Altus Group Ltd

TSX:AIF

Q1-2025 Earnings Call

[Operator]

Ladies and gentlemen, thank you for standing by. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to Altus Group's First Quarter 2025 Financial Results Conference Call and Webcast. [Operator Instructions]

And I would now like to turn the conference over to Camilla Bartosiewicz, Chief Communications Officer. Please go ahead.

[Camilla Bartosiewicz, executive]

Thank you, Abby, and hi, everyone. We're sorry for being a couple of minutes behind. We understand there's still a few people trying to get in, so we just wanted to make a little more time. Well, welcome to the conference call and webcast discussing Altus Group's Q1 results for the period ended March 31, 2025. Our press release, MD&A, financial statements, and the slides that accompany our prepared remarks, they're all available on our website and, as required, have been filed to SEDAR+ after market close this afternoon. I'm joined today by our CEO, Jim Hannon; our CFO, Pawan Chabra; as well as Rich Sarkis, the President of Software and Data.

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 information disclaimer in today's materials.

Please be reminded that Altus Group uses certain non-GAAP financial measures, ratios, total of segments 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 our investment in our shares as they provide additional insight 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 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 a substitute 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 and basis point growth rates we refer to on today's call will be on a constant currency basis over the same period in 2024.

And okay, over to you, Pawan.

[Pawan Chhabra, executive]

Thanks, Camilla, and thank you, everyone, for joining us today. Altus had a solid start to the year, delivering recurring revenue growth, steady margin expansion, and improvements in cash generation. Let me hit some of the highlights. Analytics total and recurring revenues were up. Consolidated revenue was modestly down, impacted by the Appraisals and Development Advisory segment. Profit from continuing operations improved by 47%. Adjusted EBITDA was up 29.7%, driving a 280 basis point margin improvement. Both cash provided by operating activities and free cash flow were up meaningfully over last year, and the comparative period last year included the contribution from property tax.

Turning to the Analytics business segment. Total revenue growth was led by ARGUS Intelligence. As discussed last quarter, we've been winding down some nonrecurring revenue lines of business. We're really pleased with the consistent improvement in adjusted EBITDA, which reflects higher quality of revenue, operating efficiencies, and our ongoing cost optimization efforts. Recurring revenue is a key metric for our performance. ARGUS and VMS revenue streams have very low churn, with retention rates above 100%. Q1 recurring revenue was up 2.1%. ARGUS software growth was strong. VMS growth was modest, as expected. As you recall, there's seasonality to VMS. Historically, Q4 represents our largest quarter for VMS revenue. Our margins continue to expand, up 200 basis points in the quarter, above guidance. Drivers of our margin expansion include revenue growth, our portfolio optimization efforts, efficiencies from our Global Service Center, benefits from restructuring activities, and our overall expense growth moderation. We're steadily driving towards our FY 2026 target of approximately 35%.

Turning to Analytics new bookings. This metric reflects new and incremental business. We're pleased with the 34.3% improvement in recurring new bookings, which included strong software bookings and a $5 million of the $15 million 3-year subscription agreement with Ryan Tax. Excluding this deal, recurring new bookings growth was 3.1%.

Turning briefly to our cloud adoption rate. Having reached 90% of users contracted on the cloud, we are now retiring this metric from our external reporting. Finally, at Appraisals and Development Advisory, as CRE transactions remain muted, revenue came in lighter than guidance. However, our restructuring activities are paying off, driving $1.3 million improvement in adjusted EBITDA in Q1, in line with guidance.

Transitioning to the balance sheet. Following the sale of the Property Tax business in January, our cash position at the end of the quarter increased to $491.9 million. We had $158.9 million in bank debt at the end of the quarter, representing a 1.44x funded debt-to-EBITDA ratio. During the quarter, we deployed $76.3 million towards a share buyback, reducing our outstanding shares to 44.4 million. We also reduced our debt by $127 million in the quarter. Restructuring costs were $6.2 million and dividend payments were $6.5 million. Cash from operations continues to be strong, driven by improvements in working capital. We expect our cash conversion to improve throughout the year as our restructuring efforts take hold.

With that, I'll turn it over to Rich Sarkis, President of Software and Data to discuss Benchmark Manager.

[Richard Sarkis, executive]

Thanks, Pawan. I'm happy to be here, and I'm proud to announce that we launched Benchmark Manager in Q1. Benchmark Manager is a significant addition to ARGUS Intelligence and builds on our previously announced portfolio manager capability, which was launched last September. Industry benchmarking has traditionally relied on backward-looking, static, and generic averages to track performance. Now with Benchmark Manager, powered by what we believe to be the most comprehensive valuation dataset, users can immediately see how their assets and portfolios stack up against the market. Crucially, this enables CRE professionals to track their portfolio's performance across markets, asset classes, and at different points in the cycle. This provides powerful insight into what is driving movements in value right down to the individual asset level, ultimately enabling users to drive portfolio performance and mitigate risk. We have been very encouraged by client interest and the quick pipeline build.

With that, over to you, Jim.

[Jim Hannon, executive]

All right. Thanks, Rich. Hello, everybody. Very happy to be back in Toronto. I think it was 2 years ago, I sat in this room and said, "Go Leafs." Some of our guys from out west were trying to convince me last night to say "Go Oilers." But I guess Toronto is my Canadian home. So I got to stick with "Go Leafs." Very happy everyone is here.

All right, guys. Our strong performance in Q1 demonstrates the continued execution of our growth initiatives and our commitment to delivering value to stakeholders. As you heard from Pawan today, the team's delivered strong financial results. Resilient recurring revenue performance and sustained margin expansion has been a consistent theme. Our operational improvements and ongoing portfolio simplification is translating to higher-quality earnings compared to a year ago. This drove strong improvements in cash flows. In Q1, we returned capital to shareholders by repurchasing $76 million of our shares. Operationally, we delivered significant new bookings growth. I'm very pleased with the adoption of ARGUS Intelligence and its add-on capabilities. We have currently over 1,300 clients contracted on ARGUS Intelligence and signed dozens of new asset-based pricing deals in the quarter.

We hit our 90% cloud conversion target. This was partially driven by a large service provider agreement with an asset-based pricing structure, which includes ARGUS Intelligence and Forbury Solutions. This represents the future state of our commercial contracts, allowing unlimited users and driving expanded adoption within our clients. Releasing Benchmark Manager at the end of the quarter was a key strategic and operational milestone. With this capability, Altus demonstrates its unique position to help clients drive performance. Benchmark Manager will also make our internal teams significantly more productive.

During the quarter, we integrated Forbury with the ARGUS calc engine for modeling multifamily assets in the U.S. This connects Forbury data to our platform while delivering enhanced functionality for our Forbury users. This also expands our addressable market, particularly in the U.S. with our initial focus on the multifamily sector. As a reminder, Forbury brings simplicity of use through its Excel interface.

Looking ahead to the rest of the year, we remain committed to executing against our guidance, which anticipates a steady improvement in market conditions, representing a stronger second half. At the same time, we recognize that macroeconomic volatility, particularly surrounding tariffs, could introduce uncertainty. That's why we are staying closely connected with our clients, monitoring leading indicators, and adjusting our operations as needed to navigate the evolving landscape. We remain bullish on the long-term prospects for Altus Group, driven by strong secular trends in commercial real estate, compelling new product innovations, a refined pricing model driving client adoption, an exceptionally strong balance sheet, and a dedicated team committed to delivering value.

Before I open up the line for questions, I'm pleased to share that we're planning to host an Investor Day on September 9 in New York. We think that will be the right forum and time to discuss new metrics. Stay tuned for more details to be shared in due course, and we hope you can join us. Okay. Let's open the questions -- the line up for questions, Abby.

[Operator]

[Operator Instructions] And our first question comes from the line of Stephen MacLeod with BMO Capital Markets.

[Stephen MacLeod, analyst]

Just wanted to ask about the Benchmark Manager, which it's interesting to hear about that from Rich. Just curious if you can share a little bit about initial feedback from clients and how you see that product evolving over the next 12 months or next few years.

[Richard Sarkis, executive]

Great question. Thanks. We're really excited with the client feedback. We've talked to hundreds of customers over the last several months and quarters as we developed this and figured out what really they were looking for that they didn't have. And the response has been really solid. Now, of course, we'll continue to iterate on that in a very rapid fashion, but the response has been very positive.

[Stephen MacLeod, analyst]

And just to clarify, that's a live product that you're currently selling right now?

[Richard Sarkis, executive]

Yes. That's live. We launched it in Q1, and we'll look to evolve it over the next few years.

[Stephen MacLeod, analyst]

And then I just wanted to ask about the -- you cited in your recurring revenues, just a new contract with Ryan. And I just wanted to confirm, I think, Pawan, did you say that's a multiyear contract? And do you expect that to continue to have similar contribution as you think about the rest of the year or over the next few years?

[Pawan Chhabra, executive]

Yes. It's a good question, Stephen. As you recall, we had said that the deal was -- it's a 3-year contract for [ data-type ] solutions that would contribute about $5 million per year. And then, obviously, we're looking forward to continuing that relationship with Ryan Tax at the conclusion of this first iteration of the contract.

[Stephen MacLeod, analyst]

And then just lastly for me, just on the Q2 guidance. Can you talk about just some of the revenue components around the Analytics expectation for 1% to 3% total revenue growth, what the components are into that?

[Pawan Chhabra, executive]

Yes. Look, we're continuing to keep a very close eye to the macros. With that said, we're pretty comfortable with regards to our guidance for Q2. We're going to continue to see positive momentum, as we saw in Q1 on ARGUS Intelligence and the software elements of the revenue component. We are seeing modest growth in VMS. And as you know, a lot of VMS is tied to the timing around asset deployments, and in the current macro environment, while we're still seeing growth, the growth is not as robust as software. And so, as you think about the guidance, we're thinking about Q2 is really a continuation of the momentum that we built in Q1, continue to see good momentum on the software side, and modest growth in VMS.

[Jim Hannon, executive]

Steve, let me add to that on the components. If you recall from last quarter, we talked about the fact that we sold some noncore businesses in Analytics, which brings down the overall growth rate, but that's why we particularly emphasized the higher quality revenue that we have now. And we are also very deliberately not pursuing noncore data clients, and we are not heavily pursuing nonrecurring service agreements. So there's a lot of focus going on here on the high-margin recurring core client activities.

[Operator]

And your next question comes from the line of Richard Tse with National Bank Financial.

[Richard Tse, analyst]

Just wanted to get an update in terms of your conversations with clients today in terms of when they're thinking market to recover. Is it still largely around rates and, I guess, now tariffs? Or is there something more specific to the CRE market?

[Jim Hannon, executive]

No, you nailed it, Richard. The clients are -- we had a webinar today. So what we're seeing from clients is we're seeing actually improvements in underlying NOI and in valuations, including in office, which is an interesting turn in several quarters in a row. So that's a point of optimism amongst our client base. Of course, being able to predict their cost of capital is a little trickier. So we remain cautious on that. And so I said, we're staying very close to the clients on the leading indicators for us here, and we will manage the bottom line very closely as we always do. So on the recovery, look, everyone in the world is watching. It can change day to day. But with what we know right now about some of our clients' activities and with the new products coming out, we feel good about our guidance range, and we have flexibility around that guidance to maintain our margins. So we're still banking on the back half of the year that we work through the volatility that we're seeing right now and that things stabilize by the time we enter the second half.

[Richard Tse, analyst]

And I guess in a related question, have any of your clients or have you observed any permanent structural changes in the market? And if so, how those changes would inform your decisions to invest in certain areas of product or R&D?

[Jim Hannon, executive]

Yes. I see a positive structural change, which is there's more private debt available. So the liquidity in the market is good, and that has us doubling down on our focus on making sure we are tailoring particularly our VMS services to the particular needs of the debt side of the market, and we continue to grow clients and funds there, and we'll continue to build out our expertise in debt.

[Richard Tse, analyst]

Okay. And then just the last one for me. I think you've talked about acquisitions in the past, and you clearly have quite a bit of capacity now from a balance sheet perspective to do that. Can you just remind us the areas that you're most focused on? And is the market for valuations today looking more compelling given that soft backdrop? Or have they moved up, down, stayed the same? Just curious to see what the update on that would be.

[Jim Hannon, executive]

Yes. There were -- as the whole market saw, there were a lot of prop-tech darlings a few years ago that you saw us do our key strategic acquisitions, and you're now seeing those come through in our new products. So Reonomy is the heart of the Altus ID, which allows us to tie all of the models to the benchmarking. The StratoDem acquisition gives us the attribution analysis that provides that extra insight to our clients. So once you saw us make a couple -- and Finance Active put us on the debt side of things, and Forbury gives us that more of a global footprint and ease of use that expands our market. So outside of those key strategic acquisitions, you saw us really back off, other than our attempt to go for REVS, which would have been a great acquisition. But other than that, you saw us back off because our perspective was valuations were extremely lofty. They didn't meet our IRR requirements and our hurdle rates for acquisitions. We maintain a very specific set of guidelines of how and when we'll pull the trigger on acquisitions and the financial hurdles and the strategic fit that they have to have. That said, valuations have come down significantly, and we're getting a look at interesting things. But we're in no hurry. We're going to take our time. We're going to be super smart about this. I don't feel like that cash is burning a hole in my pocket. And right now, we're very happy to be returning capital to shareholders through a very strong share buyback program.

[Operator]

And our next question comes from the line of Paul Treiber with RBC Capital Markets.

[Paul Treiber, analyst]

On your outlook for the year, there is backend-loaded growth, and you did mention macro and new products. How quickly typically do you see new products ramp? And then which is the more important driver, do you think of an improvement in growth for the back half of the year? Is it really the availability of new products, is there pent-up demand, or are you anticipating that a macro improvement would underpin a lot of that growth?

[Jim Hannon, executive]

Paul, that's great question. So let me break that down into a couple of pieces. When we think about our growth algorithm, I think the core of your question is how much is predicated on just organic market growth, and we do expect some. The Q2 guide that we just gave is exactly in line with the model when we gave the Q1 guidance and the full year. We are still on that model. Every month, we do a bottoms-up field outlook by product line. So we know where the -- and we do price times volume on that outlook. So we know where the assumptions could be a bit aggressive from the field. Pawan has modeled all of that out with sensitivities that give us a comfort level around our range.

That said, if something like wild came out macro economically, we're not -- our guidance range isn't handling or contemplating something crazy. But steady state and with the improvement, and I think people getting their head around the current environment, we think we have a reasonable set of volume assumptions. Now we also -- as we said, we have asset-based pricing deals, which give us an opportunity to lift our wallet share with clients because clients see the value in it that they can -- they'll get a price bump, but their volume bump of number of users could be their whole business. So from an ARPU perspective for us, my team has heard me say I would be very happy to see our ARPU come down because our absolute revenues are going up from the pricing.

And we want our clients to be adopting as many products as possible, and we're making that as easy as we can for them to do it. Then we have new logos that we're going after. Forbury, again, expands our addressable market into the nonheavy ARGUS user, but who needs valuation and wants those models tied to a platform. And then we have the new product take-up and adoption. I am very bullish on Benchmark Manager. The entire architecture that we've been talking about in building the platform was so that we could deliver that product at scale with platform economics, and we've done it. And not only does it -- will it help our clients, but our VMS business is an excellent -- and our Appraisals business is an excellent proxy for our clients. So our VMS business does a tremendous amount of analysis for the biggest investors in the world. So we know what their requirements are. We help them manage their data and the platform and Benchmark Manager, in particular, was built to accelerate the time to analysis and decisions. So we're bullish on that. It will really have a much bigger impact in '26 as clients are deploying more and more of ARGUS Intelligence, which Benchmark Manager has to sit on top of. So the pricing, we're delivering the value with the asset base because their volumes go up. We do think volumes will come up in the second half. We'll add new logos from new spaces like multifamily, and then the new product adoption will be good this year. It'll really accelerate in '26.

[Paul Treiber, analyst]

In terms of like the growth of asset-based pricing, you mentioned dozens of deals. How should we expect that to grow from here? Do you think you're just scratching the surface and it'll ramp significantly? And is that [ guidance ] that you'll continue to give going forward so we can track the adoption over time?

[Jim Hannon, executive]

Yes. So on asset-based pricing, we actually -- so for the very, very low end of the market, like 1 or 2 properties or assets, it's really not worth our clients' time or our time to try to convert them, right? Or if they have 1 or 2 ARGUS licenses, we're just going to keep as frictionless commerce with them as we can and let them renew on license basis. We didn't actually expect broad adoption from the service providers. To have a marquee service provider move to asset-based pricing, we think that there's going to be a lot of fast followers from that. And it would also help drive Forbury in the markets where Forbury is the best solution and ARGUS in the markets where ARGUS is the best solution, without our clients having to go back to their IT groups every time we go, we'd like the budget to add one more user. It's back to as frictionless as possible. So we think the industry is going to follow fast on this.

[Operator]

And our next question comes from the line of Scott Fletcher with CIBC.

[Scott Fletcher, analyst]

I'll ask one on capital returns, the buyback in particular. Obviously, it was really very active in the quarter. Could you have -- could you just give us an idea of how you're expecting that to play out over the course of the year? And whether you have a clear plan on timing and if that can change, I guess, whether other capital allocation opportunities present themselves?

[Pawan Chhabra, executive]

Yes, Scott, it's a great question. And as we said in some of the prepared remarks, we're extremely pleased with the traction that we made in Q1 against our NCIB on the share buyback, so the $76 million that we accomplished in Q1. If you recall, it originally positioned us, we said we wanted to do $250 million of share buyback over the course of 3 years with a heavier weighting, $150 million-ish -- heavier weighting in the first year. And obviously, with the start that we have in Q1, we're well on that path, and we're going to look to continue to pursue that. We have a very good view in regards to valuations, and we're going to continue to take a significantly strong position and continuing to pursue that. From a year-to-date perspective, I can share with you that $76 million is now at $107 million as of, I believe, close yesterday. And so that traction continues.

So look, we said we believe share buybacks is an excellent way to return value back to shareholders. We're committed to that. As Jim mentioned, we're going to opportunistically look at other potential vehicles, potential M&A, but the cash is not burning in our pockets. And we believe that this share buyback is a great way to return that value back to shareholders. So that's the plan, Scott. Hopefully, that answers your question.

[Scott Fletcher, analyst]

Yes, definitely. And then I'll just ask one on the margins, very strong in the quarter, above the guidance range. Is there anything that's specific to call out in terms of outperforming what you thought you would do? And then is there -- should we be expecting maybe near the high end of the guidance range for the full year, given the outperformance in the first quarter?

[Pawan Chhabra, executive]

Yes. And look, the narrative around the margin expansion is not dissimilar from how we've talked about it in the past. And again, we continue to have a lot of -- continue to be able to moderate margin. We have a lot of control and really focusing on what we can control. And again, when you think about it, there's both the revenue and a disciplined cost management approach to it. So on the revenue side, the cloud conversions continue to provide some degree of a tailwind, and that's going to continue as we move towards the full transition to the cloud. We are doing price-led growth in our valuation advisory upon renewals. And so that's going to continue to be tailwinds from a revenue perspective. And the price-to-value increases on our software subscriptions, plus the lift that we're going to get from the new product launches that Rich just talked about, it's going to help us on the revenue side.

On the cost side of the equation, Scott, if you remember, we did a pretty large restructuring last year. We're going to get the dividends of that restructuring flowing through for the full year this year. We are committed to continuing to grow the GSC in India. It plays a very crucial role in optimizing workflows, improving our delivery speeds and really supporting our operational scalability. And so when you combine both the revenue and the cost management efforts, we're pretty committed to being able to continue to scale our growth and feel comfortable that we've got several levers to continue to drive the margin expansion.

[Operator]

[Operator Instructions] And our next question comes from the line of Kevin Krishnaratne with Scotiabank.

[Kevin Krishnaratne, analyst]

I had a question on Benchmark Manager and maybe some of the AI products that you've got out there now. Can you maybe talk about adoption? Where do you see adoption rates going? And more bigger picture, a lot of your customers may already have in-house data science teams. How do you see your product in that context, is it going to help support those teams? Is it going to be taking budget -- [indiscernible] budget for you if more of their AI team strategy is leveraging products? I'm just trying to understand the AI strategy and how you see it really fitting into your customers' strategies themselves going forward.

[Richard Sarkis, executive]

Yes, Kevin, good question. Thanks for that. Let me just hit on a couple of the core value propositions of Benchmark Manager, and then I'll talk a little bit about the AI component as well. One of the more fundamental value propositions of Benchmark Manager is leveraging that unique identifier, the Altus ID, to bring all of the data together. And that's something that, even in-house, a lot of our customers tell us it's something that they need help with. So that is a core value prop that I didn't want to talk about. And then, of course, it's the quality and the granularity of the benchmark and the depth and breadth of the benchmark and the ability to go down and drill down and understand why certain assets are under or overperforming versus a hyper relevant set of comp properties is something that comes through very, very clearly with Benchmark Manager. And of course, given that it's powered by the aggregated anonymized ARGUS and VMS data that within a specific client, they obviously don't have the breadth of all of that, really helps to differentiate that as well. In terms of AI, building on that and moving that forward to recommendation engines that not only show under or overperformance, but then help to suggest action to ultimately drive performance is something that we are heading towards as well.

[Kevin Krishnaratne, analyst]

And then maybe just the last one for me, just on the recurring new bookings, I think you mentioned excluding the Ryan contract, 3% growth. I think that's quite a slowdown from what you saw in Q4. I might be reading the MD&A incorrectly. Correct me if I'm wrong there, but it just looks like the recurring new bookings was a little bit lighter, excluding that contract. So I'm just wondering if you can explain that trend there. I know it's really hard to, the way that you disclose the bookings, it's not really the greatest comparison. But can you just talk about the trends that you're seeing there? Because I think you did mention software growth as being strong in the quarter.

[Jim Hannon, executive]

Yes, Kevin, we did say that software growth was strong. It's one of those -- I wish we disclosed the pieces of it. But as you know, we're going to move away from bookings, which is internally, we're much more focused on ARR and NRR at this point. And as I said, we'll start introducing those metrics at Investor Day so that we can explain exactly how we do all of them. But the ARGUS software growth was really impressive for us in the quarter. I was shocked given the market environment. On the flipside, the VMS growth was not there, which is completely predictable in this interest rate market because the VMS clients are on a wait and hold on transactions. Overall, we're seeing complete transactions across the market, like transactions of all sizes were down over 7% year over year. So where that manifests itself is in the growth of VMS. So to put up the 3% growth, excluding the data contract, in this market with VMS flat, is a really strong performance for our software business.

[Operator]

[Operator Instructions] And with no further questions at this time, I would now like to turn the conference back over to Mr. Jim Hannon for closing remarks.

[Jim Hannon, executive]

All right. Well, my closing remarks is thank you, as always, for joining us. We are always available for the one-on-ones and follow-ups. We look forward to talking about the quarter and what we see the rest of the year. And hopefully, most of you can make the Investor Day in September. So thank you, and we'll talk to you soon.

[Operator]

Ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.