Altus Group Ltd

TSX:AIF

Earnings Call Transcript 2022-Q3

[Operator]

Thank you for standing by. This is the conference operator. Welcome to the Altus Group Third Quarter 2022 Financial Results Conference Call and Webcast. [Operator Instructions] And the conference is being recorded. [Operator Instructions]

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

[Camilla Bartosiewicz, executive]

Thank you, operator. Good afternoon, everyone, and welcome to Altus Group's Third Quarter Results Conference Call and Webcast for the period ended September 30, 2022. The news announcing our results was issued after market close this afternoon and is posted on our website along with our -- and on our SEDAR profile, along with our interim MD&A and financial statements. For those of you joining us online, we're pleased to introduce slides to accompany our prepared remarks. The slide deck is also available on our website for those participating by phone.

Joining us today are CEO, Jim Hannon; CFO, Angelo Bartolini; as well as the Vice President of Finance and Accounting, Eric Lau. 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.

Please be advised that some of our remarks on this call may contain forward-looking information. Forward-looking information is based on assumptions and therefore, subject to risks and uncertainties that could cause actual results to differ materially from those projected. You can read about these assumptions, risks and uncertainties in today's press release and on our most recently filed MD&A and any information form as well as in our other filings with the Canadian Securities Regulators. We undertake no obligation to update forward-looking information, except as required by law.

Also, please be reminded that Altus Group uses certain non-GAAP and other measures as indicators of our financial and operational performance. An explanation of these measures are detailed in today's IR materials, including the news release, slides, MD&A and in our other filings with the Canadian Securities Regulators. Okay. Over to you, Angelo.

[Angelo Bartolini, executive]

Thanks, Camilla. Before I begin, please note that all the figures we'll be referring to today are as reported and our growth rates will be on a constant currency basis. We delivered another quarter of very strong results with clear evidence of our execution across numerous key metrics.

Our double-digit consolidated revenue and adjusted EBITDA growth reflects continued momentum in Analytics and robust CRE consulting performance. Analytics is firing on all cylinders, high growth in recurring revenue, solid bookings performance and adjusted EBITDA margin expansion.

Our continued execution is driving high sales productivity, cost optimization and enhanced operating leverage, demonstrating that we can grow and expand margins. This results in increased cash flow from operations, up nearly $19 million year-over-year in the quarter. In addition to delivering solid financial results, we're making progress against our strategic initiatives, and we are seeing the returns from our investments. We have momentum across all our businesses as we invest in technology and strategic growth initiatives. I couldn't be more pleased to host my final earnings call at Altus delivering such an outstanding quarter.

Diving into our consolidated performance, we had strength across all of our key metrics. Revenues were up 18%, of which 13% of the growth was organic. This is the sixth consecutive quarter of double-digit top line growth. Profit under IFRS was $6.8 million, up meaningfully from a loss in the prior year. Adjusted EBITDA was up 34%, reflecting the earnings growth from Analytics. Consolidated margins were up 240 basis points to 18.5%, driven by a 590 basis point increase from Analytics. And adjusted EPS came in at $0.42, a nice increase, particularly given the larger share count following the equity financing last year. Through focus, simplification and execution, we are improving our business performance while positioning Altus strategically for the future. This requires us to realign our operations and our resources towards our growth priorities.

In Q3, we took additional costs out as part of our restructuring program, recording an $8 million restructuring charge. More than half related to our ongoing efforts to rationalize our office leases space in certain markets and the remainder related to employee charges. The year-to-date restructuring program charge stands at $21.9 million.

Turning to our business segment performance. Starting with Analytics. Analytics revenue was up 35%, and notably, Over Time revenue was up 40%. We're sustaining the accelerated growth and starting to put up normal margin expansion. This speaks to our sales execution bolstered by the operational improvements we've been driving, healthy demand for our solutions and our focus on enhancing operating leverage. As well we are starting to see the results of our transition to a recurring revenue model implemented just over 2 years ago, which provides for greater revenue growth and margin expansion. I'm really pleased with the 25% organic revenue growth and especially the 28% organic Over Time revenue growth, a new high.

On the earnings side, adjusted EBITDA was up 76%. This reflects higher revenues, improved operating efficiencies, ongoing cost optimization and a netback tailwind on an as-reported basis from a stronger U.S. dollar. Slide 9 illustrates the impact of these growth factors, which show a 590 basis point increase in our adjusted EBITDA margins to nearly 24% in Q3. Given our strong Over Time revenue base and low churn, this bodes well for margin expansion in future.

Over Time revenue growth is an important KPI for us. We are growing this revenue stream and continue to make investments that will further improve this metric. We enjoy a healthy demand for our key offers while benefiting from customer expansion as well as new customer additions. Our high percentage of our revenue growth continues to come from our existing customer base, where we have a significant runway for wallet share expansion and we continue to add new customers to our roster, both in North America and internationally.

In Q3, we added approximately 200 new logos for ARGUS. This is in addition to new logos from our other solutions. We're also seeing revenue growth internationally in our core geographies. While the majority of our growth continues to come from North America, we also posted notable growth in EMEA and APAC. Our bookings at $26.9 million showed a solid increase, up 28% over last year, while increasing 8% sequentially, indicating continued strong demand for our offers despite the macro challenges. Most noteworthy, recurring bookings were up 55% year-over-year.

As a reminder, the effectiveness of our go-to-market model began to emerge in the fourth quarter last year. While our productivity continues to grow, our year-over-year percentage growth in the future will now be off this benchmark.

Turning to the CRE Consulting segment. Property tax had modest revenue growth, consistent with our expectations. Both the U.S. and Canadian operations had double-digit growth, offset by a decline in the U.K. An unfavorable FX rate continues to challenge the U.K. business. And as discussed on the last earnings call, the U.K. continues to be impacted by the slowed cadence of settlement volumes at the valuation office due to resourcing streams. Though impacting revenues in this quarter, it translates to a higher backlog entering 2023.

Our valuation and cost advisory businesses performed well in the quarter. This reflects continued healthy market demand and effective sales execution. The growth rate also takes into account a lower compare in the same quarter last year, which experienced disruption from the cybersecurity incident.

Our final -- and finally, our balance sheet and our net cash from operating activities continue to be strong. We finished the quarter with a cash position of $46.6 million and with $324 million in bank debt. The funded debt to adjusted EBITDA leverage ratio, as defined in our credit agreement, was 2.29x, a nice improvement from last quarter and well below our maximum limit of 4.5x. Applying our cash and net debt to adjusted EBITDA leverage ratio was 2.2x. Given our growing adjusted EBITDA levels and our ability to generate strong cash flows, we are able to deleverage quickly and reapply our 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 think everyone knows that we work out the scripted comments here, but my unscripted comments are, Angelo, what a mic drop moment for you, it's awesome. I am so happy that these are the results that we get to deliver. And we're not surprised because we're -- the company has built a great foundation for years, and we put in operating plans for the last few years that have just been, just everyone just onboarded and it's great. Thank you.

So to say I'm really pleased with the third quarter performance, you'd probably discard as an understatement. Not only was performance great, but our strength across all of our leading indicators is up. It's a really exciting time for Altus Group and by extension for all of our stakeholders, our clients, our employees and our shareholders. Thanks to all of our colleagues for their hard work and outstanding contributions this quarter.

I'm going to focus my comments on our 2 largest businesses, Analytics and tax. The fundamentals of both businesses are very healthy. Even in the current economic environment, all parts of our businesses have performed well. 87% of our Analytics revenue are Over Time and our relationships with our tax clients represent long-term and often renewed engagements. The volatility of the markets makes our offers more impactful, helping to reveal drivers of alpha and identify in mitigating risk to our clients' portfolios, in other words, reducing data.

Our results again show that we're stable and quite resilient across the various economic cycles. We believe we're navigating successfully in this current economic environment by focusing on resource allocation of detailed account planning and value selling and creating value and bringing value to our clients.

Our Q3 Analytics bookings are up, and we have a healthy and growing tax backlog. Other indicators such as pipeline build, renewals and sales cycles are trending nicely and tracking with our expectations. Overall, analytics delivered an impressive quarter. Last year and in the first half of this year, we focused on ramping up our sales productivity. As you heard today, analytics highlights include 40% Over Time revenue growth, a 590 basis point improved margin improvement in analytics and 28% bookings growth, including recurring bookings being up 55%. With the acceleration in top line growth, we're on our path to reach our aspirational $400 million revenue goal for Analytics next year.

And in the tax business, we expect to close a record revenue year. As we prepare for 2 important new tax cycles, which are expected to commence next year, we're poised for another multiyear run of revenue growth, market share gains and enhanced operating efficiencies. Additionally, the integration with Rethink Solutions is progressing well and opens up new cross-sell opportunities with a recurring revenue stream. It also advances our efforts to digitize and automate many of the manual workflows of the tax business.

Turning to a quick update on ARGUS Cloud adoption. We ended the quarter with 55% of our ARGUS Enterprise users on the cloud, in line with our plan. We have good visibility on upcoming contracts and expect larger clients to convert to cloud upon renewal. Based on that, we maintain our target to get to the low to mid-60s Cloud adoption rate by the end of the year and expect to have a large majority of ARGUS Enterprise users on cloud by the end of '23.

A notable operating highlight is the upcoming launch of an important addition to our Intelligence-as-a-Service offer portfolio. Investors are looking for ways to harness data and predictive analytics to improve performance and manage risks. Our next Intelligence-as-a-Service offer will enable clients to harness both through the combination of predictive models and macroeconomic, demographic and valuation data. It will be further enhanced through our extra lead delivery.

To illustrate this with the use case, consider a CRE investor focused on the retail sector, looking to identify new opportunities. Client would evaluate factors such as demographic profiles, income and employment trends, population growth, mobility trends, vacancy and rental rates and growth prospects in addition to comps, all are valuable decision criteria. Without the right data, analytics, technology and expertise, this type of research takes extensive effort and time to gather and analyze.

Projecting the performance of an investment based on changing economic conditions could take weeks or months. Our capabilities can reduce decision time to hours and minutes while significantly increasing the quality of the analysis. This will be our first offer powered by our next-gen technology stack, which we call the Altus Performance Platform, or APP for short.

The APP delivers scalable, diverse and extensible data model designed to support advanced analytics applications. Our organic investments in technology, combined with 2 of our most recent acquisitions, StratoDem and Reonomy, converge on a platform to allow us to deliver Intelligence-as-a-Service. This is an exciting time for our Analytics team.

Moving to Operations. By design, 2022 is a key execution year during which we metaphorically report our foundation and got our house in order. We made focused investments in our operations, our people, our systems and our technology to accelerate growth, efficiently scale and position Altus for many years of success. While some of the work continues into next year, I'm very pleased with the team's successful execution against the strategic priorities that I laid out for you when I first took on the CEO role.

As you've seen through our quarterly results, many of our investments has started generating returns, and I believe we have only scratched the surface. We have a solid foundation for growth and efficiency. During the quarter, we held our strategic planning meeting. We refined our strategic direction, investment allocation and our budget process. We start with our clients, their opportunities and challenges and how we can help them profitably and sustainably grow their business. We know our core. We know which markets, customer segments and offers represent the largest growth opportunities. We know where we need to innovate and expand our use cases to create more value for our clients and capture more users in our platform ecosystem. We know how we're positioned against the competition and what we need to do to defend and grow our business. This drives our next steps.

We align our 2023 budget investment request to the most impactful opportunities. We prioritize those investments. We're confident in the successful outcome of those investments because we have the best team in our industry, driving value for our clients every day. Having recently reached my 2-year anniversary with Altus, I'm even more excited about the future success and opportunities for Altus Group.

Okay. Let's open up the line for questions. Operator?

[Operator]

[Operator Instructions] Our first question is from Richard Tse with National Bank Financial.

[Richard Tse, analyst]

I have a question about sort of the advanced Analytics on APP. Obviously, it sounds like you have a lot of sort of interesting opportunities coming. Can you help us maybe sort of size that market for Altus in terms of the incremental over and above the run rate that you're currently at?

[Jim Hannon, executive]

Sure. During Investor Day last year, we sized the markets that we currently serve with our legacy franchises at over $5 billion in the 6 core markets that we serve, U.S., Canada, U.K., France, Germany and Australia. We're in many, many other countries, but those are the -- that's where we focus our investments. The asset performance offers and the portfolio investment strategy and intelligence that we're bringing to the table today, we'll be doing at more scale, more efficiency with APP significantly grows that addressable market. So we don't give exact guidance at a product level on that, but this opens up a significantly larger market for us.

Markets set before the ability to connect all of the data across all of our franchises and bring in this macroeconomic and demographic data, we didn't really have the ability to synthesize all of that at an asset level, which -- and now we do. And our -- we think we have the best asset level data anywhere.

[Richard Tse, analyst]

Okay. And as far as the transition to the cloud, is there sort of a point or some sort of broad number, whether it's 60%, 70%, 80% adoption that you kind of get into this point where there's another level of critical mass? Or is that not the right way to think about that?

[Jim Hannon, executive]

Well, as we move on past Page 14, our development efforts are very focused on -- we'll be -- over the course of time, we'll be limiting the entitlements on maintenance. And it will be in our clients' best interest and our shareholders' best interest that we get to one platform. So it will all get to cloud over time. We're, of course, sensitive to our clients who have other investment opportunities for their IT spend and we're accommodating that as long as they're on the latest platforms. The days of managing multiple versions are over. So eventually, all of them get there. To your point, is it the right way to think about it? I already think about this as the Analytics business as a cloud technology business. So yes, we know our path to the low 60s. We know which clients get us there. We're operating like a cloud company inside now.

[Richard Tse, analyst]

Okay. Great. And just one last one for me. With respect to your sort of $400 million target, it looks like the run rate is getting pretty close there. Is the assumption here that you'll get to that target without acquisitions? Or would it sort of include acquisitions?

[Jim Hannon, executive]

It's without acquisitions.

[Operator]

The next question is from Yuri Lynk with Canaccord Genuity.

[Yuri Lynk, analyst]

So really impressive organic growth, particularly against a pretty tough comp last year. Wondering if you're seeing any organic growth being driven from the acquisitions of Finance Active and maybe even StratoDem that are now in that organic growth calculation given that it's been over a year? Are -- you mentioned same customer sales. So are you seeing some of your legacy customers adding some of these modules onto their contracts? Or any color you can give on if that's driving any organic growth?

[Jim Hannon, executive]

So are we having organic growth in those areas? Yes.

[Yuri Lynk, analyst]

No. Are they driving it? Like are they -- are customers -- are you actually seeing your customers adding Finance Active or Reonomy or StratoDem to their offer?

[Jim Hannon, executive]

Yes. Absolutely. We're having success across the board. The core businesses are very strong and those additions to the portfolio are what allow us to move to now that we talk in terms of offers and less about products or legacy brands. So we think about strategy offers for our clients to -- as they look at where should they invest next or what should they divest from or asset performance. All of the acquisitions come together to give us that holistic view of portfolio and asset performance.

[Yuri Lynk, analyst]

Okay. It looks like Reonomy had about U.S. -- just over USD 5 million of revenue in the quarter. If you annualize that, which I understand is a dangerous thing to do, you're kind of getting just over $21 million of revenue. You bought it, it was due in '18. Is that the type of growth that you had planned for that business? And as a follow-on to that, has it in fact moved into EBITDA-positive territory in the back half of 2022?

[Jim Hannon, executive]

So a couple of things in there. That business does have a seasonality to it and this is not the high part of the seasonality. Is it the expectations along what we had -- are they in line with our expectations? Yes. I will reiterate that Reonomy was a technology buy for us. The technology in Reonomy allows us to connect asset attributes across different datasets together to get a holistic view of an asset performance and portfolio performance. That was a key part of the strategy. We -- with that acquisition, we laid out our strategic intent and now we're executing on it.

What we said about Reonomy last year was that the Reonomy business would hit breakeven in Q4 of this year. Our reporting is a statutory reporting. When we bought Reonomy, we were not only buying technology, but more importantly, we were buying smart technologists and great go-to-market people. And their impact is across our entire portfolio. So Yuri, the way to think about this, the way I thought about it as the President of Analytics when we did the acquisition and still now was would it help drive expanded Analytics margins in total. And as you can see in our performance, it has.

[Operator]

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

[Stephen MacLeod, analyst]

Just a couple of questions. A couple of questions. Just on the Over Time revenue. It sounded like you made a point in the press release or the MD&A of talking about majority of growth coming from North America, but also seeing contribution from EMEA and Asia PAC regions. So I'm just curious, can you give a little bit of color on where that growth is coming from? Is it new customers? Is it expansions? And how does that set the stage for future growth outside of North America?

[Jim Hannon, executive]

It's -- the growth is coming from both areas. So our number of -- so if we just break down -- can't give you the exact numbers, but if we break down the ARGUS brand legacy view of the world, our number of clients are up significantly and our number of users are up more -- at a greater percentage than our number of clients. And our revenues are up greater than that, which gets back to the why the analysts have all been focused on the cloud adoption numbers. So the strategy as it has been laid out for years and we've accelerated a bit here, it's playing out in the Over Time models. But that growth is coming from the user count growing faster than even the client count, that comes from the high end of the market.

[Stephen MacLeod, analyst]

But is it -- are you seeing incremental growth there from new customers? Or is it expansions within existing customers?

[Jim Hannon, executive]

So we add hundreds of logos every quarter, which is primarily driven out of the ARGUS portfolio.

[Stephen MacLeod, analyst]

Yes. Great. Okay. And then you sort of alluded to this in your prepared remarks, but I just wanted to confirm, are you seeing any slowdown or extension in the sales cycles just given the macro backdrop, that seems to have accelerated, the pressure seems to have accelerated through the quarter?

[Jim Hannon, executive]

As you can see in the bookings numbers through to -- through the end of Q3, it's just been extremely strong demand. And then I made the comment of not only was our Q3 performance strong, but our leading indicators are strong. So we measure each week how many opportunities we expect to add in the Analytics business. We know what our weekly pace is to go into the top of the funnel. We know the same on the tax side, by the way. And our pace of opportunities going into the top of the funnel have stayed right on track right now. So our comments of volatility can work in our favor. I think that's proving out, market volatility.

[Stephen MacLeod, analyst]

Right, right. Okay. Okay. Great. And then maybe just finally, in the last call, you talked a lot about just the revised credit facility providing flexibility for acquisitions. I know you said in response to a previous question that your $400 million target does not require acquisitions, but is that something you're still on the lookout for, strategic deals?

[Jim Hannon, executive]

Always. So we consider -- it's an arrow in the quiver and we have our pulse on the market and always looking at strategic opportunities. We're looking through it with the -- that there's the -- some of the acquisitions we did last year like Reonomy, where we disclosed it wasn't a EBITDA-positive business when we bought it, we're looking with different filters at this point in time with very defined IRR requirements as well as payback periods, but we are absolutely watching the markets and have our strategic targets, whether we -- our strategic areas of growth, whether we build or buy or partner, looking at all scenarios at all times.

[Operator]

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

[Paul Treiber, analyst]

Just a couple of questions on APP. I think last quarter, you said that it would launch Q4. Is that still on track for Q4? And then how do we think about the magnitude of revenue contribution from APP in the near term?

[Jim Hannon, executive]

The -- so APP is not a product. So one will not come in and buy the APP. The APP is the platform upon which we can offer our advanced analytics offers. So the APP also -- so again, if the APP allows us to ingest data, connect attributes across different franchises, different datasets, our own datasets, external datasets and then drop that into the analytics models. So that's where the StratoDem acquisition comes in with Reonomy on top of our legacy technology and data.

So the APP drives the ability to offer advanced analytics as well as improves our internal operating efficiency. So it allows us to target our R&D investments much more efficiently because we're not building on multiple platforms and it allows us to deliver service much more economically. Our folks can scale more because the APP can take over some of the manual processing and analytics that our folks had to do. So it allows efficient scale as well as new products.

[Paul Treiber, analyst]

Okay. That's helpful to understand. The -- earlier, you mentioned you're operating like a cloud company internally. The one thing you see a lot from cloud companies is a self-service model for customers externally. Is that something that you would consider where customers can go online and sign up for ARGUS and other data products?

[Jim Hannon, executive]

Yes. Absolutely. It's in our investment selection for next year. It's one of the investments the team is targeting. So we talk about the market on the Analytics side is high touch and then the scale or growth business, the smaller businesses. And then I've made the comments before that. The reason we do that segmentation is because of the customer acquisition cost and the cost to serve is so different at those various parts of the market. So we know we need to enable more of that self-serve complete customer journey at that end of the market where it ideally would happen without us touching it.

And our internal investments in infrastructure, there -- so the APP and our internal infrastructure investments, that's all thought through as one holistic architecture so that we can enable that customer journey.

[Paul Treiber, analyst]

And so with the transition, more customers moving to the cloud, like how do you think about evolving the monetization strategy over time?

[Jim Hannon, executive]

How do we think about the monetization strategy?

[Paul Treiber, analyst]

Yes. Do you -- I mean, going from subscription and users, potentially you evolve it to some other metric.

[Jim Hannon, executive]

So we look at -- so the point I was making about operating as a cloud company is, of course, we're going to continue growing the number of cloud users. That's just a given. And we spent -- since I've come into the company 2 years ago, we spent a lot of time on that metric when that's just, in my mind, that's a given. So the metrics become how efficient, how much can we expand margins without inhibiting growth. So we're doing both. We're not -- the margin expansion that we have was predicated on building, improving the productivity of the go-to-market resources that we had.

We'll be running a balance of go-to-market investments and margin expansion at the same time. So driving growth and margin expansion at the same time. The metric is going to be internally we look at revenue per head, cost per head. We're looking at LTV to CAC. I know we're not producing it externally, but we're certainly using it to drive where we're making our bets. So eventually, we'll get where we're moving to those type of metrics externally, but that's how we think about how to measure the productivity and the efficient -- the operating efficiencies of being a cloud company.

[Operator]

The next question is from Scott Fletcher with CIBC.

[Scott Fletcher, analyst]

I have a few questions on the sales process for the advanced Analytics offerings. First, I wanted to ask if there's a certain category of investor, be it an asset class or maybe by the size that you're doing particularly well with or maybe on the flip side that you haven't seen the traction you want to get yet?

[Jim Hannon, executive]

Sure, we're actually doing well because we think about our go-to-market, we have one go-to-market leader for Analytics, but we think about it in those 2 segments, and we -- the motions of those 2 segments are different. And we're having great success at both ends of the market. As far as the high end of the market and selling into that market, I talked about the cost to serve.

Part of the model is dedicated resources for those larger investment clients. So we're at more of a consultative approach with a sales approach with dedicated customer success to make sure that we're coordinating across our entire portfolio, resolving all of the clients' needs versus the more of the legacy Altus way would have been several go-to-market teams and support teams going in on a client. So there's a very specific resource allocation model at the very, very top end of the market. Then there's the general high touch and then there's the growth or scale part of the market, which at the last question, eventually, you'd like to get to a complete self-serve model there.

[Scott Fletcher, analyst]

That's helpful. Yes. And the second question I have is do you have a sort of any statistics on how often you're displacing I think existing Analytics offering when you are upselling someone and expanding a relationship?

[Jim Hannon, executive]

We're -- when we're providing those solutions, we're usually displacing lots of different piece part vendors that the client has to put together themselves. But more is the case that we're not displacing anyone. They just don't have the abilities. So having an environment that where you're investing in data science and data scientists and the technology, the processes to give them the tools, that's a huge investment and that's the role that we play on behalf of investors. Many of our investors -- of our clients, they have their own data scientists. We're here to help enable their data scientists to do their jobs more efficiently and enable their data strategies for them.

[Operator]

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

[Jim Hannon, executive]

All right. Well, thanks, everyone, for joining us. As always, you can reach out to Camilla if you have follow-up questions. And again, Angelo, thank you on the last call. I think there was a little part of you that thought that was your last call and I told you no way, you're definitely doing this one. And what a great quarter to be part of.

[Angelo Bartolini, executive]

Pleasure to do it, Jim. Thank you.

[Jim Hannon, executive]

All right. Thanks, everybody.

[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.