Altus Group Ltd
TSX:AIF
Earnings Call Analysis
Q4-2023 Analysis
Altus Group Ltd
The company painted an optimistic forecast, indicating that macroeconomic pressures should start to ease in the second half of the year, potentially amplifying market activity and fueling new bookings growth. This bodes well for their business, particularly given their expertise in valuation, data, and analytics, which are critical during market recoveries. They expect this easing of pressures to drive a ramp-up in the latter half, primarily due to stabilizing interest rates and credit conditions.
Management expressed confidence in their ability to deliver growth, with a specific target for full-year recurring revenue to increase between 8% to 12% versus the previous year. This is before considering contributions from the impending REVS acquisition, which is expected to be accretive to both revenue and margins in the Analytics segment. They also plan to expand annual margins significantly, by 400 to 500 basis points, and beyond this year, they forecast recurring revenue growth to return to mid-teens with continuing margin expansion.
The company projected a temporary slowdown in revenue growth within the Property Tax segment, expecting low to mid-single-digit growth for the upcoming year. This is partially attributed to weakness in Canada due to the Ontario cycle extension. Despite this, they are targeting margin improvement within the segment and anticipate a strong multi-year run beyond the current year. On a broader scale, they expect to maintain single-digit revenue growth, with a notable double-digit improvement in adjusted EBITDA and overall margin enhancement.
Maximizing free cash flow is underscored as a principal measure of success. Meaningful cash generation is expected to enhance capital allocation flexibility, including the potential for deleveraging post-acquisitions, making additional growth investments and M&A, and potentially returning capital to shareholders through buybacks.
Investments in Reonomy and a strategic focus on data science and data analytics capabilities are geared towards driving advanced offers and insights for clients. This is a shift from previous skill sets, and as new talents come onboard to handle the immense metadata from ARGUS and VMS data, the company expects to reap the benefits of these capabilities through their road map items outlined earlier.
The company's global expansions, such as the Analytics business, have been ahead of other segments in adopting an offshore strategy and building GSE (Global Service Expansion) strategy. This cross-functional, holistic approach aims at efficiency and headcount growth channelled mainly into GSE. Furthermore, they addressed the expected cloud conversion, indicating a continuation of past growth rates into the next year, especially as the backlog of bookings begins to be deployed.
The company's executives believe that process improvements, as a result of their investment in a new ERP system, will continue to pay dividends in the upcoming year. This will be evident in better working capital management and improved Days Sales Outstanding (DSO) metrics, leading to enhanced cash generation. Internally, the company is expecting an inflection in cash generation as it begins to reap the benefits of these investments.
Management conveyed their expectations for mid-single-digit growth in the first half of the upcoming year, which would align with the company's recent performance. The pipeline suggests that a higher volume of bookings is not imperative to achieve the lower end of their revenue range for the full year. However, an uptick in assets being deployed could result in reaching the higher end of the growth projections, predominantly in the second half of the year.
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Good morning. My name is Jamie, and I will be your conference operator today. At this time, I would like to welcome everyone to Altus Group's Fourth Quarter and Full Year 2023 Financial Results Conference Call and Webcast. [Operator Instructions] I would now like to turn the conference over to Camilla. Please go ahead.
Thank you, Jamie. Good afternoon, everyone, and welcome to Altus Group's fourth quarter and year-end conference call and webcast for the period ended December 31, 2023. Our disclosure materials, notably the press release, MD&A, financial statements and the slides accompanying our prepared remarks are all available on our website and as required, have been filed to SEDAR+ after market closed this afternoon. Some of our remarks on this call and in our disclosure may contain forward-looking information that is based on certain assumptions and therefore subject to risks and uncertainties that could cause actual results to differ materially from those projected. Please refer to our forward-looking statements disclaimer in today's materials.Please be reminded that Altus Group uses certain non-GAAP financial measures, ratios total segment measures, capital management measures and supplementary and other financial measures as defined in National Instrument 52-112. We believe that these measures may assist investors in assessing an investment in our shares as they provide additional insights into our performance.Readers are cautioned that they are not defined performance measures and do not have any standardized meaning under IFRS and may differ from the similar computations as reported by other entities, and accordingly, may not be comparable to financial measures as reported by those entities. These measures should not be considered in isolation or substitutes for financial measures prepared in accordance with IFRS. An explanation of these measures is detailed in today's IR materials.I would also like to point out that unless otherwise specified all percentage growth rates we refer to on this call today will be on a constant currency basis over the same period in 2022. However, basis point margin expansion will be on an as-reported basis.Joining us today are CEO, Jim Hannon; our CFO, Pawan Chhabra, who will review our financial performance as well as our Chief Technology Officer, David Ross, who will provide a brief update on our technology road map.Okay. Over to you, Jim.
Thanks, Camilla. Thank you, everyone, for joining us today. 2023 was a highly productive year for Altus Group. I want to begin by expressing my gratitude for the unwavering dedication of our team members around the world. In the face of a dynamic CRE and macroeconomic backdrop, we remain focused on what is under our control, driving operational excellence, maximizing operating leverage and strategically positioning ourselves to serve the industry with advanced analytics. The strength of our model was validated by our continued growth during one of the most challenging CRE cycles in decades. Several initiatives such as the implementation of our new ERP system, the expansion of our new Global Service Center in India, enhancements to our tech stack through the Altus Performance Platform and the addition of Forbury have been transformational to our business model. You'll hear more about our Analytics capabilities and innovation road map from David later in the call.Our full year results, as presented on Slide 5 speaks to the team's disciplined and committed execution of our strategy. In 2023, we grew recurring revenue double digits in a challenging market. We expanded Analytics margins by 360 bps, and we effectively managed through the Property Tax annuity reset in the U.K. For context on that, we absorbed the bulk of the $33 million annuity revenue stream loss to finish the year down just $5.5 million.Our 2023 net cash provided by operating activities came in at $71.4 million, below our '22 results, partially due to higher interest expense. However, free cash flow finished at $58.9 million, a 12% increase versus 2022. With much of the heavy lift of the ERP upgrade initiatives now behind us, our CapEx came down to $12.5 million versus $24.5 million in the prior year. The net result is an increase in our adjusted EBITDA to free cash flow conversion rate to 44% compared to 39% in 2022. As our cash from operating activities accelerates, we will continue to prioritize organic growth investments, opportunistically pay down debt and maintain financial flexibility for acquisitions and stock repurchases. Pawan will now expand on the financial performance.
Thanks, Jim, and good afternoon to everyone on the call. In 2023, our revenue grew by 2.2% to $772.8 million, up 7% if we were to exclude the impact of the U.K. Property Tax cyclicality. The U.K. reset was also a significant factor in the 4.2% decline in adjusted EBITDA. Adjusted EPS, was further impacted by increased borrowing costs, driving a 13.2% decline year-over-year. Our fourth quarter performance was strong. We achieved improvements in revenue, profit and notably free cash flow, which doubled to $40.1 million, our highest quarterly level on record. Turning to our business segment performance. The Analytics segment continues to drive top line growth and market expansion. Revenue growth was driven by our ongoing transition to cloud subscriptions and the addition of assets on our Valuation Management Solutions platform. Due to the high interest rate environment, the conversion time from bookings to revenue in the VMS segment has been elongated as our clients navigate through this period of asset price discovery. This slowed the rate of revenue growth over the last several quarters. Adjusted EBITDA benefited from higher revenues and improved operating leverage. I'll cover more of that in a few slides.Recurring revenue represents 90% of our Analytics revenues. These revenues are comprised of mission critical solutions with relatively high switching costs. These are resilient revenue streams with very low churn.Our ARGUS contracts are multiyear subscriptions. Our VMS recurring revenues also represent multiyear contracts based on asset volume. The value of the asset itself or the change in value more specifically does not impact the revenue generated from that asset. Transaction volumes do not impact the installed base revenue in the Analytics segment. Our margins continue to expand, higher by 40 basis points and 360 basis points versus Q4 and full year 2022, respectively. The improved margin demonstrates our operating leverage and our focus on taking necessary actions to achieve our target operating model across all parts of the Analytics segments.For 2024, we've made further adjustments to our capital allocation within Analytics, giving us confidence in driving greater margin expansion throughout the year. We ended the year with 74% of our ARGUS Enterprise users contracted on the cloud. This represents a 10 percentage point improvement from a year ago. Our transition to ARGUS Cloud continues, creating more revenue growth opportunities in 2024. We expect to see the same level of conversion in 2024 as we did in 2023.Turning to new bookings. This metric captures incremental new business growth and unlike recurring revenue, the timing of bookings can fluctuate, particularly in this current macroeconomic environment. That said, though lower than 2022 levels, we're still adding new business. New bookings in Q4 held steady above the $25 million range. And importantly, we added nearly $20 million of recurring new bookings in Q4 that added to our VMS backlog. While there is significant cash on the sideline that's been raised for CRE investment, bid-ask spreads are still elevated and transaction activity remains muted. These factors aside, CRE is still a stable and growing asset class, and we believe our recovery is on the horizon. As the market begins to stabilize, we are well positioned to capitalize on the recovery and convert our growing backlog into revenue.Turning to Property Tax. Q4 revenue growth in the U.S. and the U.K. was offset by a decline in Canada where the Ontario cycle extension is impacting growth. If this new cycle resumes next year, which is what we're expecting, this should drive growth in late 2024 and into 2025. Property Tax adjusted EBITDA reflected higher compensation and ongoing investments in our cybersecurity and tax systems support infrastructure, and geographic mix of our revenues also negatively impacted the margin percentages in the quarter.And finally, Appraisals and Development Advisory revenue and adjusted EBITDA were down in the quarter. This sector of our business has some exposure to reduce transaction volumes, resulting in fewer appraisals and new project starts.Turning to our balance sheet. We finished the year with a cash position of $41.9 million and with $308.6 million in bank debt. The funded debt-to-EBITDA leverage ratio as defined in our credit agreement was 2.06x. Applying our cash, the net debt to adjusted EBITDA leverage ratio was 1.98x. Our balance sheet is strong, allowing us to invest in growth, such as the planned REVS acquisition and the buyback of shares as we showed in 2023. With respect to the REVS acquisition, we continue to expect to close the transaction in the first half of this year. It is a highly strategic acquisition that will contribute high-margin recurring revenue. Revenue will be accretive to the Analytics segment growth and margin profile. It will build upon our high-value asset intelligence core to our strategy, and it bolsters our blue-chip client base with the target buyers for advanced analytics capabilities.With that, Jim, I'll hand it back over to you.
Thanks, Pawan. Okay. Let's dive into our business outlook. Looking ahead, and as expressed by some of our largest clients, we expect that CRE macro pressures will begin to ease by the second half of the year. And as interest rates and credit conditions begin to stabilize. This should be a catalyst for a pick up in market activity and lead to the record levels of dry powder beginning to get deployed, which we expect will translate into new bookings growth and accelerated conversion of our VMS backlog into revenue. A stable or improving interest rate environment bodes well for our business, where our valuation expertise, data and analytics tools will play an important role in the price discovery process for our clients. Given the dynamic environment we find ourselves in, we're providing a more prescriptive outlook for this year. Beginning with the Analytics segment, we expect single-digit growth in the first half, with growth ramping in the second half, mainly driven by macroeconomic factors. We expect full year recurring revenue to increase between 8% to 12% versus 2023. This includes contribution from Forbury but does not yet incorporate REVS. As Pawan noted, when REVS closes, that business will be accretive to both revenue and margin in our Analytics segment.With respect to earnings, having delivered 26% growth in 2023, we are confident in our ability to keep growing adjusted EBITDA in 2024. We plan to expand annual margins by 400 to 500 basis points. Beyond 2024, with an anticipated market recovery and revenue contribution from new Analytics capabilities, we expect recurring revenue growth to return to the mid-teens with continued margin expansion.Turning to the consulting businesses. Revenue growth at Property Tax is expected to be temporarily muted in the low to mid-single-digit growth range in 2024. We have strong opportunities in the U.S. with the expansion of itamLink, and the U.K. annuity will continue to build. However, that will be offset by weakness in Canada, given the Ontario cycle extension.On the earnings side, we're targeting to between 50 to 200 basis points of margin improvement. It's a wide range that balances growth investments with prudent expense management. We are aligning our investments to leverage our technology and offshore capabilities to drive ongoing margin improvements. Beyond 2024, Property Tax will have another strong multiyear run. Assuming that Ontario commences a new cycle in late '24 or '25, we expect Property Tax revenue growth will accelerate with higher operating leverage with growth in all 3 countries.Turning to the Appraisals & Development & Advisory segment, we expect low single-digit revenue growth. We'll be focusing on client profitability with a view of improving the bottom line. Accordingly, we're planning for a double-digit improvement in adjusted EBITDA. We expect quarter costs will be up in 2024 due to regulatory and compliance requirements related to REVS.Putting it all together at the consolidated level, we expect to deliver single-digit revenue growth, double-digit adjusted EBITDA growth and an overall margin improvement at the consolidated level.Before we open up the lines for questions, I'll turn it over to David Ross for a brief update on our author and innovation road map. Late last year, David took on an expanded role as our Chief Technology Officer. In his initial role as Chief Information Officer, David led the revamp of our front, middle and back office infrastructure and has been consulting closely with the teams designing the Altus Performance platform. Having previously worked with David at FICO and Callcredit, I'm confident that his deep expertise in product development will fuel the next leap of innovation for Altus.
Thanks, Jim. It's a pleasure to be here. As you've heard from us over the past couple of years, we are on a mission to provide our clients with intelligence as a service, to enhance their asset performance and risk management capabilities. This mission is the cornerstone of our offer road map. 2024 is the year our new performance management capabilities start to come to life commercially and in the hands of our people. Expanding into performance management through advanced analytics is where we have the most immediate value to our clients, making us core to their decision-making. This will also significantly expand our addressable market and drive the next phase of our growth. Beginning in the second quarter, we'll evolve our market insights offer by improving our clients' access to higher quality data. This is the most essential ingredient to deliver better performance. Our data set will be augmented by August, structured through our AI-powered entity resolution, all of it made accessible through a unique asset identifier the Altus ID.Next, throughout the second quarter, we will build upon the data, an upcoming release of our portfolio performance offer will augment the Altus experience with performance and market-based analytics, a capability that is high priority for our clients.Our Valuation Management Solutions will take center stage in the third quarter. We've equipped our professionals with access to AI-powered recommendations and comparisons that will increase delivery speed, scope and reliability evaluation intelligence. This will be foundational to our scale to scale our VMS resources, particularly as we integrate with REVS.Finally, we will close the year with further enhancements to our portfolio performance offering. We will have AI power performance benchmarks and projections, along with scenario-based business planning capabilities. With the Altus performance platform in place, we have a strong foundation to deliver on this room app. We have the right tech stack, ample sources of asset intelligence and have refocused our R&D skill set with the addition of data science talent. Most importantly, our clients are engaging with us on their most strategic efforts, heavily influencing our offer road map and ensuring alignment with market demand.We look forward to sharing more at a future Investor Day and to demonstrate these new capabilities with our clients at Altus Connect in September. With that, I'll turn it back to Jim.
Thanks, David. We covered a lot of ground today, so let me wrap by summarizing. We're growing profitably despite a challenging market. We've demonstrated this in our 2023 results. Our Analytics business is poised to deliver outsized earnings growth even at the bottom end of our recurring revenue guidance range. As David just laid out for us, we have new performance analytics capabilities launching this year. We will be the consumers of our own innovation and put these hands in the tools of our people, as David said, driving more efficiency and lowering our cost to serve as we deliver intelligence as a service. We expect longer sales cycles for the next few quarters. But based on customer collaboration, we expect the road map will drive new opportunities with existing clients while expanding our addressable market to all aspects of the CRE industry that focus on improved asset performance.Finally, our improved operating leverage and the upcoming innovation-driven growth will continue to expand our cash generation ability. Maximizing free cash flow is one of my most important measures of success. Meaningful cash generation supports capital allocation optionality. This includes deleveraging post REVS, increasing capacity for growth investments and M&A and the opportunity to return capital to shareholders via buybacks.I'm very excited about the opportunities for Altus for this year and beyond. This is the outcome of the disciplined execution of our multiyear value creation strategy.Okay. With that, let's open it up for lines now. Jamie?
[Operator Instructions] Your first question comes from the line of Yuri Lynk with Canaccord Genuity.
Just some clarity on the guidance. I think you said the high end is contemplating a recovery in CRE in the back half of the year. Maybe just expand on what the low end would imply? And more importantly, what are your internal indicators telling you about next year? I mean this is pretty detailed guidance that you haven't given before. So maybe just share the thought process and what gives you the confidence to come out in such a volatile market with fairly precise guidance for Analytics?
Thanks, Yuri. So let me address the, why give guidance right now. I think it's important in the last year, as the cycles change, our bookings waterfall has changed. I think it's been harder for investors to model out the business. And internally, we have some more visibility and metrics as to what we believe those growth numbers are going to be. So we thought we'd take some of the guessing out of it for investors and provide guidance. We're not planning to get into the guidance business by quarter. The first -- the current growth rates remaining through the first half and then accelerating in the second half is as far as we're going to go on that and may or may not give guidance next year. We just thought in this environment, it would be more helpful for investors to understand what we're seeing. So to your point on the low end and the high end, the high end would look more like a recovery starting in Q3, Q4. The low end of the guidance really reflects our Q4 growth rates plus Forbury.
It doesn't get talked about much, but your SG&A up 15% last year on 5% revenue growth. And I know you guys talked about cost control as a reason for the good Analytics margin. So where is that -- why is SG&A up so much last year? And what's a good run rate going forward?
Well, the SG&A lands across all the business units, as you know, a big part of our increase in SG&A has been our continued investments in cybersecurity and our data protocols, our data governance to make sure that we are keeping the corporations' data safe, more importantly, keeping our clients' data safe. So we think that, that is a good investment on behalf of our constituents. So as far as thinking about how to model it going forward, we've given it to you in the pieces of, you can model out how we're thinking about the Analytics' margins. And throughout last year, we just say, our capital allocation strategy was drive 300 bps. We've shown we can do that for 2 years straight. We're comfortable with the bps guidance extension in Analytics and Tax. And then on the corporate side, we're just planning for the REVS acquisition could drive some heavier compliance costs that we need to prepare for that will have the benefits for the company for years to come. So -- and those -- right now, we're showing it, we're talking about it on the corporate costs and in adjusted EBITDA. Some of those costs, given that they're REVS related could end up outside of adjusted EBITDA, but we're being conservative right now and assuming it's hitting the adjusted EBITDA line.
Next question comes from the line of Kevin Krishnaratne with Scotiabank.
Just a question on the guidance, again, sort of related to the -- Yuri's question there. Just can you remind us again on the confidence in the back half, I know you record bookings and then that takes some time to translate. Is the revenue growth that you're seeing potentially coming in 2H? Is that already in the bookings? Or is it in sort of the confidence and the conversations that you're having with your customers that they will start to deploy more and there might be some more bookings growth coming in like Q1, Q2, Q3? I'm just trying to understand like how much of the revenue do you already see in sort of contracts or bookings that you've already sort of contracted to industry yet to be deployed.
So we don't need bookings to accelerate much, if any at all, to hit the low end of our range here. So the high end of our range is if assets get deployed at a faster clip than they did in 2023. But if we put up the same cloud conversion on the ARGUS side and the same asset growth that we saw in '23 versus '22. We -- and then with some just modest growth from new capabilities that gets to the bottom of the range. And that modest growth on new capabilities is to the installed base where clients are collaborating with us already.
And then just a comment that you made at the very end of your prepared remarks on the longer sales cycle over the next couple of quarters, VMS for sure. But are you also then seeing that on ARGUS and add-ons like seat expansions, are you seeing? Is that -- was that commentary also related to sort of what other IT companies are seeing with regards to sort of a softer macro?
Yes. Yes. It's the low end of the range assumes that the market stays pretty much consistent with Q4. The high end of the range assumes that it comes back. So our -- on the software side, our clients are split between investors and service providers. So the service providers, clearly, they will track more with transactions. So as transactions come back and they add people, that will be a driver of seats. But the current clip of ARGUS growth in Q4 is what we're modeling through most of next year.
Maybe just one more focusing on Analytics. The margin expansion you're expecting 400 to 500 faster than this, I think, before we were thinking about 300 every year. So good to see there. Where are you getting sort of any savings or cost savings there? Because it sounds like there's some step-up in maybe R&D in Q2, Q3 on some of these new initiatives that we just talked about also on the call. I'm just curious where the -- where do we think about the savings coming in.
Yes. Kevin, the savings coming for the Analytics business is from a lot of different areas. A, as we've mentioned to you all, there's a lot of opportunity for us to continue to drive a lot of our delivery capabilities offshore, and that's a big focus area for us, not only in the Analytics business, but also in the Tax business as well to you. And so that is going to help us accelerate our margin expansion story. We're also very focused on realigning our target operating model across the business that includes certainly the support elements that go into the Analytics margin number, where we're being very careful in regards to how we grow with scale and make sure that we can continue to contribute to the growth of the Analytics business. And so it's a mix with how we go to business in regards to the mix of our resources between onshore and offshore as well as a more judicious approach in regards to how we're scaling at the nonowned cost per se within the business.
Our next question comes from the line of Christian Sgro with Eight Capital.
I'll start on the tax side of the business and ask a first question there. Well, could you comment on in the way the U.K. annuity cycle builds into 2024? And how do you see that progressing if you look over a multiyear cycle against that $33 million peak that we just steps down from, like how is this build shaping up compared to your expectations and historical?
It's '24, '25 are ramping to similar curves as we saw on prior cycle resets and then it will run right through '26 if the cycle doesn't get extended like it has in the U.K. in the past or like it has in Ontario now. So it's tracking to former curves. Other parts of the U.K. business actually grew very nicely around the reset. So we're still adding new clients at a good clip, and we are selling -- as we sign up new clients, we're selling them on the '23 list as well as the '26 list. So the team is driving good productivity on the customer acquisition cost front.
And then I'll jump back to the Analytics segment for a second question. Are there ways you're prepared to adapt to the dynamic macro like offers that you'd either sell more aggressively or ones that could be easier to communicate with the client and you call it a more hawkish or dovish environments? Like are there ways you're thinking about changing the strategy through the year? Or is it pretty set in stone with the way things are going to be rolled out through quarters?
Well, it's -- we're not going to be packaging the offers differently. So it really is predicated on the delivery of the road map. The things David's discussing as far as Q1 are very far along. And to add on to Kevin's last question that Pawan was answering, a large -- a good amount of the APT development, the heavy lift is behind us. So that's some of the shifting of -- or the -- our expenses don't need to grow at the same rate as revenue -- going throughout 2024 because a lot of the heavy lift is done. And now it's shifting skill sets over to adding more data science and data analytics capabilities. So it's -- as those people come on and can do the data science on the metadata of the files that are in ARGUS and in the VMS data, that's what will drive the advanced offers and insights for our clients as -- again, as we've be talking about as they're going through price discovery.
I'll ask one more and probably a more direct way of my previous question. But in those conversations with clients on the offers coming to market, maybe just broadly how you'd characterize how those conversations have gone. And then what the appetite is like for clients to pick them up in this environment? Just what clients are saying about the new and innovative offerings that have come to market?
So in terms of the conversations that we have already been having with clients. And in many ways, capability that we deliver through services today, they're interested in getting access to the expansion that they get through our ARGUS information. So being able to provide data at a much better scale and allowing them to do greater comparison, understand their performance management and do that at a market level as well. It's something that they have shown an interest in or an extended period and that's becoming something that's reality now as we're getting momentum in the conversations and how they can begin to deploy that into their own organizations.
Thanks for the color on the technical side. Yes, go ahead.
So I was going to say just on top of that, it that this is very much leveraged on our investments in Reonomy that we made a couple of years ago and the technology that we've brought through there. So both the combination of the knowledge graph capability that gives access to the data at a different level and the Altus ID, which is built on again additional research Reonomy ID that allows them to attach and recover data and information around assets in a much better way as we provide that AI-driven entity resolution.
Next question comes from the line of Steven MacLeod with BMO Capital Markets.
Just wanted to follow up on a couple of things, just with respect to the tax business. Do you have any incremental insight on the tax, the Ontario tax reassessment delay and sort of when you think that will come back to kind of flowing into revenues and EBITDA?
The last person to comment on the Ontario political drivers of the reset -- there's -- Steve, you live here, you know it's a fluid situation. Should Ontario decide to push '25, which is what looks most likely, there's still growth opportunities for us late in '24 as you look at pre-roll type appeals. Our team is all over that. Our Ontario-based team also is heavily involved with the government to understand exactly what might drive the change, when they would drive the change and the impact that it could have on rates and valuations.
Just turning to the Analytics business. I know you've given a lot of color, which is great. I just want to clarify. So the margin guidance for fiscal 2024 is excluding REVS similar to the way you're presenting revenue. Is that correct?
Correct.
And along the lines of REVS. I mean, I know the deal hasn't closed, but have you been able to have any incremental conversations with the team there integrating with the team at Altus or is that sort of off-limits until the deal is closed.
That is off limits until we get through regulatory approval.
And then just finally, not really talking about much, but the Appraisals & Development Advisory business, it just stood out to me that you were expecting double-digit growth in adjusted EBITDA in fiscal 2024 on low single-digit revenue growth. So just curious if you can give some insight into what the major drivers are on that stronger than EBITDA growth outpacing revenue growth.
Yes. Great question, Steve. With our new systems, we have much better visibility into client profitability. And so when we when we stack rank the clients, we can see where we have closing returns. And we're just going to choose like we could probably actually grow the top line faster, but we're drawing a hard line on the profitability per client, which is going to move some of that very, very low margin commodity business off to other players. And we're fine with that. We think that that's just a good arbitrage for us. So we're focused on the top tier, and we won't have to grow expenses at the bottom tier to chase low profit work.
I see. So you're effectively just sort of drawing the line on profitability levels per client. Okay. That makes sense.
Our next question comes from the line of Scott Fletcher with CIBC.
Jim, you mentioned the Analytics business potentially growing at accelerating to a mid-teens rate into 2025. How much of that -- or would the rollout of the new advanced analytics tools be a significant contributor to that acceleration in growth? Or would it be more the macro backdrop just continuing to improve into '25.
Great question, Scott. There's 3 elements to it. One, there's the macro, which, again, we're taking the lead from our clients, some of which are public and have recently discussed their views on the market, and we agree with them. We're seeing the same trends. The second thing is what our private investor clients are telling us and some of the activity we're seeing in their portfolios. The second piece is the workdown of the VMS backlog. So we know that the waterfall to revenue has slowed down, but our clients have committed those assets to us when they deploy. So again, we're predicating all of our comments on stability, the macro market stability. So we're assuming no major significant new geopolitical events that could disrupt supply lines, drive inflation, which would impact interest rates. So assuming a stable or improving environment, we think the macro picks up, and we think that our clients who are sitting on that large pile of dry powder I referred to, that assets will disproportionately accrue to our clients. So working down the backlog even without significant bookings growth next year or significant bookings next year, we're comfortable that 2025 is shaping up to be a good year. The last piece to your question on new products, new products will come in, will manifest themselves as added capabilities that we can charge for, but most of them will be in the base products and the ability to extract more value because of all of the enhancements that we're putting in, whether it's on the data products, the market insight products, as we call them, or whether it's on the ARGUS side itself or whether it's on advanced insights that we're delivering through VMS. So those 3 things really converge to provide a lot of value for clients that we think we can capture a proportionate share of it while still giving the clients the outsized share of the value that we're creating.
And then a second question I have, you're looking to get the same rate of cloud conversion in 2024. That sounds like it's down from your commentary last quarter when you talked about having substantially all of it complete by the end of the year. Is that an actual change in your expectations? Or am I reading too much into the change in wording there?
No. We think that getting us into the mid-80s is the vast majority as significantly complete. So we would have -- we expected going into '23 before kind of Silicon Valley Bank and all of that hit that we would have ended up higher with the cloud conversion this year. So you can see that in our results, even though we're putting a good revenue growth numbers, good recurring revenue growth numbers, margin expansion. We thought it was going to be better. If you remember at the beginning of the year, we were reaffirming our guidance around that long-term $400 million number. We got close, but it was down because of the macros. So the flip -- the converse of that is the growth that we saw this year, we're saying same growth next year. So we're not -- so our cloud conversion is not predicated on a big change in the macro environment. So if we get that, we could exceed that 10-point improvement that we're saying. But our conversion and our revenue uplift in '24, the way we're planning it right now and have it at the low end of the guidance is that it's similar to the '23 numbers? Okay. So in 2023, it becomes upside for '24.
Our next question comes from the line of Gavin Fairweather with Cormark.
There's been a lot of effort in terms of leveraging some of the new products coming out to expand into new client sectors like REITs, lenders and debt funds. Maybe you can just provide us with an update on how those conversations are progressing and whether pipeline is starting to build in some of these areas.
Yes. Thanks, Gavin. Just raising your question there. So on the debt funds, continue to make progress, continuing to sign up debt funds as clients. So we're happy on that side of it and more and more of the debt funds are related to -- are the same companies that have the equity funds and their LPs are asking for the same level of transparency on asset values that they have on the equity side. So that continues to go at pace. On the lenders, they're using our data. We're involved with several of the regional banks right now. I expect that will pick up. That's an area of continued opportunity for us. As David talked about, later in the year, we will have our AI-powered valuation engine, providing recommendations for our folks. What that does is it allows us to serve a bigger client base at a different price point than we serve our equity investors today. So it won't be the same full white glove service. It's more portfolio triage, but we are working with them. And that's what's driving the requirements for the road map items that David talked about earlier.
And can we just dig in a little bit further into the offshore strategy? Can we get a more fulsome understanding of kind of how many resources you're looking to add offshore kind of where we are in that strategy now at the end of this year, for example? And how impactful it could be to margins in the fullness of time?
So the Analytics business was probably 18 months ahead of the Tax business in deployment and starting to build the GSE strategy. So we're up to a couple -- I don't have the exact number right in front of me. We're up to several hundred people in the GSE. On the tax side, -- we've been focused on -- we launched the tax GSE initiatives with the U.S. business first. But we're now serving part of the U.K. market, and we're starting to ramp up service for the Canadian market with the GSE. So we have a few dozen people on the tax side, where we've got a couple of hundred on the Analytics side. And most of our growth, most of our headcount growth as we have attrition and as we're just planning for more efficiency. Most of the headcount growth is going into the GSE. Pretty much every function in the company now has a GSE strategy. And that's core for our associates in India that they have full career paths that can serve in multiple functions versus just being in one function for one division. So we run that in the operation as holistically across all the businesses, even though they serve the processes of the individual business segments.
And then just lastly for me. You touched on the BMS bookings backlog as being a potential driver towards that mid-teens Analytics growth in '25. But I guess just from a high level, is the backlog big enough that with the better macro, you think the unlease -- the release of that backlog could drive accelerated growth in '26 and beyond?
Sure. We did.
Our last question comes from the line of Paul Treiber with RBC Capital Markets.
Your earlier comments on the new offers that you're rolling out are helpful. How should we think about the timing of the impact to bookings and ultimately revenue? Should we think about that as a catalyst for bookings growth in '24? Or do you think it will take -- should we think about it more taking a couple of years to ramp?
Over a couple of years, Paul. It's -- if we were in a high transaction volume environment, I would be more bullish on it. But those -- the new offer capabilities to favor -- the road map that David talked about to 2 things. One, and first and foremost, when we talk about our own margin expansion it's based on our own teams consuming, and we said a couple of times, put it in the hands of our own people. It's our own service delivery teams, demonstrating the value of how they can run valuations faster, provide more insights, deeper insights as we automate a lot of the processes that we have going on for some of our largest clients today. So we expect to prove that through our service delivery and then stand-alone adoption of those products as additional sales, we see late '24, so really, really driving growth for '25.
I think yesterday or earlier this week, you did announce a valuation data set for Europe. Can you speak to the traction that you've seen in Europe with ARGUS Cloud and how you look at the opportunity for your new offers in Europe?
Yes. So 2 things. We talked about the pan-European data set. We've been building that data set for several years. And that's -- you can see in the press release, we've quoted Julian. Julian runs our VMS business for Europe and handles our largest clients over there, several of which are also U.S. clients. So it's been a while to get the -- those clients to contribute their data, but they see the value of it now. As far as ARGUS Cloud goes, ARGUS Cloud is more prevalent in the planning. Our European clients are some of our most complex clients because they're dealing with assets in so many different countries. So even if you're in one country, you're going to be dealing with asset managers and portfolio managers who are using different nomenclature to talk about the cost and expense associated with their asset performance. So that one of the key things that we do for our largest VMS clients is we normalize that data so that they can benchmark themselves against all of our other data. That's key to what we're doing in Europe right now. Our European ARGUS clients have been using ARGUS to do just the same, except they're exponentially -- their problems are exponentially larger because of the multiple jurisdictions they work in, on top of having multiple asset managers and multiple underlying GL systems. So as David talked about, their basic data gathering and requirements and being able to link all their data together is still a fundamental problem that they have that we can now solve for them using the Altus ID, which is the Reonomy-Knowledge graph technology. The other -- I'm sorry, Paul. The other thing I was just going to add is that there's different valuation techniques by country and Forbury has actually been quite successful, particularly in the U.K. market. So we're leveraging the Forbury acquisition to ensure that where different valuation techniques are used and ARGUS is not absolutely fit for purpose for that jurisdiction. Forbury can be fit for purpose, and that is how they've grown their business, and that's why it was such a great complementary acquisition for us.
Just lastly, how do we think about free cash flow conversion maybe in '24 and also just going forward with the investments that you made in new ERP system, should we think about it as driving down working capital and DSOs versus maybe what you've done historically?
Yes, that's a great question. And as you know, we did have working capital pressure in Q1 and Q2 as we transition over to the new systems of the last 2 quarters have proven to us that the transition to the new system is paying tremendous dividends in regards to helping us simplify our processes, driving productivity across our teams, really driving a very high level of throughput in regards to what we're doing in Q3 and Q4. And our view is that, that level of process improvement is going to continue to pay dividends for us as we head into the 2024 [indiscernible]. And DSOs, obviously, as you see in how we reported it, it's a trailing number that picks up 5 quarter average. And we have a much tighter lens internally where we look at the DSOs on a quarterly basis and a net DSO numbers obviously improving significantly. And so we will see data status continue to improve as we -- as Q1 and Q2 fall out of the number in terms of the calculation where we have the greatest level of headwinds. But we are expecting a pretty meaningful cash generation inflection as we leverage the investments that we made in 2023 and head into 2024.
And we have another question comes from the line of Richard Tse with National Bank Financial.
With respect to the conversion to the cloud, are there any common attributes of those customers that have yet to convert? Are they sort of larger in certain jurisdictions or certain markets?
The common theme is that they have contracts that run through end of 2024 or end of 2025. So some of them are -- even some of the 2025 clients given that a large portion of the ecosystem has already converted to cloud their older on-prem systems are not compatible. And one of the major benefits of ARGUS is the collaboration on the files, ARGUS Cloud benefit is collaboration on the files. So that's driving some of these larger clients. So we'll see step function moves on as some of these larger clients come across which is why we're comfortable that the 2024 will be the same rate of growth as '23.
And just one quick one here. Obviously, thank you for the guidance. It's obviously -- well, I guess we think it's tough to probably get those numbers nailed down. But you seem very engaged with your clients and prospects. And so another way maybe of asking sort of the business from a pipeline perspective, is that -- what does your qualified sales pipeline looks like? And how has that sort of changed year-over-year? So maybe that kind of gives us an order of magnitude of how the underlying businesses are building up here.
Yes. The pipeline supports our comments of, we think we're -- we think we're mid-single-digit growth for the first half. So kind of similar to our Q4 performance. So we're modeling out our own investments, assuming similar level of bookings as last year, which gets us to the low end of our range for the full year. So then if we see the pick up, which we can see it in the pipeline, the pipeline supports the more of a back half pick up. But we think that the current environment rolls through for a couple of more quarters.
There are no further questions at this time. Mr. Jim Hannon, I turn the call back over to you.
All right. Thank you. Thank you, everyone, again, for joining us on the call this evening. As always, please don't hesitate to get in touch; get to Martin or Camilla, as always. And we look forward to talking to you all soon. Thank you.
This concludes today's conference call. You may now disconnect.