Altus Group Limited

Thank you, Patrick, and good afternoon, everyone. Welcome to our Q3 results conference call and webcast for the period ended September 30, 2017.

For reference, earnings results news release was issued after market close at 4 p.m. Eastern time today and is also posted on our website, along with our MD&A and financial statements.

Please visit altusgroup.com to obtain these documents and for more information. On today's call, we will begin with an overview of our performance during the third quarter, including a discussion of our financial results and noteworthy developments.

We also plan to discuss the acquisition of CVS, which we announced by press release this morning. We will finish by taking questions from analysts and institutional investors, and if we miss anyone, please contact me directly after the call.

Joining us today is our Chief Executive Officer, Bob Courteau, and our Chief Financial Officer, Angelo Bartolini. We're also joined by Barry Eisen, our head of M&A, who can help answer questions pertaining to the CVS acquisition.

Before we get started, please be advised that some of our statements today may contain forward-looking information. Various factors and assumptions were applied or taken into consideration in arriving at the forward-looking information that do not take into account the effect of events announced today.

There are also numerous risks and uncertainties that could cause actual results to differ materially from those set out or implied by such statements. They are always described in the company's filings on SEDAR, and our comments and answers to any questions must also be considered in the context of the disclosure of those materials.

And with that, I'll turn the call over to our CFO, Angelo Bartolini, who will start with a review of our financial performance.

Thank you, Camilla, and thank you all for joining us on the call and webcast this afternoon. I'll start off today with some highlights of our consolidated financial results, followed by a deeper review by business segment.

Overall, following a strong first half of the year, we were really pleased with the sustained top-line and earnings growth, and the steady improvement in our operating margins. The team delivered solid results in Q3, and we're really pleased with the progress we're making against our growth strategy.

Starting off with a quick recap of our Q3 consolidated performance, revenues grew by 6% to CAD 117.4 million, adjusted EBITDA grew by 1% to CAD 23.6 million. Profit in accordance with IFRS was CAD 7.5 million, compared to a loss of CAD 5.1 million.

The big driver in the change, in addition to adjusted EBITDA growth, was the goodwill impairment charge on Geomatics taken in 2016. Adjusted EPS was CAD 0.34, up 10% from CAD 0.31.

Moving on to our Q3 performance by business segment. Our Altus Analytics business had another double-digit growth quarter led by strong license sales.

Revenues were up 121% to CAD 40.7 million, and 16% excluding FX impact. Growth from the acquisition of EstateMaster was 3%, and the headwind from FX was 3.5% on both revenues and adjusted EBITDA.

Recurring revenues were up moderately to CAD 27.9 million, impacted by currency winds I just mentioned and the anticipated loss of some DCF maintenance revenues following the end of support on DCF's maintenance that took place on June 30, 2017. Nonrecurring revenue growth was strong at 46%, rising to CAD 12.8 million, largely the result of strong license sales.

As Bob will discuss in more detail shortly, we continued to benefit from solid add-on sales, including customers adding more seats and functionality, as well as benefitting from new client additions, continued client conversions from legacy products to ARGUS Enterprise, and sales in Europe. Adjusted EBITDA was up 15% to CAD 12.2 million, reflecting the higher revenues, partly offset by higher expenses as we increased investments in our ARGUS product roadmap, including adding cloud functionality.

We continue to focus our investments on areas of the business that drive long-term growth while delivering strong operating margins and cash flow expansion over time. EBITDA margins remained strong at 30% in Q3.

Commercial Real Estate Consulting revenues grew to CAD 64.3 million. Property tax revenues were up 2% to CAD 39.4 million, or up 4% excluding FX impact.

Meanwhile, Valuation and Cost Advisory revenues grew by 3%, rising to CAD 24.9 million on good performance from our cost practice. From an earnings standpoint, CRE Consulting adjusted EBITDA was up 5% to CAD 19 million, up by 9% to CAD 15.4 million at property tax, but down 9% to CAD 3.7 at valuation and cost advisory.

Following a strong quarter, we were pleased with a follow-up performance in property tax in light of the fact that we are in the first year of two new assessment cycles in Ontario and in the U.K.. We are also coming off a strong growth quarter in Q3 last year, when the growth rate was 24%.

Overall, we continue to be very excited about our prospects and future opportunities in property tax in North America and in the U.K.. Our pipelines from the new cycles show increased value and volume of appeal.

In addition, the technology we are introducing to support these service lines will continue to allow us to expand market share, provide greater data and data visibility to our clients, and help improve our efficiencies. At Geomatics, revenues were up 4% to CAD 12.6 million as we saw higher activity levels from oil and gas clients.

And despite the ongoing market pressures, we continue to improve earnings. Adjusted EBITDA improved to CAD 1.5 million, and margins improved to 12%.

Finally, in our corporate division, corporate costs were CAD 9 million, up from CAD 8 million last year. Year-to-date corporate costs have been trending higher year-over-year, reflecting increased variable compensation and the investments we have made in our IT platforms and HR systems in order to scale and support our future growth.

As at the end of the quarter, our balance sheet remained strong. Our bank debt stood at CAD 140 million with a funded debt-to-EBITDA leverage ratio of 1.6x, and with CAD 59 million of available borrowing room under our credit facility.

Our [indiscernible] position at end of quarter was CAD 56.3 million. Subsequent to quarter end, as you might be aware from this morning's announcement, we acquired CVS.

The transaction was valued at GBP 36.3 million, or approximately CAD 62 million. We pay GBP 25.3 million on closing, or approximately CAD 54 million, with an additional GBP 6 million or approximately CAD 10 million to be paid in two years subject to certain conditions being met.

The transaction was funded primarily with cash on hand and with approximately CAD 8.5 million drawn from our credit facility. Bob will speak about the acquisition in more detail shortly, and I'll return to comment on some financial metrics.

With that, I would now like to turn the call over to Bob.

Okay, great. Thanks for the summary, Angelo, and good afternoon, everyone.

On the back of a strong first half of the year and as we come into our top year-over-year comparison, I'm really pleased with the solid performance in Q3, driven by a robust performance across all of our business segments and lots of progress around our strategic initiatives. Our results year-to-date, 9% top-line growth and 19% earnings growth at improved margins, underpin that Altus Group is in growth mode, increasing market share with our key offerings and delivering on our strategy.

We're also really excited about the property tax acquisition of CVS in the U.K., and I'll talk about that in a minute. But first of all, I just wanted to welcome the employees of CVS.

We've had a team on the ground there today. I think there's a lot of enthusiasm on both sides, and really, really excited about this acquisition.

I'll talk a little bit about that, as will Angelo a little bit more, and I'm sure there'll be questions from the folks on the phone. Following a strong Q2 at Altus Analytics, we continued to grow our business in Q3, sustaining double-digit top-line and earnings growth while continuing to add new customers, increasing add-on sales, and making solid progress in our international markets.

As Angelo covered [indiscernible] in total, despite some of the currency headwinds, Altus Analytics finished the quarter with 12% top-line growth and 15% adjusted EBITDA growth at a strong 30% EBITDA margin. Having recently surpassed 3,300 customers at ARGUS Enterprise, the license sales momentum continues, coming from a combination of add-on sales, net new customer additions, and of course, from those who are still converting from our legacy products, DCF in North America and ValCap in Europe.

Although we saw a big spike of conversions in Q2 in preparation for the DCF end-of-support deadline, as we expected, naturally there was some more casual users who have yet to convert, and the majority of which sit in the small size customer category. We continue to work with these customers on an upgrade transition plan and expect that the majority will convert over some period of time, and we feel strongly about where we are in North America with our Argus-centered price product.

Nonetheless, the loss of these customers paying maintenance fees impacted our recurring revenue growth, and recall, too, that our DCF customers were paying higher maintenance fees than our AE customers as a way of driving the transition, per our strategy to encourage them to upgrade. So there was price impact too.

We still feel very optimistic that we can continue to offset this impact from new license sales. Overall, as our results to date show, we remain in growth mode at Altus Analytics and continue to have a very strong runway ahead.

We feel increasingly confident that we can bridge the sales gap between the end of the DCF upgrade and the new wave of growth, which will be increasingly reliant on a broader mix of revenue sources, including growth from international markets, add-on sales, targeting new customers and users, as well as new opportunities created from global deployment as our global customers adopt ARGUS Enterprise across all regions. We also continue to see a lot of positive trends unfolding that support our confidence.

Let me talk about a couple. In the past, a high percentage of our growth came from conversions, but, in fact, in Q3, reflecting the value of our now greater-than-3,300 customer base, we had strong performance in add-on sales, as current customers come back to add more functionality or add more seats.

And in fact, add-on sales and net new customers contributed approximately 75% to license sales in the quarter. Overall, we've been very successful in expanding our customer relationships, increasing wallet share, and selling broader inside accounts.

In addition, we're continuing to add a lot of net new customers, especially in the new geographies like continental Europe and Asia-Pacific, and from new market categories like in the debt space in banks. We continue to also benefit from a broader mix of revenue sources, and overall have seen more customers' interest in the complete range of Altus Analytics solutions and services, some of which we're starting to deliver in a managed services model to extend the capability of our appraisal management capability.

We're also innovating on our way to broaden our appraisal management sales to close then funds, pension funds, and debt funds, and see a lot of opportunity there, especially as we're seeing some clients get into daily valuation funds. We had some exciting new appraisal management deals in Q3 that included doing debt fund valuation work as well, and now we're working on about 10 new open-ended debt funds and see further potential in this space.

As evidenced by the healthy adoption of our Argus On Demand offering, which stands at roughly 600 firms, we're also encouraged by the market opportunity for new innovative cloud solutions, and we're working on that very diligently now. Overall, we continue to believe that our Altus Analytics business is well positioned for growth, and as proven by our track record, we have been very successful in delivering this growth while sustaining strong EBITDA margins.

Let me talk about CRE Consulting a little bit. As U.K.'

s largest property tax practice based on the number of appeal files processed from the last cycle, and now our main competitor in the U.K., the acquisition of CVS will double our U.K. tax business and position us as the largest business rates advisor based on the combined volume of appeals.

Operating for over 17 years with offices in London, Manchester, and Bristol among others, CVS has gained substantial market share in the U.K. property market.

Similar to our U.K. practice CVS specialize in the mid-market client category, which covers properties with a ratable value under GBP 100,000.

This provides for high margin engagement opportunities. And recall that in the U.K., the tax burden falls on the tenant and not the landlord, and unlike North America, this lends itself to a model where we can focus on large institutional clients.

The offerings are very comparable to those that we provide in the U.K.. CVS specializes in tax representation for all types of commercial properties, including office, retail, and industrial bulk [indiscernible], and its primary services include business rates, which is the local reference to effectively reducing taxes on businesses and other organizations that occupy commercial premises.

This acquisition met our criteria on many fronts. Financially, it will be a home run and highly accretive over the course of the cycle, and position us for continued organic growth and market share growth in the U.K.

market, especially for the new cycle that we have entered this year. More color from Angelo on that in a minute.

We get a significant talent acquisition, and that was a key consideration, as we believe that the addition of approximately 230 professionals will strengthen our business rates expertise while contributing to our overall growth plan. Throughout the due diligence phase, we're always impressed with the people at CVS and the great job the team has done in building CVS into a market leader.

We're very enthusiastic about the considerable growth potential of bringing the two companies together. This acquisition brings together some outstanding talent and expertise, spanning sales, market, and operations, and combined will have over 400 professionals in our U.K.

tax practice. Strategically, CVS expands our market share and gives us critical mass in a strategic global CRE market, aligns with our growth strategy, and also adds to our data on comparable property information, which at a minimum will give us a competitive advantage in [indiscernible] and lease negotiations to deliver great value to our clients, and longer term, as we have our sights set on modernizing property tax with technology and data, having critical mass in the data that goes with it in this market will be key and will also be important for our large commercial real estate customers.

The plan is to integrate CVS into Altus Group immediately so that we can benefit from a consolidated team and processes, while maximizing our operating synergies. There's so many people to thank for this acquisition, but I really did want to acknowledge the tax management team in the U.K.

led by Alex Probyn; the M&A team here with Barry Eisen; all of the support teams, including Liana and many other people that were in the transaction; Angelo and the finance team. This was fairly heavy lifting.

We're excited to welcome the CVS team to Altus Group, and I truly believe that our combined value proposition is significantly enhanced for both clients and employees. We wanted to share with everyone a little bit more information on CVS's revenue model, given some of the nuances unique to the U.K.

market. We're going to ask Angelo to spend a few minutes on this and talk about how it differs from the North American market.

So back to you, Angelo.

Thanks, Bob. First, I'd like to begin by saying that this acquisition places us on very strong competitive footing.

Given the data we have from the 2010 assessment cycle, our combined businesses would have yielded approximately 20% market share by volume of appeals filed during that assessment cycle. The next largest market participant would be approximately half this size.

As a result of this combination, the opportunity for additional growth and synergies strengthens even further. The key elements in having a successful cycle and maximizing the revenue base throughout the period is to build a contractual pipeline of clients and properties in the early years.

This requires a focused approach and investment in sales and marketing efforts which diminish toward the latter half of the cycle. In 2018, our intention is to combine our individual expertise in these areas and to continue to maximize share, particularly for incremental new clients.

The contractual arrangement that CVS has with its clients is to charge them a percentage of the savings which they achieve on an annual basis throughout the 5-year cycle. As a result, revenue earned on each settlement is recognized on a savings period-to-date basis with future years' savings recognized in the year saved for the remaining assessment period.

So, for instance, if an appeal was settled in year 3 of the 5-year cycle, 3 years of the total revenue we earn is recognized in year 3, with the remaining revenue recognized over the following 2 years. This creates a scaling effect of revenue throughout the 5-year period.

We also need to keep in mind that there is a ramp-up with the valuation office of cases settled at the start of a new assessment cycle, and that we are still currently in the first year. As a result of these factors, we expect significant increases in EBITDA beginning in 2019.

Overall, we expect the average EBITDA multiple of this transaction to be 5.5x, given the total EBITDA expected to be earned for the 2017 assessment cycle, and which excludes any potential synergies which we may obtain from this combination. We also expect EBITDA margins to be similar to our overall 2016 property tax levels on a total basis.

I'd like to reiterate that this is an exciting acquisition for us and that it demonstrates the opportunity for further acquisitive growth in both the U.K. and U.S.

markets. With that, I will now turn it over back to Bob.

Okay, great. Well, listen, I'm sure everyone has a lot of questions.

Why don't we open up the phone?

All right, Patrick, please.

I was wondering if you could maybe give us a bit of color in terms of how this entire process with CVS began and was this company of for sale, and just kind of give us a bit of background on that.

Okay. I think I went to see CVS four years ago, and part of the reason I did is we were trying to figure out what their whole market play was.

And at that time they were trying to recruit some of our senior management. And so, I said, I'll just go see them and check it out.

And at that point they made an offer to buy us. And when we left that night, I told the guy, Alex Probyn, who runs Europe, that, you know, one day we are going to buy these guys.

We're going to just flip it on them. And the way the CVS team manages their business is a little bit different from ours, where we have a concentrated business development focus over the length of the cycle.

The way they did it was a boom-bust kind of approach. At the beginning of the cycle, they would really load up their cost significantly and then take those costs down as they went through the cycle.

They did that because they had a single appeal approach to the tax. We have a multiple appeal approach.

We actually, for one tax client, might appeal on two or three different areas. And so, what they would do is hire 40 or 50 people and then 2 years later fire them all, and then that became fairly difficult to sustain the enthusiasm of employees when you do that.

And what happened is about a year ago we approach them saying, you guys want to go through this again? Are you sure you want to?

Now is the time to start talking about whether we should have an opportunity to consider selling to us. And it literally took us 8 or 10 months once they came around to close the transaction.

And we are now at a point where we did this alone, we got to them in a way that we made a good offer at a time where they could avoid what would have been another huge investment against a much better competitor: us. Because we were way better organized as a team this time to compete against them then we were 4 years ago, 5 years ago, 7 years ago.

But it was 4 or 5 years ago we went to see them.

Okay, that's helpful. Thank you.

With respect to the synergies going forward, is more going to be on the revenue side or the cost side? And I don't know if you have those numbers, Angelo, but maybe kind of give us potentially an order of magnitude of what they would be?

Yeah. Here's the way we are thinking about it, guys.

Because it was competitive right to the end, they were always fairly careful about getting full visibility to synergies. And so, we have a couple decisions as we go forward.

One of them is, because we are at the beginning of the cycle, we both have fairly strong -- and there was some chance this wouldn't close, we both have fairly robust sales organizations because we are at that point in the cycle where that's what you do in really securing appeals. And the real thing that we emphasize in the next couple of quarters is how much do we want to keep on to really go after that next wave of organic growth post acquisition.

And there's a really good chance that if you look out the next couple, three quarters, that we are going to model this on an EBIT-to-neutral basis, meaning that we're going to want to keep that expense on. But what we're telling you guys is, we'll come back to you after -- as we come out of the 1st quarter of 2018, to really size the synergy, whether we want to take some of those costs off.

But for the next couple of quarters, we really, really want to put a big press on organic growth and really even go for more share. We think we are roughly 20% share, a little bit less than that with the combined businesses, and we'd really, really like to see if we can take a nice run at increasing that.

So, not a lot of synergies in the next couple of quarters, but why I say this is a home run, if we look at, coming out of 2018 and coming into 2019 and 2020, we think we are going to have a conservative -- we announced the purchase multiple at 5.5x; we're going to try to make that conservative. We think we have a significant opportunity over the life of the cycle.

And then on the admin side and expense side, we're going to work through that. I don't know, Angelo, you want to talk about that?

Well, there's that, but I was also going to add just on the revenue side that we're, given the size of CVS, given our size, and the market segments that we're in and the type of clients that we get, for the most part we've gone head-to-head with them in the past, and sort of been us and them. And so, sort of, now we're really working together as opposed to working against each other in this next cycle.

So, and we see just the strength of the 2 adding additional opportunities on the revenue side. And then on the cost side, again, there are obviously, there's going to be like for like things that we do in the back office areas that will provide us synergies, and particularly with scale will be able to get additional synergies.

But this is a play for the cycle and for a long-term position in the market that will be significant. We said we wanted to be number 1 in this market.

We did that already, but we really want to be number 1 in the market. We're going to keep this going.

The real work on this one -- because we thought you might ask this question -- the real work on this one is to size our expense to the available market share growth, and we're going to do that. But we are not in a hurry to take cost out of either sale side of it until we size the market opportunity for organic growth.

Hi guys, and congratulations on the deal. Angelo, I just want to make sure I understand the way this revenue is going to show up over the next 5 years.

So is it when the appeal goes through and the decision is made, you get kind of like a catch-up payment that you're expecting in 2019 that would cover, like you said, 3 years' worth and then, following that, the 2 years subsequently, will you get a payment every year? Is that the right way to think about it?

Correct. Absolutely.

Exactly. So it is a catch-up, so year 3 they would have already had the 3 years' savings, and we take our revenue, we recognize our revenue at that point and then for the next 2 years we do an annual billing and we recognize it at that point.

Okay. So you're not expecting -- why 2019?

Is that just a typicalÂ…

Oh, no, that's just an example. So let me backtrack.

If we settle a case, call it in the 1st year or call it in 2017, a case is settled, you only recognize one year of the total 5-year savings and our revenue cut at that. And then you've got an additional 4 years annually.

If it's year 2, you basically recognize in that year 2 when you settled it, you recognized 2 years out of the 5, then with 3 additional annual recognitions, and so on.

So you end up building a book of business has you work through these cycles.

Okay. But you mentioned in the press release that you expect significant contribution in 2019.

Is that just kind of how it built up through the cycle and that's how youÂ…

So that's when, as Bob was discussing in terms of how we're sizing the opportunity and looking at our cost-to-opportunity basis, we're going to decide in 2018 how much more we want to invest, given the incremental benefits. So we expect it to be relatively neutral on a EBITDA basis, but significantly start ramping up starting in 2019 from an EBITDA standpoint.

One nuance that I mentioned in here is that we do a lot more thorough work on behalf of the customers, which also tends to lead to more complex work with a higher contingency. And the more complex higher contingency, those are the ones that and up taking the longest to close, but they're good because they set up that next wave.

So if you look at the U.K. performance, we don't break it out.

We've said it's been pretty good this year, partly because we're closing business that we built out in the last tax cycle in 2017, that we think we can bring to the CVS business where we'll pick out certain number of files where you have an opportunity for a better outcome, ergo higher contingency, and that's one of our upsides in our thesis around this acquisition.

Certainly not to beat a dead horse on CVS here, but I just wanted to -- like so you've given what would be an implied EBITDA, just backing out the 5.5x from the purchase price. But in terms of getting a starting point for the revenue, understanding the waterfall effect of the 5-year cycle, what kind of margins does CVS generate?

Like if we changed it back into a top-line.

Yeah, so I indicated in my prepared remarks that we're looking overall at margins over the cycle that you equate to approximately our 2016 property tax business overall. So in the mid-20s is what you could expect, and maybe slightly above the mid-20 level.

Right, okay. And as you recognize those potentially lump year revenues, is there an associated lumpiness in margins?

You'll have an expanding margin throughout the period. And the revenues shouldn't -- actually, the revenue profile for the CVS business, given what they had in the previous cycle, again, it starts low because of the sort of ramp-up, that there's a bit of a delay.

You've got to get the appeals in, start meeting with evaluation office before you start getting the settlements completed. And so, the revenues ramp up, A, for that reason.

And then, B, because you have this scaling a fact with every year you're adding more to your base in sort of that annual billing that we do.

Right, okay. Okay, that's great.

And then just changing gears here, just on the corporate costs, Angelo, I know you mentioned that they've tended to trend higher. Can you just give a little bit of an indication of what you would expect over the next sort of 2 years, like maybe the balance of 2017 and then 2018, 2019?

You know, we did step up our investments starting sort of mid last year around some of the platforms that we've implemented: Workday, some ERP add-ons such as Concur. And we've been building a platform around data at the corporate level as well.

So we've started those investments. They've continued on into this year.

And I think we've had -- it's a bit of a step function. We've had that step function over the course of the 2 years.

I think we are going to go back to -- subject to not introducing new investments, but given what we have currently, you should sort of see more of a moderating and more sort of historical increases.

Okay, that's great. And then, sorry, just to come back to the U.K.

tax market, you mentioned that the third-largest player is sort of half the size of what your pro forma share would look like. Are there more and/or interesting acquisition targets in the U.K.

property tax market?

It's still very fragmented. So the next one now after us is 10% or under.

And again, this is based on data from what we've collected that's public, and based on appeals filed, they're half our size and it continues to go way down after that as well.

But I wouldn't underestimate the different type of appeals that we can do. Our [indiscernible] rates business is doing well.

We like this business because in all of our services business, data is becoming more important, and we want to connect this business back to the CRE owners. And so, not only do we want to acquire, but we also want to innovate, and this gives us a critical mass to innovate.

And the one thing about the combined business is that we pick up some good people on both sides, then we can invest more in the technology and data opportunity around this.

Okay, that's great. Looks like a very interesting deal.

Congratulations.

I will ask about property tax, as you probably might have guessed. Bob, I guess around this time last year, I was under the impression that you guys would target consolidating in U.S.

property tax market first, and you've done some acquisitions on the U.K. side now and with the one today.

Was that expectation wrong, or did something change, or is it just you're seeing better opportunities in the U.K. versus the U.S.?

Acquisitions are a 2-party system, so sometimes you've got to take them where you can. We like the U.K.

We think we have been a leader and an innovator in that market, and you've read or heard that there's a lot of people that are trying to do interesting stuff in the U.S. market, and it's a market that it's important that we do a lot of really exciting things organically equal to acquisition.

Even if we were to buy the top -- not number 1, right, who's already declared he's not selling. But if we were to buy 2, 3, and 4, we would still not have the market share that we enjoy in the U.K.

now. And so, there's an opportunity to consolidate and innovate in the U.K., which we like to do, and if any of those other players in the U.K.

are listening to this call and they want to sell, please give us a call. And in the U.S., we're talking to a bunch of people still and these things have a way of being opportunistic.

Okay, great. And I think you alluded to some of what the CVS customers get now that Altus is on board in terms of more robust claims.

But how does this get you faster toward the managed service model, and what kind of data does this bring that you can spread through the rest of your businesses?

Okay, so if you follow the business -- okay, so actually I'll take it a step back. If you've seen our position as a company, what we want to do is we want to serve the largest owners of real estate assets in the world, and the PMs and asset managers around that.

And if you understand the data that we collect in tax, we do this on the tenant side. But what's in that is rent and movement and turnover, and a lot of really interesting things that can provide visibility to these large asset owners as they think about the most important aspect of NOI, or net operating income, and that is revenue trajectory.

And so, our thinking is that we started with empty rates in terms of bringing out a product in the U.K. that was important to the asset owners.

Now, we're getting to critical mass with 20% of the appeals in the market, we can go and really start developing solutions that give visibility to revenue movement, revenue trajectory, vacancies, empty rates, and we have it in our mind that this kind of data is going to be interesting to our large commercial real estate owners. And on top of that, as we become more significant in the U.K., both in appraisal management, now with ARGUS, we'll actually start collecting data in multiple ways that will be a big part of the next evolution of Altus Group.

Okay, great. And then just added to that on the managed service front, so this seems sort of like an annuity model that once the first revenue kicks inÂ…

Yeah.

Is this a path to getting to a full managed service model, or how does that work?

Well, I think where we're focused on the full managed service model right now is in North America, in our Canadian companies down there. It lends itself to a market that will be served by multiple small franchise players, and that's where we have some emphasis around that with our customer portal, with our relationships, with appraisal management and the like.

Okay, got it. And then one last small question if I may on the accounting for Angelo.

Just on the cash flows around the revenue recognition, does the cash flow follow the revenue recognition, does it come afterwards or before?

It's pretty close, yes, of course. Yes.

It's an annual billing. So the catch-up is right away, because the client also gets a one-time payment from the revenue services and we take our cut of that, and then they then will experience the savings in future years every year when their tax bill is due, and at that point that's when we bill them and they owe us money.

Okay. So it's not like you get a catch-up plus a big deferred revenue whack on your balance sheet.

No, no. We recognize it annually.

On CVS, so I'm just curious, will the management team stay on their post-acquisition?

We've made some changes right away. We've made provisions for their managing director to be available to consult to our team.

But we're putting Alex Probyn in charge of the combined business. We promoted somebody in our office ratings business to manage that business as part of the transition, Robert [ Ayden ], who was also running [indiscernible] before, and Alex will be focused on managing the new organization and then doing a full integration of both businesses.

So, no, we're integrating this business into Altus Group.

Okay. And then the CAD 10 million portion that will be paid in 2 years, if you're able to I would be interested in hearing just what some of the conditions might be for that payment.

Is it performance-based or otherwise?

The holdback is really meant to ensure that all the deliverables actually do come to Altus, quantity of instructions that we agreed upon, with a clawback on a per instruction basis if any of those instructions don't end up coming over to Altus. And as well, it's fair to provide support for the warranties and the indemnities that were agreed upon in the legal process of the agreement.

Okay. And so then would there be any risk of the exiting management team then competing with Altus in the future, or has there been sort of like a non-compete arrangement?

The management team and the ownership that exited are all subject to lengthy non-competes.

Okay, great. So moving on, just wanted to touch on the go-forward.

So, Q4, maybe a bit of a housekeeping item, but I recall last year there was a bit of bonus payments that happened, and so curious how you see that, potentially expect very impacting expenses in Q4 of this year. Is that something we should be considering in our modeling?

We've been consistent for numerous years now in terms of how we accrue our bonuses and allocate some back to the business units. We accrue throughout the year based on our programs that we have in place, and we do it on a corporate basis because there is some variability and uncertainty.

And so, we have it in a corporate bucket and then at year-end once we've analyzed the earnings and the conditions that go along with the bonus, then we allocate out what's been accrued within the corporate bucket out to the BUs. So it is expensed throughout the year, and there will be an additional expense obviously in Q4.

[indiscernible] higher.

Nope, it's still consistent with EBITDA. It's just that it gets allocated to the BUs, and so that's where at that point you should be looking at the full year, because it's comparable to the full-year basis.

Q1, Q2, Q3 continue to be comparable to prior year. That's at the [ U ] level.

It's just that their performance on an EBITDA is before bonus at that point. And then again, they take the charge in Q4, as always.

Okay, thanks for the clarification. One last question.

So, mentioned in the [ MDNA ], there was some impact of software development activities on expenses in analytics in Q3. I'm assuming that's cloud-related.

Wondering when that sort of additional expense may be complete, or if that will be ongoing over the next several quarters and into the future.

Well, we're basically increasing our spend in the cloud, and I've been talking about that for 3 or 4 quarters. So we absolutely are increasing our capacity and we are doing it incrementally.

We are not moving our -- we want to sustain growth in applications on ARGUS Enterprise [indiscernible] while we bring out these new cloud applications. So we've been talking about that, and I think what I've been saying is that at the beginning of the year we first started talking about that and we said that the combination of the DCF trail-off and increased investments, there could be pressure on margins in the second half of the year, but as you can see, so far, so good.

And what I was trying to emphasize earlier is that we think we're going to have a revenue trajectory that will allow us to sustain good margins as we go forward.

Sorry to touch on CVS again, but I just wanted, at a high level, just to summarize the revenues or the economic dynamics that they see. Is that very similar to what you see in your existing U.K.

business, but we as investors don't see it because it gets blended with the Canadian and U.S. tax business?

So, traditionally we have not had that model whereby we would charge on an annual basis. We did, on some scale, introduce it 3 years ago, and so it was embedded in our overall numbers but it was not at a significant level.

We still, for the most part, earned our revenues, billed and collected in the year of settlement.

Okay, thank you. That's helpful.

Just looking at Altus Analytics, the recurring revenue specifically, you called out the decline due to the end of DCF support. Is all the quarter-over-quarter drop in Altus Analytics recurring revenue attributable to that?

And then on those customers that were on the end-of-life DCF, do you have a sense if they've turned off, or are they still using the products and still potential upgrade opportunities?

I think we track every one of them, and people are still using the product for sure. What we identified is some category of people that didn't even know they were paying the maintenance, and when we brought it to their attention -- you know, it's a small percentage but some of them weren't even using the product, so you're going to lose that revenue.

But, for the most part, they're using DCF, this is like the part-time real estate investor, maybe a broker that owns 2 or 3 buildings, he doesn't sell them, he doesn't trade in real estate, and we think even those guys are going to come over to ARGUS Enterprise as it evolves in the standard. And we have a pretty good plan to start taking them back.

We had a pretty good quarter on takeback on that end. Frankly, we'll actually outrun this problem in general through selling software, but we also have a pretty good plan to take them back.

The other headwind that we experienced was foreign exchange, and that continued to be a drag in the quarter, and increasing drag in the quarter, both from a U.S. and U.K.

perspective. So those were the 2 main impacts on recurring revenues.

And what I said about it is that we have a whole focus with these cloud solutions coming out in terms of overall strategy to move our business to a much more holistic recurring revenue business, and that something that where looking at coming out of 2018, but we want to start putting some practices in place in 2018 that'll move ourselves there. So you'll see this thing turnover in 2 or 3 quarters.

Okay, good to know. Last one for me.

Just with regards to M&A, one of your competitors has been very aggressive or the number of acquisitions in the CRE tech space the last couple months. What are your thoughts on those acquisitions?

Did you look at them? Were they of interest to you or they're not strategic to you?

Yeah. First of all, I know those guys pretty well.

We're friendly with them, we partner with them. I know all the companies they bought, including the first one they bought to get the party started.

And we made a strategic decision years ago not to do that. The acquisitions they're doing feel a lot more like a consolation model then a innovation model.

Nothing wrong with it, but if they decide they're going to go on a harmonization route, it'll be fairly challenging, right? And so, they're on a different agenda than we are.

Good guys. They're competing in a couple areas with us, but it's a completely different model from an innovation model that we're running, with a lot of organic growth.

And just to finish it up, what are your thoughts looking forward in terms of M&A for deploying capital within the CRE tech space?

Yes. Yeah, there isn't -- I mean, look.

We are the largest company in the world selling software to CRE. So, right away, we are 5,500 customers when you include ARGUS Enterprise, ValCap, EstateMaster and developer and Voyanta.

And then the falloff on companies of substance, we've walked past most of them: MRI, YARDI, [ Cougar ] [indiscernible] something. But, look, we are focused fairly aggressively on -- part of the reason we're making these investments in the cloud versus gobbling up a bunch of cloud companies is there ain't any, and the ones that are out there are not accretive financially and they're still questionable in terms of whether they're going to get to scale.

So our primary goal around technology is white space tuck in, watching some of the early stage companies investing in a few, and really going to market that way. If I was to have bought, for example, a company like Cube or MRI, then we would have alienated the opportunity to be at the center of all commerce.

We would have created enemies in that category, and I think these guys are all fighting for market share in a non-growing market. And so, I'm creating new markets and I'm doing it globally and we're adding tons of customers.

And one of the things that I said earlier is already, we are seeing the benefits of 3,300-customer base in ARGUS Enterprise. It's working.

I guess again I may contribute to a CVS question. But Angelo, you talked about a 5.5x purchase multiple.

Is that like applied pro forma or is that like a trailing multiple?

It's an implied pro forma 5-year cycle multiple.

Okay, got it. Thanks.

And I guess switching gears onto the analytics side of the business, can you talk about some of the European opportunities on the analytics side and how the European clientele is shaping up?

I think last quarter we talked about some of the large deals that we've done. When we look at some of the transactions in front of us, especially when we go into continental Europe, this isn't about converting customers, this is about selling large enterprise deployments to large customers.

And they come with no burden of credits on a upgrade, they're fairly large. Many of these opportunities are of the size and scale where we can combine assets, where they look at both ARGUS, Voyanta, and some of our new reporting functionality.

So it's all [indiscernible] new, large, good-size transactions, and it serves that pipeline that we're creating for future sales.

Just to step back for a second on your question earlier about multiple, I just wanted to highlight, if we actually went back and looked at the prior cycle, the 2010 cycle, that multiple would have been lower. So in terms of our perspective look at this, it's based on our projections, some conservatism, and so I just wanted to highlight the reason we didn't use the prior cycle.

We're looking forward [indiscernible] much more realistic approach, or at least a balanced approach. Let's put it that way.

That's the difference between an accountant and a CEO. I'm saying it's conservative, you're saying it's realistic.

And then to support the analytics opportunities in Europe, do you have the sufficient sales staff in place or do you expect to increase your sales headcounts in Europe?

Look, we've got a full complement in Europe and we've got a great team. They're really, really doing a good job.

We hired a very, very strong leader for Europe last year. He's a year in the job.

He's doing an amazing job. He's a C-level executive.

He's doing enterprise selling. We're in good shape.

And I appreciate the data [indiscernible] data point on the add-on sales. Could you talk about the sales team and how they're consented to push like add-on and cross-selling opportunities?

They're consented to make their budget, and they make their budget any way they can. Look, the big change like the one change that we are looking to making for next year is that they've been really focused on transactions inside their market, so whether it's the U.K.

or Europe or the U.S. or Canada, and we've had a couple of large global transactions this year that are fairly meaningful breakthroughs.

And so next year we are building a team that is going to focus exclusively on large global transactions and also on the integration of those transactions some of our appraisal management capability as well.

So listen, let me summarize. Great quarter.

Excited about CVS for now and for the future. We paid for this with cash, so a reflection of a well-run business.

We want to do more acquisitions, and we continue to be the leader in creating customer value in the commercial real estate market at a time where there's a lot of customers looking for the value we create. So we are in really good shape, and thanks for taking the time to join us tonight.