afternoon, everyone, and welcome to Altus Group's first quarter results conference call and webcast for the period ended March 31, 2022.

The news release announcing our results was issued after market close this afternoon and is also posted on our website along with our MD&A and financial statements.

Joining us today are CEO, Jim Hannon; and CFO, Angelo Bartolini. We'll start with some prepared remarks and then we'll move right into the Q&A session. If we miss any questions, please contact me directly by e-mail.

Angelo will begin by covering off our financial performance, and then Jim will provide an operational update.

Before we get started, please be advised that some of our remarks on the call today may contain forward-looking information.

Also, please be reminded that Altus Group uses certain non-GAAP and other financial measures as indicators of financial and operational performance.

Forward-looking information and an explanation of these measures are detailed in today's news release and in our related MD&A reports on SEDAR. All of the forward-looking information discussed today is qualified by the cautionary statements and included in these reports.

Okay. Over to you, Angelo.

[Angelo Bartolini, executive]

Thanks, Camilla. As you'll hear today, the year is off to a productive start as demonstrated by our financial performance in Q1, the positive growth indicators in our bookings and the operational momentum across the company. This is a key execution year, and we're really pleased with the progress against our strategic initiatives during the first quarter.

Please note that unless otherwise specified, all figures that I will be discussing today are as reported and all growth rates are on a constant currency basis.

On a consolidated basis, revenues were $167.6 million, an increase of 24%, of which 11% of the growth was organic. And adjusted EBITDA continues to steadily improve at $17.7 million or up 4% as we captured synergies from last year's acquisitions and continued to adjust our cost structure in line with our new operating model.

Looking out with the analytics firing on all cylinders and our Property Tax business set to deliver another record year, we feel confident in our plans to deliver strong top line and adjusted EBITDA growth this year at expanded margins.

Analytics delivered another strong quarter. Revenues were $80.3 million, up 50%. Especially noteworthy, organic revenue growth was 19%. This marks the third consecutive quarter of organic revenue growth in the mid-teens to 20% range, proof that the evolution of our operating model implemented at the start of the year and the revamped go-to-market plans are increasingly effective.

We saw solid growth across our key solutions with strong customer expansion and new customer additions to our platform as we saw 250 new logos for ARGUS in the quarter. We're proving that once we win over clients, we not only keep them but grow them. Our customer success teams are a great driver of our retention rates, which are industry-leading across all our software, data and analytics solutions.

I have to say that I am really excited about the growth in our Over Time revenues. At $68 million, Over Time revenues grew 60% year-over-year and 24% on an organic basis. Building off of a strong Q4, Over Time revenues were up 14% sequentially and up 9% on an organic basis. This is a significant increase and really speaks to the durability of our revenue streams.

Regarding our cloud migration progress, we are tracking on plan as we closed the quarter with a little more than 44% of AE users on the cloud. Following the large increase in adoption in Q4, the current quarter's increase was on pace with our expectations. With visibility into our pipeline, we expect closing on some sizable deals. And by the end of 2023, we expect to have converted the large majority of our users on to the cloud. The recent enhancements to cloud-enabled AE 14 launched in late 2021 in addition to our plans to end support for AE 12.1 or older by June 30, 2022, will be significant drivers in helping us achieve our targets.

Adjusted EBITDA showed positive improvement in the quarter as well at $11.2 million, up 11%. This is significant when you recall we purchased Reonomy late in 2021, an early-stage business with an adjusted EBITDA run rate loss of approximately $20 million. Although we have begun to achieve synergies in Q1, we still have more to go.

Also bear in mind that as part of the purchase price adjustment for Reonomy, we incurred a discount on deferred revenues of approximately $1 million in Q1, which also impacted adjusted EBITDA. This $1 million adjustment alone had a 1.2% impact to margins.

Notwithstanding Reonomy's impacts to adjusted EBITDA, going forward, we expect quarterly improvements in margin and expect margin to be higher on a year-over-year basis for full year 2022.

I'm also excited about our bookings and bookings growth. Bookings came in at $28 million, up 32%. Bookings are increasingly skewing more towards recurring in nature, reflected in Over Time revenues and pleased to add that organic Over Time bookings in Q1 were especially strong.

Looking out, we're very well positioned for the year to deliver positive performance across our key metrics: Over Time revenues, bookings, AE Cloud users and margins. As I said, the business is firing on all cylinders.

Turning to the CRE Consulting segment. At Property Tax, Q1 revenues were $58.5 million, up 8% and adjusted EBITDA was $13.3 million, up 21%, driven by strong performance in the U.S. where we saw a rebound from previous COVID-related delays. In Canada, we held steady while the U.K. continued to experience lower settlement volumes caused by resource constraints at the valuation office. We do expect resumption to normalized levels later this year.

Overall, we're very positive on the year for Tax as we have a healthy backlog of tax appeal cases to be settled, significant bookings in our pipeline and a robust level of annuity billings in the U.K. scheduled for Q2. As a result of these factors, we expect another record revenue year.

As we've discussed before, we are driving more technology into this business. The results of our investments are greater operating efficiencies, enhanced business development and market intelligence and greater savings for our clients. As you'll hear from Jim in a minute, we're also excited about the acquisition of Rethink Solutions, which will begin to provide us with not only an Over Time revenue base, but with our first software revenue streams within global Tax business.

Although our Valuation and Cost Advisory revenues were up modestly over last year at $29 million, we see underlying strength in the business that will translate into stronger performance throughout the year.

Finally, in Q1, we initiated a global restructuring program for the year and resulted in onetime restructuring costs of $8.4 million in the quarter. This program was initiated as we drive toward greater efficiencies in our operating model. Approximately $3.8 million of these costs relate to our efforts to rationalize our office space in certain markets. These reductions in office space is a result of both the synergies that we planned under the acquisitions of Finance Active and Reonomy and as a result of our deliberate approach toward a hybrid office working model.

As detailed in our recent sustainability report, we believe that by moving to a hybrid model, we can reduce our square footage of our leased space by up to 15% in 2022. The environmental benefit of this approach is that it significantly reduces our Scope 2 and 3 emissions. We expect this program to continue throughout the year and expect further reductions in office space and greater efficiencies resulting from ongoing integration work.

Turning to our financial position. We finished the year with a cash position of $46.8 million and with $306.7 million in the bank. The funded debt-to-adjusted EBITDA leverage ratio, as defined in our credit agreement, was 2.6x, well below our maximum limit of 4x. Applying our cash and net debt-to-adjusted EBITDA leverage ratio was 2.37x, representing a very healthy balance sheet. Given our ability to generate strong cash flows and growing adjusted EBITDA levels, we're able to deleverage quickly and reapply available capital towards growth initiatives.

With that, I'll now turn it over to Jim to take us through some of the operational progress.

[Jim Hannon, executive]

All right. Thanks, Angelo. Good afternoon, everyone. I'm excited to be here. And I agree with Angelo, the business is firing all cylinders.

As you just heard, it was a strong start to the year. Thank you to all our colleagues for their continued commitment to our clients and the business. We're quite pleased with our 22% consolidated revenue growth, including 11% organic growth, particularly on the heels of a very strong Q4.

As covered on past calls, we're structuring all aspects of our business to reinforce Altus as the leading Intelligence-as-a-Service provider for the commercial real estate industry. We continue to make great progress on our innovative product road map and scalable operating model. We are executing against our strategic priorities, and this is reflected in our recent results as well as the number of internal KPIs. Most importantly,

[Audio Gap]

very supportive and they are our partners on this journey.

The market fundamentals for our business are healthy. We're bringing our clients actionable intelligence solutions in a very dynamic market, helping to maximize their returns, protect their bottom line and better manage risk. Increasing alpha, reducing beta, that's our mission.

As proven throughout the pandemic and now with challenging global macroeconomic events, our business is stable across various economic cycles, benefiting from a diversified revenue mix geographically and by service. Our results reflect a growing base of recurring revenues reflected in our Over Time revenues driven by providing mission-critical solutions to our industry.

Further, as our industry continues to mature, the tech adoption curve accelerates and that the labor market continues to be constrained, the need for outsourced expertise is mounting. In combination with the promise of increased alpha and reduced beta, clients gain significant value partnering with Altus for their various needs across the CRE value chain.

Over the past few weeks, as I stepped into the CEO role, I've had the opportunity to speak with many of our customers, employees and investors. I'm galvanized by the support we're receiving from our various stakeholders who remain deeply engaged in our value-creation plans and the innovation we drive for our industry.

What is clear is this: clients increasingly regard our team as strategic business partners based on the quantifiable value we drive for them. True to our high-performing culture, our employees are rallying around our refreshed strategy and are motivated by the operational momentum that's moving us to new heights. And the investment community has been a great resource throughout this transition, validating the potential ahead for Altus and appropriately holding us to account. The promise of Altus was always there, and we're steadfast in making it happen.

Okay. Reflecting on the progress in Q1. The analytics growth engine continues to run at a significantly increased pace that we established in 2021. We had terrific revenue and bookings growth, both organic and in total, and particularly in the Over Time category. We expect a continued strong sales execution under our new model with opportunities to extend these go-to-market practices across tax and costs.

With a large serviceable market, we're continuing to add more clients to our platform and grow wallet share with current clients. Our pipeline is expanding with increased cross-sell opportunities following last year's acquisitions. And overall, we're seeing a higher mix of larger transactions. Of note, by example, Q1 included a sizable multimillion dollar deal from a long-standing top tier client. It was predominantly an expansion of our appraisal management solutions, but included a cross-sell with our One11 consulting group.

Our transition to value selling under our new office structure is progressing well also. During the quarter, our sales team completed several weeks of training on the new office structure. As you access today's IR materials, I trust you would have also seen our new website, which launched this week bringing Intelligence-as-a-Service to life. Our product and marketing teams are providing excellent sales enablement materials and driving high qualified sales leads. Our customer success teams are maximizing customer satisfaction while discovering expansion opportunities. Our go-to-market team has been well equipped, trained and supported to deliver on our ambitious growth plans. And as we saw in our Q1 financials, they are delivering.

Turning to our CRE Consulting segment. This quarter, we began to align our Valuation and Cost groups closer with our Analytics business under a common regional leadership model. Our new office structure supports serving clients across the CRE asset life cycle. Our Valuation and Cost services focused on developers, lenders and investors align with the solutions we offer through Analytics. Property development is an important stage in the CRE life cycle. Intelligence-as-a-Service delivers on our expert advice, technology, data and analytics across all of our business units.

Our Property Tax business had a very productive quarter.

Financially, we're delivering solid performance as our expert consultants maximize savings for clients while growing the volume and value of our backlog.

And operationally, it was a productive quarter, working towards our target operating model while continuing to advance our tech strategy and completing the due diligence on Rethink Solutions. This acquisition with the itamlink property tax management software is an important building block for our tax strategy, so let's spend a minute on that topic.

First, we're excited to welcome Mordechai Katzman, Founder and President, as well as his talented team of approximately 35 people to Altus. Rethink Solutions is a mature SaaS business that has been around for over 2 decades with a very impressive client roster and stable ARR.

Trusted by many large organizations across the U.S. and Canada,

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property tax processes and improved productivity by efficiently managing real estate tax and assessments across multi-property portfolios. Effectively, the software enables customers to centralize property tax data, automate processes with configurable integrations and includes built-in data management tools, intuitive dashboards and reports.

itamlink software is highly synergistic and complementary with our offerings. We know this will add substantial value to our clients. This acquisition enhances our growth profile with a new Over Time revenue stream, enables cross-sell opportunities and creates new and expanded customer use cases for our traditional tax market.

Furthermore, the acquisition accelerates our technology strategy to develop an end-to-end property tax management platform, representing significant time and cost savings for us in advancing that strategy. The software saves our clients time and resources and allows us to grow our business more efficiently and serve our clients more effectively.

Property tax approaches and processes vary widely from one country to another, but ultimately, the foundation of the tax business is the same: property values are assessed and taxpayers have the right to appeal. Strategically, we envision an end-to-end tax management solution with a workflow for the tax management and tax appeal process. The itamlink software addresses several key workflows critical to that vision plus the tax-focused expertise the team brings will accelerate our efforts.

Finally, as I wrap up, thank you to our shareholders. We are appreciative of the support we received during the AGM yesterday and value the candid engagement we had with many of you.

Okay. Let's open up for questions now. Operator?

[Operator]

[Operator Instructions] The first question is from Daniel Chan from TD Securities Just one moment, please.

[Daniel Chan, analyst]

Can you hear me okay?

[Camilla Bartosiewicz, executive]

Yes.

[Daniel Chan, analyst]

Awesome. So in Q4, you guys had some big cloud wins. I'm just looking to get an update on how those migrations are going. Are they now starting to contribute Over Time revenue? Or is there still a lot to go?

[Angelo Bartolini, executive]

Dan, this is Angelo. Yes. We've launched into a number of those. You're seeing now the recurring revenues acknowledge some of those wins in Q4. So we're -- we've implemented some of them, not all of them. There are still some that are outstanding, but some are underway.

[Daniel Chan, analyst]

Okay. Sounds good. And then last quarter, you guys also called out that getting to 35% to 40% of cloud adoption was a tipping point. So I'm just wondering whether you start to see an acceleration in the cloud adoption and whether the discussions you're having with customers are changing as a result of getting to more of a critical mass?

[Jim Hannon, executive]

Dan, it's Jim. We -- the Q4 was a giant quarter for us, as you know. And the cloud adoption rates are going exactly as planned for us. We can see when -- existing clients when their contracts are coming up and we get well ahead of that in negotiating their contracts around data security and implementation. So that's tracking where we expected. And then we've added significant amount of new logos in the quarter. So we're still tracking to plans that we've been discussing for a couple of years now.

[Daniel Chan, analyst]

Okay. Sounds good. And then just a final question on Rethink Solutions. Can you guys provide any details on that transaction, the price, the financials or growth?

[Angelo Bartolini, executive]

Well, what we have disclosed, Dan, is the purchase price. In total, there are some components, but in total, it's about CAD 40 million. There's a component that's contingent based on performance and then there is an element of equity. So it's -- that's all we disclosed for now and we'll be -- it was just a subsequent event. And so there will be more information as we proceed into the next quarter.

[Camilla Bartosiewicz, executive]

Yes. And then that's in the MD&A.

[Operator]

The next question is from Richard Tse from National Bank Financial.

[Richard Tse, analyst]

Can you hear me?

[Camilla Bartosiewicz, executive]

Yes.

[Richard Tse, analyst]

Okay. Great. I was wondering if you can maybe elaborate a little bit on the restructuring beyond sort of the rationalization of real estate.

[Angelo Bartolini, executive]

Hey, Richard, it's Angelo. So look, this year, as I mentioned, is a bit of a new year in terms of some of the things we're doing: implementing the new operating model, really launching and integrating Reonomy to our system and there's a lot of work that we're doing as well really integrating globally our Tax business.

So this is a year of opportunity for us. It's across the board. We're taking some real costs out, as we've noted. A big component of it was taking advantage of some of the offices that we had. So we've moved to a hybrid office working model and we're just able to take a bunch of costs out. And the synergies that we're able to achieve with Reonomy, with Finance Active, with the new One Altus operating model just led us to move on this restructuring program.

[Richard Tse, analyst]

Okay. Sort of a broader question, like Jim, you've done a lot since you've sort of come on board. I kind of characterize it as sort of the 3 Ps: the process, people and product. If you kind of go along that line of thinking, which one of those is that sort of the biggest impact in terms of the progress you're making here?

[Jim Hannon, executive]

That's a great question. And I'll say we've really -- it's actually all 3. As Angelo said and I reiterated, the teams really are firing on all cylinders. Across the board, the teams are excited about the new product direction. The offer structures are wrapped around that.

The people and process go together, and the way we think about that is we need to improve the customer journey, make it easier for clients to transact with us and get served by us. And in doing so, we need to make it easier for employees to work here.

So that's the approach that we take in this. It's about simplifying the processes, getting focused on most high-value processes and ensuring that this is the best place for our folks to work and that they have a say in how we're improving those processes. So those 2 really go hand in glove.

The product, we think, in terms of offer. So it's really the tech-led services and bringing that expertise to bear efficiently with more forward insights than we have in the past, and the teams are excited about that.

[Richard Tse, analyst]

Okay. And just a one last quick one for me. Clearly, you've got a lot sort of underway here. But as you kind of look through, you're crossing this chasm in the next 3 years, you'll probably get to normalized run rate. So when you get to that normalized run rate, what do you think is a sustainable kind of organic growth rate for the company as a whole or respectively, Altus Analytics and then CRE and then I guess related target margins for those businesses? And that's it for me.

[Angelo Bartolini, executive]

Hey, Richard, this is Angelo. Look, I think we've set some targets for ourselves as you're very well aware. And in terms of margins, we've talked about hitting the 30-plus range for our Altus Analytics business. Now that's 2 to 3 years out. We're making progress on that journey.

Now this quarter, you've seen us, again, a bit of a step back as part of that acquisition. But going forward, we're going to see increasingly improving margins on a quarterly basis and annual basis. And so we will get to that point.

In our Property Tax as well, it's already a pretty good margin business. But we're taking -- we're achieving more efficiencies, particularly with the technology that we're deploying.

And so overall, I think over the next 2 to 3 years, you're going to see on a consolidated basis our margins improving.

And then in terms of revenue, like we still have lots of opportunity. We've recently, in the last year, have gotten into adjacencies. Data obviously big with Reonomy, but also on the debt side with Finance Active, we see a long runway there. So for the next several years, we're seeing mid-teens organic growth rates.

[Jim Hannon, executive]

Richard, I'd add to that the -- for the Analytics side of the business, you saw the increase -- the significant increase in the bookings capacity last year or production last year. And that's a high watermark to grow the same percentage off of. But growing above that in absolute, like maintaining that growth level and growing from there, those are the numbers we're putting up and we expect that to continue.

The sales enablement and the value prop activities that I talked about in Q1, they're just kicking in. So the go-to-market machine is really firing well. And as we move towards One Altus here, there's even more cross-sell and synergy opportunities on account level.

[Operator]

The next question is from Gavin Fairweather from Cormark Securities.

[Gavin Fairweather, analyst]

I wanted to start on the go-to-market side. I know it's kind of early days on the move to value selling and the per asset pricing model. But perhaps you could share some early customer feedback on kind of the new approach and maybe some of the barriers that you need to overcome on the customer side.

[Jim Hannon, executive]

We've had -- Gavin, it's Jim. We've had significant amount of CXO level engagement over the last quarter, and the feedback has been fantastic. They want actually it's -- we love it. It feels different. These are -- we've gone from as -- we discussed those amazing point solutions franchises to pulling it together with the acquisitions. And if anything, it's guys, go faster and get this global for us.

So the acquisitions last year, Finance Active obviously, increased our access to the debt side of the business, but significantly improved -- increased our EMEA concentration of revenues. So that was great.

For StratoDem and Reonomy acquisitions, they are U.S. focused right now. So it's bringing that technology and those data sets globally faster is the feedback we're getting.

[Gavin Fairweather, analyst]

That's helpful. And then just secondly for me on kind of the potential for an ARGUS tax module kind of longer term. Maybe when just thinking about the enterprise segment, which would typically have some more white-glove service. How much upside do you think there might be in kind of per head productivity? What would your targets for that be kind of over time? And what are some examples of some of the workflow improvements that you can make there?

[Jim Hannon, executive]

This was all about driving new market growth, but -- so I'm talking about itamlink specifically right now bringing tech into the tax business. So number one, we talk -- we think in terms of offers insight and how we communicate as a management team and how we think about enabling the fields.

So tax and cost are offers right alongside of the core analytics offers of strategy, intelligence, performance, valuations, transactions. So we look at it as one set of offers that are interrelated versus the legacy view of you have different business units with completely different motions. When we think in terms of driving alpha, reducing beta, of course, cost and tax are part of that equation.

From the tech side, itamlink, it's accelerating the tax tech strategy that we've been talking about for a while and so now you're seeing it come to life. In the longer term, so when you think about like ARGUS-branded tax, it's Altus-branded tax solution and it will all be one platform over time, not tomorrow. And we don't have to get there tomorrow because this acquisition brings us a great technical solution today, but we will rationalize that into one platform over time to achieve the platform economics that we've discussed.

Those platform economics drive increased offers, increased wallet share, but it's also significant improvement to internal efficiency. So that revenue per head and the profit per head will be tracking upward nicely.

[Gavin Fairweather, analyst]

That's great. Then maybe just quickly for Angelo. Just following up on the restructuring plan. Were some of those savings implemented kind of late in the quarter? Do you realize any of the benefit in Q1? How should we think about that?

[Angelo Bartolini, executive]

They were more mid- to late quarter in terms of the savings. So we'll get a bigger bang in the next quarter. And then as we go, we'll continue to have more savings throughout the year. I mean we still have -- we're still rationalizing some additional offices. There is efficiency still with bringing the teams together. It's not concentrated in any one area, but we do see additional efficiencies.

And just natural -- some natural attrition also just takes care of some of that. We're not doing some backfilling.

And then there's opportunities for us in terms of just merging contracts and leveraging scale, which when you've been in a bit of an acquisition mode, you sort of inherit -- you inherit contracts for a period of time. And so we're really going through a rationalization process and we expect to see savings throughout this year.

[Operator]

The next question is from Scott Fletcher from CIBC.

[Scott Fletcher, analyst]

Really, really strong now, organic growth in the Over Time business this quarter. I'm just wondering if this -- are you sort of seeing that 24% number as maybe a high watermark? Or is that -- was there anything specific in the quarter that drove it that high? Or is this something you're going to strive towards keeping at that level?

[Jim Hannon, executive]

Scott, it's Jim. The way I think about that is that I go back to the waterfall of bookings. So with that bookings capacity staying up to -- the way I described it to the team as we talked about capacity is we have a sales factory and in '21 we took that factory and took it up, not to the top of production, but we started running the factory at a much higher production level. And we're running at that level and growing from there on the bookings side, actually amazingly.

I don't mean amazingly that it's happening. I mean amazing numbers that the teams are putting up. That, of course, is going to flow through into the organic Over Time revenues. So with those booking production numbers staying high, you'll see sustained high growth rates in the organic revenues.

[Scott Fletcher, analyst]

Okay. And then a follow-up on that. Just wondering if I can get a sense of how much of that organic growth, I mean, directionally, is being driven by customer expansion versus new logo sales.

[Jim Hannon, executive]

What we have, 259 new logos in the quarter. It's both. We very purposely segmented the go-to-market in the high touch, what we call the scale business, which we do that because there's very different customer acquisition cost economics around that and costs to ultimately serve. Both segments are producing really well for us right now.

The other part of the equation is with the launch of the customer success team, we were able to take a lot of the activities off of the field sales team, let them focus on new client growth or wallet expansion growth with existing clients and then take more of the administrative ongoing maintenance of clients, put it with customer success.

Customer success also uncovers opportunities as they're engaging with clients. They hand that back to the field. So to go back to my factory production analogy, it creates more production capacity in that sales machine.

[Scott Fletcher, analyst]

Okay. Great. I do have a second question on the talent side of things. You guys are obviously undertaking a big project and had tech-heavy project and I'm sure you brought on staff through these acquisitions. But I'm wondering if you guys still -- if there's still some hiring that needs to happen on the tech side, given that it's a pretty tight talent market for developers.

[Jim Hannon, executive]

With these types of growth rates and the opportunities in front of us, we are always recruiting talent, and we are laser focused also on retaining our top talent right now. And that was part of the shareholder considerations that was voted on at the AGM, and we appreciate that support to give us the tools to drive that retention of key talent.

[Operator]

[Operator Instructions] This concludes the question-and-answer session. I would like to turn the conference back over to Jim Hannon for any closing remarks.

[Jim Hannon, executive]

All right. Well, once again, we appreciate all of the support from the investment community. Great feedback as we engage with many of you over the last quarter, we appreciate it. The team is laser focused here, very excited. And we look forward to talking to all of you soon. Thanks for your time.

[Operator]

This concludes today's conference call. Should you have any further questions, please contact Camilla Bartosiewicz at Altus Group. You may disconnect your lines. Thank you for participating, and have a pleasant day.