Altus Group Ltd

TSX:AIF

Earnings Call Transcript 2020-Q2

[Operator]

Good afternoon, ladies and gentlemen. Welcome to Altus Group's Second Quarter 2020 Financial Results Conference Call. [Operator Instructions] 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, Vice President of Investor Relations]

Thank you, Michael. Good afternoon, everyone, and welcome to Altus Group's Second Quarter Results Conference Call and Webcast for the Quarter Ended June 30, 2020. For reference, our earnings results news release was issued after market closed this afternoon, and is also posted on our website along with our MD&A and financial statements. Please visit altusgroup.com to obtain these documents and for more information. Joining us today is Bob Courteau, Chief Executive Officer; and Angelo Bartolini, Chief Financial Officer, who will 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. Before we get started, please be advised that some of our statements and responses to questions on this call may contain forward-looking information. Forward-looking statements are based on management's current knowledge and expectations as of today and are subject to certain risks and uncertainties that could cause actual results to differ materially from those forward-looking statements. Also, please be reminded that Altus Group uses certain non-GAAP, non-IFRS measures as indicators of financial and operational performance. Forward-looking statements and an explanation of these measures are detailed in today's press release, and in our related reports on SEDAR. And I'll now turn the call over to Angelo.

[Angelo Bartolini, Chief Financial Officer]

Thank you, Camilla, and thank you all for joining us on the call and webcast this afternoon. During one of the most challenging periods in our history, Altus Group put up a very strong second quarter, actually, the best quarterly revenue and earnings performance in our history. Revenues were up 9% to $155 million, and adjusted EBITDA was up 16% to $35 million, driving a 22% improvement to adjusted EPS at $0.62. The strength in the quarter was driven by record revenues and earnings at Property Tax and sustained strong double-digit growth in our Over Time revenues at Altus Analytics, demonstrating that our core services and analytics solutions are mission-critical and that our core business is solid and resilient. One of the most recurring questions investors have about our company is how we might perform in a market downturn. I believe that our second quarter results have answered that, validating that we have a strong and stable revenue base across various economic cycles. I see this as a legacy quarter, one that we can be proud of and point to as an example of our resiliency. Turning to the individual segments. Our Altus Analytics performance remains on track for our multiyear transition to primarily Over Time revenue model and shift to a SaaS enterprise. Reflecting this shift, Altus Analytics revenues were up 2% to $51 million, and earnings were down 14% to $10 million. But most notably, Over Time revenues, our key metric, were up 18% to $43 million. As you'll hear from Bob today, we're making steady progress against our cloud subscription strategy. And as we look ahead, the acceleration of digital transformation in the CRE industry is a positive catalyst for our long-term strategy and our aspirational goals. As you're aware, at the start of 2020, we made the full shift to subscription model for all our August software products, from a hybrid subscription and perpetual sales model. Simply put, more of our Q2 revenue last year had upfront perpetual license revenues, where the full price of the license was recognized upfront, versus today, where the term value of the subscription license is recognized over time. Although this change creates a stronger long-term economic model, the transition particularly impacts overall revenues in the first year of transition, but has a positive effect on Over Time revenues. Top line revenue was also impacted by some of the cloud-related pressure on onetime revenue streams, such as software consulting and training services, which were down year-over-year on an organic basis. The pandemic also had some impact on software sales, particularly in the SMB space and in prolonging sales cycles of some of our larger deals. This was mainly a factor of client priorities and focus shifting during the pandemic, and as they themselves got organized to work remotely. Despite these headwinds, our revenue growth and transition is proceeding as expected, and there is a strong and building story. At this time, 83% of Altus Analytics revenue base is Over Time revenue, a solid improvement from being in the mid-60s just 3 years ago, and well on our way to reaching our goal of getting to 90% by the end of 2021. Some key highlights for the quarter include the following: strong software subscription revenues as a reflection of both current and past deals, healthy new subscription license sales, including a significant renewal with a strategic global service provider on improved and expanded terms that further entrenches AE as a standard valuation management solution and sets us up for sustained future growth. Although our sales cycle for larger deals has somewhat lengthened as a result of the pandemic, we have visibility into a number of large strategic enterprise deals over the coming periods. Our sales execution will be supported by our product road map that will further develop out our cloud capabilities and cloud transition, which Bob will touch on a little later. Our maintenance revenues, supported by an industry-leading 95% retention rate for ARGUS Enterprise. We expect our retention rates to hold in the mid-90s range as the demand and use of AE remains high. Over time, this revenue will transition to subscription revenues as cloud adoption takes hold. Our appraisal management solutions remain strong and are in ever increasing demand, particularly in times like this. We have signed a number of new deals in the past few quarters with both new clients and existing clients with new funds, particularly with pension funds. Our clients are very interested in the very unique aspects of our solutions, particularly on the analytics and performance capabilities that we provide, leveraging our DataExchange platform. And at our Canadian data solutions segment, we had good growth this quarter as the pandemic has highlighted the need for national data. We have done more deals with clients for national data in the past 6 months than last year and continue to make great progress migrating our users to our new Altus Data Studio platform. 10 of our largest customers have already migrated to benefit from the improved data visualization and analytics capabilities. On the earnings front, our 19% margins in Q2 reflect the initial shift to subscription revenues and a higher level of expenses compared to last year, mostly related to software consulting including the impact of One11, though we saw some offsets come through when the pandemic dramatically reduced travel and we had to cancel our in-person ARGUS Connect conference in April. Also worth pointing out with our software training and education revenues down, we were still carrying the cost base. As we look ahead, we feel comfortable with the outlook as the anticipated COVID-19 trends that we outlined on our last earnings call in May, remain unchanged. No doubt, COVID-19 will continue to impact our business in the short and medium term, but the long-term opportunity remains solid, as you'll hear from Bob today. We continue to be well positioned to deliver year-over-year annual revenue growth in 2020 as we carry on with our transition to cloud subscriptions. Our view is supported primarily by Altus Analytics, Over Time revenue base of over 80%, healthy demand trends and our belief that our retention rates will be relatively stable as our solutions are considered mission-critical amongst our clients. Moving on to CRE Consulting segment, another solid example of excellent execution during a period of disruption. Our global Property Tax business continues to be on a multiyear role with strength across all of our national markets. Revenues were up 18% to $77 million, and earnings were up 19% to $34 million. The strength of this business goes beyond a single market and beyond being in a sweet spot of any given cycle. Although our performance still exhibits some quarterly variability, this quarter being no exception, our revenue is becoming more stable and balanced as the growth across all our national markets is helping to smooth out some of the peaks and valleys, especially when you look at it on an annualized basis. We have been steadily growing and enhancing this business across a number of different internal KPIs, and the success this quarter reflects that. For instance, our success rates remained strong, amongst the highest in the industry, translating to higher savings for our clients. Our market share by volume and value continues to grow and dominate in many jurisdictions we're in. We are by far the leaders in Canada and the U.K. and have a significantly growing presence in the U.S. Our settlement volumes continue to improve in most jurisdictions. Our pipeline continues to grow and is higher on a year-over-year basis, not just due to the volume of files on hand, but also reflection of improving pricing terms and values per appeal. Our business development initiatives continue to be very impactful and contribute to the growing pipeline. In addition, rising property assessment values provide us with greater opportunities for savings, particularly in disruptive times like today. And through our technology, process and organizational improvements, we're increasing our efficiencies and supporting our strong margins on a go-forward basis. In the quarter, the $15 million annuity billing revenue stream in the U.K. was a noteworthy contributor. While strong and approximately $5 million higher over Q2 last year, it was nonetheless impacted by COVID-19 subsidy program that eliminated 2020 ratings for companies in the leisure, hospitality and retail sectors. As a reminder, the annuity billing occurs only in Q2, starting the second year of a cycle, in Q2 a seasonally strong quarter for Property Tax. The U.K. has recently announced that it will defer the next valuation cycle to 2023, thus, allowing us to continue annuity billings into 2022 and setting us up for another strong year. All to say these positive trends, the annuity stream, high success rates, improving settlement volumes, high market share and a growing pipeline, all led to a record quarter despite having faced some pandemic-related headwinds. Based on a strong first half of the year, the visibility we have into our pipeline and the current pace of settlements, which still appear to be moving along, we remain well positioned to deliver another record revenue year at Property Tax. Our valuation and cost advisory have proven to be steady businesses in these unique times. As expected, we saw some softness in the transactional parts of these businesses but our core portfolio valuation, advisory and cost consulting services performed well, and some elements showed growth. On balance, we're maintaining our revenues and navigating carefully around some of the pandemic-related challenges in the industry by focusing on unique opportunities and sectors. For example, the pandemic has added greater flexibility -- sorry, greater complexity to valuations and a number of our customers have ramped up to monthly valuations. At cost, although we're still seeing growth in our core practice, we're also proactively positioning our offerings for infrastructure projects and to assist with some anticipated distressed real estate deals and workouts.Turning to our financial position. We entered this period from a position of financial strength and our balance sheet remains healthy. As our free cash flows grow, we continue to pay down debt, return cash to shareholders through dividends and pursue investments that will drive shareholder value. At the end of the quarter, bank debt on our recently renewed credit facility stood at $160 million, down from last quarter, representing a funded debt-to-EBITDA leverage ratio of 1.65x, well below our maximum limit of 4x. Our cash and cash equivalents was $74 million. Our cash flow generation was strong in Q2, reflecting some seasonality and worth highlighting that it's consistent with pre-COVID historical levels.We remain on solid footing and continue to prudently manage the business so that we can remain in a strong position and take advantage of emerging opportunities. During the quarter, we pursued a global restructuring program. The restructuring was planned as part of our strategy to continue to focus and invest in technology and information services platforms. We recorded a total of $7.5 million in restructuring costs, of which $3.9 million related to Altus Analytics and the balance to CRE Consulting and Corporate segments. These costs related primarily to employee severance as the restructuring was company-wide and impacted approximately 4% of our global workforce.To give you some color, at Altus Analytics, the changes were relatively smaller in terms of headcount reductions, but higher dollar savings as it impacted some senior positions as the program aim to realign our operating structure for the new operating model, driven by our long-term strategy. This will allow us to rebalance some of our investments to target new emerging opportunities and to make room for new roles in our most strategic areas to strengthen the capabilities needed in support of our long-term strategy.At CRE Consulting and within our corporate group, the changes were more related to headcount reductions, primarily in Canada, the U.K. and in Australia, including some accelerated retirements and nonrevenue-producing roles. We believe that some of the changes will better position us for profitable growth in the new operating environment post-COVID-19. While there will be some cost savings in the near term, I remind you we remain in growth mode. And therefore, we do not expect any material impacts to our operating margins outside of previously planned levels. And again, at Altus Analytics, the restructuring is in line with our long-term plan and the target ranges that we previously presented for adjusted EBITDA margins for 2020 and beyond.With that, I'll now turn it over to Bob.

[Robert G. Courteau, Consultant]

Thanks, Angelo, and good afternoon, everyone. Look, I'm really proud of our team's performance. Against a challenging external backdrop, we delivered outstanding consolidated top line and earnings growth, strong free cash flow and improved our consolidated adjusted EBITDA margins, all while keeping our foot on the pedal to progress against our long-term strategy. We've been proactive and innovative in pivoting our offerings for emerging opportunities and made an incredible effort to support our clients while being under duress ourselves. It was an extremely productive quarter that supports our optimistic outlook for the remainder of the year and frankly, for years to come.Without a doubt, 2020 has been one of the most challenging and unpredictable years in our industry and, certainly, in my career. We recognize the hardships experienced in our communities and in our industry. And from that perspective, we consider ourselves to be in a very good position to be weathering the storm and to see opportunity on the road ahead. We are truly fortunate.It's not to say that we didn't face any headwinds and this fortune comes from -- it's truly a tribute to solid execution. We do have a good team. It reflects our efforts in business transformation. It underscores the high-quality and resilience of our operating model, including our multiyear effort to enhance revenues through higher economic value, recurring contracts and validates the strategic importance of our solution set in the industry. The pandemic has validated that Altus Group has a high degree of revenue stability during CRE market cyclicality, and that many parts of our business are actually countercyclical.As we've been saying, this is an exciting time for Altus Group. We're well on our way in transitioning Altus Analytics business to a high-growth Over Time revenue model with a very attractive financial profile, and it's very well-timed with an exciting run at Property Tax. Our long-term opportunity is attractive as ever.At Altus Analytics, there are significant and permanent changes happening in our industry. The expectation for insight and transparency has been heightened substantially. Digital transformation across our industry is accelerating by necessity for many companies that's absolutely been accelerated by the pandemic. We've seen this before. We're in escalation and increased momentum of significant transformations and industries are rooted during periods of crisis or economic upheaval. And in this case, we have both. This is a case for better tools, data, analytics and the applications that support them. This is a positive catalyst for Altus Analytics business and our strategy to serve the CRE market with an end-to-end vertical market platform.The foundational building blocks are in place and our transition of ARGUS Enterprise to the cloud continues to progress in line with our expectations. At the end of the quarter, 8% of our total ARGUS Enterprise user base was contracted on the ARGUS Cloud platform compared to 6% at the end of Q1. The bulk of the cloud volume continues to be S&P-driven, where there's a more straightforward transaction, and we're starting now to see bigger deals in the mix. As we've been saying, the larger companies will naturally take longer to convert as this is a strategic consideration for them, but we are happy with how the pipeline is building.By our very own experience during the quarter, we completed the migration of our in-house Canadian valuation group users to ARGUS Enterprise on the cloud. And we instantly saw a material benefit in the ability to share models internally, resulting in a more collaborative approach to undertaking appraisal assignments. With several clients moving from quarterly to monthly valuations during this period of valuation uncertainty, the efficiency gains are important as the team was doing almost triple the number of appraisals in Q2 versus Q1. Plus, we have a number of new products and features in our cloud product road map over the next several months that will make it more attractive for a number of our larger clients.In particular, ARGUS Cloud will include the new platform reporting, Yardi integration, API enhancements and full integration with our Voyanta and Taliance products. We believe that as a number of the planned enhancements and new features address current client challenges and will fortify our platform solution to help drive accelerated adoption later this year and, obviously, in 2021.Overall, we're seeing continued momentum and making good progress adding ARGUS Cloud customers, as we're now approaching 800 ARGUS Cloud customers. This includes both new customers as well as those who have migrated from the legacy on-premise version. And to build on what Angelo shared about the quarter, we have sustained momentum with our Over Time revenue growth, which is benefiting from the higher economic value of the new subscription contracts. Our bookings volumes are picking up from the temporary slowdown experienced in the first part of the quarter as people have adjusted to the new normal. Our software sales pipeline continues to be healthy. As just discussed, our cloud transition metrics are on plan and appraisal management solutions continue to be in high demand as evidenced by another strong quarter and we have a very strong pipeline of new opportunities.And finally, our Altus data performed very well in the quarter, and we're excited for the opportunity for Altus Data Studio. So in summary, we're in great shape, and feel really good about where we're headed. The market fundamentals remain exceptionally attractive and we are well positioned for the opportunity ahead, especially with our cloud strategy, which allows us to improve the economic value of our contracts, while providing significant value to our customers and the industry.Look, at Property Tax, we remain in growth mode and have plenty of runway ahead of us as our market penetration is still modest relative to the opportunity. As you heard from Angelo, we're also making solid progress improving the economic model, due in great part by tech-enabling the business. The strength of the model is dependent on growing market share, factoring in both higher volume and higher value of appeals. Our growing scale significantly enhances our internal data sets, which, combined with our deep expertise, contributes to the strong success rates that we're able to achieve for clients. It also allows us to maximize the value of the appeals that we process, which given our high contingency model as mutually beneficial outcomes for our clients, but also for the company. We're becoming less dependent on single-cycle contributions from 1 geography and have achieved more balanced performance across the board, plus combined with ongoing digital transformation initiatives, we're driving towards improved revenue predictability, revenue growth and margin expansion.As discussed in our last call in May, this business is countercyclical. Despite some short-term impacts on the pandemic, we had a tremendous quarter, and we're still poised for a record revenue year. Looking out beyond this year, the market disruption brought on by COVID-19 presents us with some unique opportunity that we're positioning our business for. It's been our experience that periods of market disruption tend to lead to valuation volatility, which ultimately provides us with greater opportunity to maximize savings for our customers. This sets up a pretty compelling outlook over the long term and a few points in support of that.The 2020 slowing of case settlement activities has allowed us to focus on growing our pipeline for future years. In addition, the spillover effect of some of the settlements that will get deferred will benefit us next year and beyond. And the spillover into 2021 is likely to be higher than we initially anticipated. And we will also see a spillover into 2022 as well. Specifically, in Ontario and the U.K., we're likely to see an acceleration of case settlements next year that will give us additional momentum. And importantly, the U.K.'s extension of the 2017 cycle by an additional 2 years is a positive for our clients and will allow us to continue with annuity billings through 2022. It also provides us with more time to process our existing pipeline and add to more 2017 list files.Our potential for higher [ opt out ] wins and the next cycle strengthens, drawing on our experience in past market disruptions. That has always been the case. For example, the volatility in property valuations could lead to higher savings for clients. We're already all over this. In the U.S., earlier this year, the team signed a new client in the retail sector and already has achieved them savings of over $1 million by proactively addressing the impact of COVID-19 on the retail space. There's many, many more examples like this one, and we're pursuing COVID-related adjustments for clients in all markets. And also using that to drive our market share in these industries.In the future, we could also benefit from some unique onetime COVID-related appeals. For example, in the U.K., we're leading a class action on behalf of our clients in response to the devastating effects of COVID-19 on their business, resulting in the service of over 30,000 appeals. No one has responded on that scale. Given the strength of our key performance indicators, as Angelo covered off, we're set up for growth. And of course, we believe that we're better positioned than our competitors. And that there will be opportunities to add talent to our team, build loyalty with clients, gain more market share, and we will obviously consider attractive tuck-ins as we move ahead.Look, we recognize that this is a very difficult time for industry with shifting complexity, more pronounced challenges in certain asset classes and sectors and, overall, with client viability, which could introduce some risk of collections. But as a countercyclical business, we have a great growth runway ahead and a phenomenal macro backdrop for Property Tax.As I start to wrap up, I want to congratulate and thank our employees for an amazing quarter. We recognize the challenges, the hard work, the extra challenging times. And we thank you for going above and beyond, not just for Altus, but for our customers as well. Our industry is one that still thrives on relationships. And our customers have been leaning on us like never before, and our team is going above and beyond. We're here to support the industry, to manage to whatever challenges may lie ahead in this ever-changing environment. All of our solution sets are aligned to help our customers maximize the value of their CRE assets. I'm confident that the increased level of thought leadership and engagement that we're having with our customers, will serve us well over the long term. We're strengthening client loyalty, and retention across every one of our business.The world has changed in the last several months, and we're committed as ever to do right by our employees, the industry and the communities that we live in. As we carefully plan ahead for an inevitable return to an office setting, we continue to prioritize proactive risk management and taking good care of our people, customers and communities. In addition to the pandemic, recent months have also seen social unrest, particularly in the U.S. This has brought heightened focus to racial inequality and injustice in our societies. For me personally, it has reinforced the importance of diversity and inclusion across our company and in our society. While I believe we have a great foundation in place at Altus, there's always room for improvement, and we look forward to rolling out more initiatives this year.So in closing, I wanted to leave you with the following: Number one, our results from Q2 underscore the high-quality and resilience of our operating model and validate the strategic importance of our mission-critical solution set in the industry. Number two, against the backdrop of uncertainty, our end-to-end CRE offerings drive better decision-making for our clients, helping improve the visibility and flow of information through their critical business process, to maximize the value of their CRE assets investments. Our clients are facing both unprecedented challenges, but also opportunities in the current environment. Strengthening the long-term demand for our cloud-based solutions, data and analytics and professional services will be a factor in supporting our clients. And number three, hey, we're in growth mode. The long-term fundamentals of our business and the market opportunity ahead of us are as great now as ever, and we are very favorably positioned.So with that, operator, if you're going to open up the line for questions.

[Operator]

[Operator Instructions] And the first question is from Yuri Lynk of Canaccord Genuity.

[Yuri Lynk]

Wanted to just drill in a little bit on the 8% cloud penetration rate for the quarter. Bob, is that still primarily driven by small and medium-sized customers? And especially given the pandemic, when do you think you might get some of your top 5 clients to make the switch? Like where is their head at right now in terms of the cloud?

[Robert G. Courteau, Consultant]

Yes. Look, I think the solutions that we're releasing here over the next 3 or 4 months are the ones that are really going to cause some of this pipeline to start moving, right? And what's cool about it is that the way we developed our multiyear road map, we're on track with this transition started with the SMB users. And as we create this new infrastructure, it's a great way to enter into a cloud model. So we feel pretty good. We actually closed a large transaction in the quarter with one of our biggest customers. And we had big, big, long discussions on cloud. But at the end, we deferred. And the reason for that is that we felt that we wanted to get it closed in the quarter. It contributes to the Over Time revenues, and we want to actually build a strategy with this customer that is going to be more broad.So there's 2 things in flight here, one -- or 3. One is getting our models intact and our business, our shift to subscription models well intact, get -- and with that, get the products out in the market for the enterprise. Number two, we also have an objective to increase our overtime revenues and this deal that we did in the close -- in the quarter is going to really contribute to that. And then number three, what we want to do is make sure that we partner with some of the big service providers out there to go-to-market through APIs, through partnering to market. And that just takes time. It's a different way of looking at the market and the industry. But we've always planned for that. And so we feel like we're on track relative to the metrics that we track inside our company. And the pipeline was really good in the quarter on larger deals. So that feels pretty good as well.

[Yuri Lynk]

Okay. One for Angelo. I thought on the Q1 call you had mentioned expectations for flat margins in Altus Analytics in 2020. Did Q2 turn out the way you thought because year-to-date were down over 300 basis points? So just wondering if your view changed or if we should expect some improvement in the back half of the year.

[Angelo Bartolini, Chief Financial Officer]

I think there's a bit of improvement that we can expect. Although we -- the ranges that we provided back at our Investor Day in December, our part is the range and part of what we did in June, that was part of our plan for 2020. And so it's -- that range still holds. And so I think we're going to be within that -- well within that range.

[Operator]

The next question is from Stephen MacLeod at BMO Capital Markets.

[Stephen MacLeod, Analyst]

Just on the tax business. The quarter came in quite strong. And at the time of Q1, you talked about some of these delayed U.K. settlements, which it sounds like some of them did come to fruition in the quarter. But was there something in the quarter that was stronger or maybe conversely not as weak as you might have expected?

[Angelo Bartolini, Chief Financial Officer]

Well, Stephen, I think on the last call, we were still in the early throes of the whole pandemic situation. And we were seeing in certain jurisdictions where there were some delays. They weren't around as much. Hard to follow through on settling cases. As it turned out in many jurisdictions where that was happening, it turned out that towards the end of the quarter, it actually improved significantly. And so that was -- I don't know if you call it a pleasant surprise, but it was a bit of an unknown for us early on in the quarter.

[Robert G. Courteau, Consultant]

Yes, Stephen, one of the things that we got on pretty quickly when governments were trying to help businesses, we -- across virtually all of our tax practices, we did a huge amount of lobbying with the government to say this isn't easy. Why would you hold back on obvious tax settlements, right? And that ended up being a fairly effective strategy in many of those markets. But we also enjoyed -- what I loved about the quarter is that there was contributions from a broad sector. It wasn't like 1 phenomenon, which is a reflection of how tax is going to evolve as we go forward. We think we're getting critical mass in this business that is going to really allow us to start getting the benefits of a more consistent, high-quality revenue. So it was a great quarter.

[Stephen MacLeod, Analyst]

Yes. Okay. That's good color. And then when you think about your Property Tax pipeline, as you mentioned, things have sort of unclogged from where they were at the beginning of the quarter. I assume you had momentum building through the quarter. So when you look at your pipeline from where you are today, what's your visibility? And would you say that it's improved -- your outlook has improved from where you were at Q1? I guess it's fair to say it probably has. But would you expect that it's still going to be a record year for 2020 tax?

[Angelo Bartolini, Chief Financial Officer]

Yes. Yes, especially given what we booked to date, for sure. We are being a bit careful in terms of even our messaging and signaling, but we're very confident we have great visibility. We're continuing to do business development and add new clients and new appeal to our pipeline. And visibility is good. And there is -- actually, given what's going on in the market right now, there's -- in certain jurisdictions, there's new opportunities. There's new opportunities for appeals that we hadn't even envisioned before. So we are adding to the pipeline. It is growing and which is the reason we're feeling confident for the balance of this year, feeling confident for 2021. And with what I mentioned in the prepared remarks with -- and what Bob mentioned as well, with the U.K. stretching out this valuation cycle, allowing us another year of annuities in 2022. It just -- it stretches the opportunity in tax for many years to come.

[Robert G. Courteau, Consultant]

And the wildcard to the short-term question is we had a really, really strong settlement in Q2 that, obviously, could have a modifier in Q3, right? We're not talking down Q3. I'm not saying Q3 is going to be bad. But it was phenomenal across the board. And so we're now in a place here where if you look at tax on an annualized basis, we have really, really strong visibility through a 2- or 3-year cycle now. It's really positive. And we think we can outrun the competition, grow market share, and we're ahead on our technology transformation. So this is a high-value business.

[Stephen MacLeod, Analyst]

Yes. That's great. And then maybe I just wanted to follow on, on something you just said there, Rob, about the really strong settlement you had in Q2. And given that the annuity cycles tend to be Q2 seasonally strong, are you able to quantify like where that came in relative to what your expectations would have been?

[Robert G. Courteau, Consultant]

I was just -- it was better in terms of the overall settlement, and it was one of those quarters where we had a broad contribution, right? So it's just a really good great quarter, particularly given the backdrop of what's going on in the world, right? I think -- look, I mean, just a little anecdote about that that I mentioned, getting organized in the pandemic and work from home to do 30,000 appeals in the U.K. on a class action basis talks to technology and the kind of influence we're having on the industry. We also had -- and probably -- I mean, Western Canada is under a huge amount of pressure. We had another strong Alberta quarter. It was amazing. And so what happens to the point I made earlier in the impact on values, given the implications of rent or revenue creates incredible opportunities and you've got a government that is trying to help these businesses on one side. And at the other side, hard to argue that, structurally, the valuations that they had previously are defendable, right? And so all those elements are in place that this is like -- our tax guys are feeling pretty good about what the next few years are going to look like. They've got lots to work with, and it's really good news for our customers in a world where it's really hard for our customers.Look, they're looking for help. And this is one, as Angelo said, as a countercyclical business, we're going to help them a lot.

[Operator]

The next question is from Deepak Kaushal at GMP.

[Deepak Kaushal, Director and Technology & Communications Analyst]

I just have a couple of follow-ups and then a couple more questions, if I may. Bob, on Altus Analytics, you mentioned the new big customer signing up for cloud. But you seem to say that they had an expanded contract or expanded agreement, but didn't put in a full kind of scope that you expected and you're kind of holding off for some further future plans. Can you walk us through what that means a little bit? Are they expanding geographically and where you extend products?

[Robert G. Courteau, Consultant]

So what happened was we signed a number of multiyear subscription agreements with these clients like 3 or 5 years ago. One came up in the quarter. And as part of the negotiation, we didn't want to let the renewal date pass. And so we got into a classic software negotiation where we didn't want to let the economic value get interrupted by introducing some of the cloud complexity that would have come with things like data rights, transition rights in that. So we ended up negotiating an amazing contract, apps in cloud, and we have an opportunity to go back and get it. So it wasn't a comment on the viability of the cloud for this client. It was actually the way the contract had come to be. We elected to take a more traditional contract now with an option on cloud and come back to it. And from an economic value, that was a better decision for us. So it's that simple. It was just a pure negotiation.

[Deepak Kaushal, Director and Technology & Communications Analyst]

Okay. So do you have to wait till the next renewal period to come back to cloud? Or can you accelerate?

[Robert G. Courteau, Consultant]

No. We signed a 5-year renewal at -- we're really happy with. And we will be back shortly.

[Deepak Kaushal, Director and Technology & Communications Analyst]

And so just in terms of big enterprises in general, if there was some kind of pause or slowdown due to COVID and now we're looking -- now we're more comfortable with the kind of COVID situation to some extent, what is the thinking around spending on these types of transitions? Were they kind of slowing down because they need to sort of internal issues first? Were they reshuffling budgets or tech stack priorities? What are their thoughts in terms of priorities now in...

[Robert G. Courteau, Consultant]

I think our pipeline went up in the quarter. So there's more opportunities than not. Obviously, like for all companies, decision-making is a little bit trickier. But again, I'll say it again, we were not dependent on these large transactions for our multiyear transition. The key is to keep the SMB going. We're actually doing better in advisory and Altus Data. Through the quarter, our pipeline in those 2 businesses have been phenomenal, and they're a modifier for any slowdown in the SMB part of ARGUS. So we feel really positive about our position now against the metrics.

[Deepak Kaushal, Director and Technology & Communications Analyst]

Got it. Okay. And then, Angelo, just on the U.K. Property Tax annuity billings. Am I -- understand this correctly that the U.K. extended for another year? Did you announce last quarter they extended to '21 and now they're extending to 2022? Is that the right interpretation?

[Angelo Bartolini, Chief Financial Officer]

Yes, that's correct. Yes. We had 2 extensions, if you will, in the last quarter. So it just has to do with them being able to prepare. And again, the pandemic has caused, you can imagine, just jurisdictions, amount of work that they have to deal with, the number of appeals, time lines. And they have to go through an assessment before they can reissue new values, and so they just needed more time themselves. And so they've announced that they are going to push out another year. They haven't actually passed the legislation but it's pretty clear that's what they're doing.

[Robert G. Courteau, Consultant]

And Deepak, it puts an exclamation mark on the government's ability to actually strike a valuation, right? Because in this world, that's a very difficult thing to do at scale for all those establishments. And that's another example of our ability to create good outcomes for our customers because of their shifting values.

[Deepak Kaushal, Director and Technology & Communications Analyst]

Okay. So 2 follow-ups to that then. So before all this happened, you guys are expecting annuities to peak this year. Does this push the annuity peak out to 2022, and you keep growing until then on the annuities, at least?

[Angelo Bartolini, Chief Financial Officer]

Yes, correct.

[Robert G. Courteau, Consultant]

And we have -- and by then, we'll have further gone on our digital transformation. We'll have higher market share. We'll have bought some companies. We will have more data. We shall win.

[Deepak Kaushal, Director and Technology & Communications Analyst]

Yes, looking forward to it. And then just the last one, if I can slip this in. You mentioned that the class action around the taxes in the U.K. Are there any externalities we should be thinking about associated with this? Like does this suck up some future tax claims? Or is this completely additive to the existing kind of momentum you've gotten?

[Angelo Bartolini, Chief Financial Officer]

No. This is all additive, Deepak. It's all incremental to -- it's just one of the new opportunities that presented itself as a result of this whole pandemic environment.

[Robert G. Courteau, Consultant]

And so think about it as -- the best way to think about it, Deepak, is class action suits over there are different from what -- how they're seen in the U.S. as an example. So think of this as a massive lobbying effort. Like we worked with a couple of industry associations to put this together. And the outcome could be a onetime benefit for our clients, or it could cause an opportunity in terms of how they strike values. And so this is us getting mobilized against all of the elements of our operation to really be influential in that -- in all the tax markets that we serve, right? So you have to have the data and technology and customers. I mean we're over 80,000 establishments now in the U.K., right? So...

[Deepak Kaushal, Director and Technology & Communications Analyst]

Is it the dynamic you can push into to the U.S. market?

[Robert G. Courteau, Consultant]

It's a little bit different because what's cool about the U.K. it's a single market throughout the U.K., They don't have regional or provincial breakdowns like they have in Canada or even in some cases, municipal, it's one big hunk in valuation market. So it's easier to get assembled against that. And we probably -- fair to say that Alex Probyn and the team over there have -- Canada is pretty good too, but have done incredible data mining. So that's the other reason that they're able to do it.

[Operator]

The next question is from Gavin Fairweather at Cormark.

[Gavin Fairweather, Analyst of Institutional Equity Research]

Just on the Altus Analytics side, you've talked in the past about how destruction can cause increased usage and drive revenue. Just wondering kind of your experience through the quarter, whether you have any kind of anecdotes or KPIs on usage of the system or needing more licenses or more frequent appraisal.

[Robert G. Courteau, Consultant]

Yes. When you get into the Enterprise conversation, more and more, we would say that the large global real estate companies and the large service providers are driving digital transformations. They're thinking about how to improve workflow. We fully expect, as we go into 2020 and they sort out their projects, that ARGUS will be a foundational technology around that and ARGUS Cloud, particularly where they can use it as a source of data collection. And these are the kind of tools that are coming out over the next 4 months, things like collaboration, APIs and that. And so anecdotally, when I talk about the growing pipeline, we're having those conversations that are about how we have to implement these solutions against their digital transformation. And the story I told about how we used ARGUS ourselves in the pandemic is not lost on the industry and the market. And so most companies are now thinking about how they can get their data into a cloud infrastructure, and we're having great conversations.And then secondly, we think one of the things that's going to happen, some of it driven by us, is we're in a period of time where we're integrating our businesses. And so if in our appraisal management business, which had a great quarter, growth and margin, if we actually start build -- using ARGUS Cloud to contribute to DataExchange, to contribute to DataBridge, that will create traction with the biggest customers in the year, in the world and the big software providers to want to serve those clients. And so that's a big part of our strategy, and we had some pretty interesting breakthroughs in the quarter about how that's going to work.And then finally, with Voyanta, we're working with a couple of large clients to be their data aggregator, their data collection platform for those customers, which then again ties into ARGUS Cloud. All of these are great opportunities. Go for it.

[Angelo Bartolini, Chief Financial Officer]

The last thing I'd mention as well is just the demand we're having from many of our clients to help them out running ARGUS models in our RVA practice where they don't have necessarily in-house expertise yet. And so we're running a lot of the analytics on their behalf.

[Gavin Fairweather, Analyst of Institutional Equity Research]

That's great. Very helpful. Just secondly for me before I pass along, M&A kind of earlier in the year. I think your thought process was being more kind of opportunistic, patiently seeing how things kind of played out with the pandemic. Just thought I'd take your pulse on kind of your M&A appetite now as the years progress.

[Robert G. Courteau, Consultant]

Well, we're getting a lot more calls post-pandemic, that's for sure. Like I think the way we're looking at it is probably unlikely -- actually, I'll say it this way. We've got to get to a point where we've got to be able to integrate these acquisitions. And it's one of the barrier -- one of the challenges of the pandemic or COVID-19. Hard to imagine that you can do integration right now, right? And so we do have a couple of interesting opportunities that we're probably going to sign some partnership agreements and use the partnership agreement as a way of doing combination of due diligence and dating and maybe even engagement to get married, right? So that's the way we think we're going to work our way through it, at least in the short term.

[Operator]

The next question is from Paul Treiber from RBC Capital Markets.

[Paul Michael Treiber, Director of Canadian Technology & Analyst]

Just a couple of follow-up questions on Property Tax. Obviously, a very strong quarter. I'm just trying to get a sense if it was better than your expectations prior to COVID when you net out all the puts and takes. Because it seems like you benefited from -- to some degree of cautious settlements, but then also there are some deferrals and then the suspension of the 2020 ratings in the U.K. So when you look at it prior to COVID, was it better-than-expected in line?

[Robert G. Courteau, Consultant]

I think in the long term, 100% way better than we expected from a countercyclical perspective. We didn't -- part of the reason that we had some trepidation, we didn't -- I mean, trying to outrun, we lost -- I don't -- we said how much we lost in the quarter. I think we didn't.

[Angelo Bartolini, Chief Financial Officer]

We didn't.

[Robert G. Courteau, Consultant]

Yes, we lost a huge amount of revenue in the U.K. in the quarter, which will be replaced next year. It was a onetime rebate and then I ran that in the U.K. and then had a broad success where we were able to gauge. So yes, it was way better than we expected in the quarter. And frankly, the 2022 valuation deferral for the U.K. was a positive on top of that. So yes, it's happy, happy, happy.

[Paul Michael Treiber, Director of Canadian Technology & Analyst]

For Angelo, could you quantify huge.

[Angelo Bartolini, Chief Financial Officer]

Quantify, sorry?

[Camilla Bartosiewicz, Vice President of Investor Relations]

Huge.

[Paul Michael Treiber, Director of Canadian Technology & Analyst]

Bob's comment about -- you lost a huge amount of revenue in the quarter.

[Angelo Bartolini, Chief Financial Officer]

Well, we didn't -- we talked about -- we also -- I believe, if I recall, we talked about in the last quarter, but we didn't actually put a number on. So it relates to 3 industry segments: hospitality, retail and leisure. And so for those clients, they had a tax holiday for 2020. And obviously, you can't bill them for something that they don't know. And it was just a 1 year thing. So it comes back next year, but we haven't quantified it, we didn't put that number out. Sorry, I mean, it would have been a segment of last year's number and on top of the $15 million that we would have booked this year. So -- but I can't give you a number since we haven't published one.

[Paul Michael Treiber, Director of Canadian Technology & Analyst]

Okay. And then look, specifically, in regards to the U.K. annuity billings, up 50% year-over-year, a significant increase. What's the fundamental driver of that? And are those drivers sustainable?

[Angelo Bartolini, Chief Financial Officer]

Yes. I mean, again, it's a little bit like the subscription model, right? So you build it constantly every year. You've got the billings from the year before. And then you're putting -- you've got what you did in annuities from the prior year. And then in the last year, the U.K. settlements just build on top of that. So it's an increasing function. And now there is -- we're a little bit careful as you get longer in the cycle. You may lose a few of those clients because some may go bankrupt, just -- some fall off the table. It's not 100% that you get to capture again in the following year, but it is a very high percentage.

[Operator]

[Operator Instructions] And the next question is from Richard Tse at National.

[Richard Tse, MD & Technology Analyst]

Aside from COVID with respect to AA, what do you figure the current major gating factors are to converting your large customers? Like, what do they want to see? Is it just time?

[Robert G. Courteau, Consultant]

Yes. I think we've always said that there's just a -- look, when you put in a new application and you think about it not as a departmental app, I mean, we're selling ARGUS Enterprise to enterprise. We still have our normal volume, people are taking licenses. But what we're talking about here is a full scale transition. So I've said it in past meetings, the reason that we didn't have a -- over significant amount of Enterprise expectations in the first year is you've got the selling cycle, you've got the cycle of validation. So if you're putting a new cloud application in to the biggest companies in the world, there's the security responsibility around that. You have to get budgets organized and the functionality that I've talked about a couple of times on the call is the functionality people need to operate these solutions on a global basis, different from the SMB customer.

[Richard Tse, MD & Technology Analyst]

Okay. And then no doubt you're in discussions with all your customers. What are the bigger ones saying with respect to whether they're seeing any permanent structural changes in commercial real estate, whether it's work-from-home, shift to e-commerce? And how does that sort of change how you think about sort of the product and services you roll out as we look kind of beyond this?

[Robert G. Courteau, Consultant]

The bell curve on that is huge, right? If you're in retail and that's a predominant part of your business, this is an extremely challenging time and both in terms of bankruptcies, collection and the like and, frankly, the work with the future of retail. So already, you're seeing in those kind of markets that are the hardest hit serious repositioning of those assets. And like I saw that -- I can't remember who it was, one of the big mall owners that closed. It just did a deal with Amazon to use one of their big box stores as a distribution center in multiple locations, both suburban and downtown. So you're already seeing people scramble, right, and find different ways to reposition their assets. I think the good news is, and I've said this all along, for the most part, real estate has become an institutional game, pension funds, insurance, banks, private equity. And they're repositioning rather than retrenching is probably a consistent theme. What could be interesting is the workouts that come out of that repositioning, the valuation work. I actually think the shift is going to move to managed funds where -- versus REITs, which have been more specialty, monoline type of structures. And you're going to see the big large firms, including the pension funds, probably even looking at buying some of those REITs and turning them into managed asset, either directly for the pension fund or indirectly as an asset management solution. We're seeing that. We're seeing all sorts of activity all over the place. That's a good trend for us because we value those funds.And then all of our competitors for ARGUS, almost everyone is a single-asset competitor. And when we think about investment management, we think about the complexity of managing portfolios. And we're going to reinforce that as part of our road map as we go forward. Because like if you look at RealPage, as an example, they're kind of a multi -- they're a multifamily company. It's the least complex asset class. And although they think they're going to compete against us in investment management, it is not going to happen because the complexity of running these institutional portfolios with ARGUS, collecting data and things like DataExchange, doing the things that we do with DataBridge on an integrated basis, this is really complex stuff and that plays to our strengths, and that's going to show up in our road maps.

[Operator]

Thank you. There are no further questions. Mr. Courteau, I would like to turn the conference back over to you, sir.

[Robert G. Courteau, Consultant]

Yes. Look, it was a great quarter. We're really happy with where we're positioned. But this hasn't caused us to relax. We are fired up about the opportunities in front of us. We think that this puts a lot of pain in funding and viability of some of the smaller companies that might have been changed in us. We think we have a better mode today in both Tax and Altus Analytics and with some of our services business than we did 3, 4 months ago. We've always been saying that. We're proud to prove it. So thanks for the interest, and thanks for your support.

[Operator]

Thank you. Ladies and gentlemen, this concludes today's conference call. Should you have further questions, please contact Camilla Bartosiewicz at Altus Group at [phone]. We thank you for your participation and ask that you please disconnect your lines.