Altus Group Limited

Thank you, good afternoon, everyone, and welcome to Altus Group's Q4 and full year 2017 conference call and webcast for the period ended December 31, 2017. For reference, our earnings news release was issued shortly after the close of market this afternoon and also posted on our website along with our MD&A and financial statements.

Please feel free to visit altusgroup.com to obtain these documents and for further information.

On today's call, we will begin with an overview of our performance during Q4 and the full year, including a discussion of our financial results and noteworthy developments. We will finish by taking questions from analysts and institutional investors.

If we missed 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.

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 at 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. These are described in our annual filings on SEDAR.

Our comments and answers to any questions must also be considered in the context of disclosures in those materials.

I will now turn the call over to our Chief Financial Officer, Angelo Bartolini, who will start out with a review of our financial performance.

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

We are pleased with our full year-over-year performance and key financial metrics, including revenues, adjusted EBITDA dollars and margin, showing continued growth and improvement despite the strategic investments we started to undertake towards long-term growth during Q4.

The strong performance in 2017 across all our businesses provides us with the stability and conviction required to look at the future prospects for Altus Group across the globe and invest accordingly. For the year, Altus Analytics maintained its double-digit growth rate with adjusted EBITDA margin outpacing top line growth in 2017.

We continue to see long-term growth opportunities globally for our products as data analytics and software solutions serve a growing need in the commercial real estate market.

Our CRE Consulting practices also performed well with a balanced contribution throughout the year from our Property Tax and Valuation and Cost Advisory businesses. We continue to see significant future market share growth opportunities in our Property Tax businesses in the U.S.

and U.K, especially with our acquisition of CVS, which was announced during the fourth quarter of 2017. Lastly, our Geomatics business posted improved top line results not withstanding some of the ongoing market pressures in the oil and gas sector in Western Canada.

I'll now provide a summary of our consolidated results, touching on both Q4 and the full year numbers. In Q4, consolidated revenues grew at 6.4% to $122.7 million, leading to an annual growth rate of 8% to $478.1 million.

We achieved organic growth -- organic revenue growth of 6.2% despite foreign exchange rate movements, which impacted revenues by negative 1.4%. Adjusted EBITDA was lower by 7.9% at $20.4 million in Q4, declined by 11% to $82.2 million for the year.

License sales, which are our driver for growth and profitability, came in softer primarily due to the variability nature of the ramp-up with large clients and a significant portion of growth in this category occurring in Q2 and Q3 of 2017, resulting in lower license revenues being sold in Q4, while we continue to work on large-sized deals going into 2018.

Margins were further aggravated by the negative impact of currency and investments. Altus Analytics, Property Tax and Valuation and Cost Advisory and Geomatics were all key contributors to earnings growth in 2017.

Adjusted EBITDA margin in 2017 improved to 17.2% compared to 16.7% in the prior year. Consolidated profit in Q4, in accordance with IFRS, was negative $3.4 million compared to $8.9 million in 2016 and for the year, $110.1 million compared to $14.3 million as a result of the gain recorded in Q2 on our investment in Real Matters.

Basic EPS was negative $0.09 for the quarter versus $0.24 last year and $2.89 for the year compared to $0.39 last year. Adjusted EPS was $0.15 in Q4 compared to $0.38 and $1.13 for the full year, down 1.7% from a $1.15 in 2016.

Moving onto our performance by business segment. In Q4, our Altus Analytics business revenues declined by 0.8% to $41.9 million, impacted by currency movements of negative 3.7%, while on an annual basis, we maintained double-digit growth at 11.7% to $169.2 million.

Currency had a negative 2.3% impact to our annual growth rate. Recurring revenues, which accounted for approximately 70% of total Altus Analytics revenues, increased by 2.8% or 6.5% without currency impacts in Q4 and by 5.2% or 7.5% currency adjusted for the year.

Non-recurring revenues declined by 8.9% or 5.3% on a currency-adjusted basis for the quarter while climbing 30.1% for the year or 33.6%, again, currency adjusted.

Overall, the performance in 2017 was driven by higher ARGUS Enterprise sales, both licenses and subscriptions and increased appraisal management engagements. However, this was offset by lower software maintenance revenues for DCF product, following the end of support for DCF on June 30, 2017.

In the fourth quarter, we saw slight decline in our AE license sales following very strong quarters in Q2 and Q3, where we saw non-recurring revenues grow 94% and 46%, respectively, driven by increases in license sales. In Q4, adjusted EBITDA declined by 39.4% to $7.2 million, reflecting higher expenses as we increased investments in ARGUS' product road map, including cloud functionality, lower revenues and currency headwinds, which impacted adjusted EBITDA by negative 4.2%.

Also, as in previous years, Q4 margin was impacted by bonuses, which are accrued in corporate throughout the year and allocated in the fourth quarter. As a result, we expect to see normalized margins return again during the 2018 interim quarters.

Adjusted EBITDA for the full year increased by 18.1% to $48.4 million. We continue to focus our investments on areas of the business that drive long-term growth while delivering robust operating margins and cash flow expansion over time.

Our annual adjusted EBITDA margins improved to 28.6% compared to 27.1%.

Our CRE Consulting revenues increased by 12.4% to $69.4 million in Q4, finishing year up 5.6% at $261.2 million. Our Property Tax business was a strong contributor.

It was up by 15% at $42 million in Q4 and up 5% at $158.7 million for the year. A strong finish in Q4 was the result of a significant win in our U.S.

transaction tax practice, the start of a new cycle in Manitoba for the Canadian business and contribution from the acquisition of CVS in the U.K.

The Valuation and Cost Advisory practices also performed well with revenues up 8.6% to $27.4 million in Q4 and up 6.7% to $102.5 million for the year. As a result of the revenue growth, adjusted EBITDA for CRE Consulting increased by 21.5% to $7.9 million in Q4 and up 0.5% to $52.4 million for the year.

Q4 adjusted EBITDA margin increased to 11.3% compared to 10.5% in 2016. Annual margins were 20.1% compared to 21.1% in 2016, reflecting investments in technology and in new service offerings.

Changes in the exchange rate against the Canadian dollar affected CRE Consulting revenues by negative 0.9% in Q4 and by negative 1.1% for the full year. The impact to adjusted EBITDA was negligible for the quarter and for the year.

Finally, at Geomatics, revenues increased marginally to $11.6 million in Q4 and up 7.7% to $48.5 million for the year, as we've seen higher activity levels with some oil and gas clients this year. Despite the ongoing market pressures, we've continued to improve earnings.

Adjusted EBITDA increased to $3.5 million for the year, while Q4 showed a decline to $32,000 from $185,000 last year.

Corporate costs in 2017 were $22.1 million, higher than the $18.2 million in 2016 mostly due to increased headcount and systems in support of strategic initiatives in IT and talent management. At the end of the year, our balance sheet remain strong with significant flexibility to support future growth.

Our bank debt stood at $150.4 million with a funded debt-to-EBITDA leverage ratio of 1.85x (sic) [ 1.84x ]. Our cash position at the end of the year was $28.1 million with $49.6 million of available borrowing room under our current credit facility.

And again, we showed improvement in our DSOs, which declined to 70 days from 74 days in the previous period.

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

Thanks, Angelo. As you've heard during Angelo's financial review, in 2017, all of our business segments showed growth in top line and at the adjusted EBITDA line, including even Geomatics.

I'm really pleased with our continued disciplined approach and commitment towards long-term growth and margin expansion while having the ability to know when it's time to invest in the future of the business as we expand our global footprint.

Let me talk about the Q4 software license results right off the top, which obviously came in at a lower trajectory when compared to recent periods. In the past, I've made reference to the potential for variability in our business as we come out of the upgrade in the U.S.

around DCF. The onboarding of major clients absolutely contributes variability to our results from time to time on a comparative basis or on a year-over-year basis.

The Q4 reflected that trend.

Following an exceptionally strong showing in Q4 2016, which at the time represented the best quarter on record, we subsequently followed up in 2017 and overachieved a new record level in both Q2 and Q3 of this year, where, in fact, we experienced sales growth for license in both those quarters over 60%. While the license sales for the reported period came in slightly lower than these recent quarters, Q4 still represented the fourth best quarter in our company's history for license.

Further, the combination of our strong performance in the aforementioned comparable periods and the negative impact of currency aggravated our growth in Q4.

But there's some good news here. We have a growing pipeline of opportunities with great visibility in this category.

This provides us great confidence in the future. Based on our current visibility with large global clients, we remain confident in the long-term growth prospects of license revenue, and as a result, we will continue to invest in the future growth of our business and in particular, in our cloud applications and solutions.

sustainable, profitable long-term growth. We continue to aggressively pursue growth in our core markets and in the existing solutions and customers, and we're making strategic investments to ensure the long-term growth and viability of our global platform.

In 2017, Altus Analytics sustained 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 mentioned in his remarks, this was accomplished despite currency headwinds throughout the year and our decision to make certain strategic investments latent in the year to underpin and accelerate our growth.

Our investments are towards the addition of cloud functionality at ARGUS, which I will elaborate on, adding talent to support our global expansion and strengthen our ability and onboarding and servicing all of the largest investors around the globe.

Altus Analytics finished the year with 11.7% top line growth and 18.1% adjusted EBITDA growth and a strong 28.6% EBITDA margin. The expanded offerings of ARGUS Enterprise, enhanced ARGUS Developer and hosted product, ARGUS On Demand helped to increase sales and drove customer growth in our software segment as we saw our ARGUS Enterprise user base grow to over 3,500 clients, including 600 ARGUS On Demand clients and over 3,000 clients now for our development software ARGUS Developer and ARGUS EstateMaster on a worldwide basis.

We expect the license sales momentum to continue coming from large global contracts, a combination of add-on sales, net new customer additions and of course, from those who are still converting from our legacy products, DCF contracts in North America and ValCap in Europe, as we approach end of life for ValCap in 2018.

With an installed base of over 3,500 clients, we are seeing the wider use and adoption of our software on a global basis. Going forward, we're encouraged with the conversion rate of our customers as a result of DCF end-of-life support deadline, which occurred at the end of June and the long-term growth of recurring revenues as we continue to work with a number of customers who are still making the shift.

In time, this transition will result in stronger growth in recurring revenues.

While the headline growth number for recurring revenue shows 2.8% in Q4, I did want to highlight that currency had a material impact here. Net of the concerned currency impact, our growth rate would have been about 6.5% in Q4, and with the addition of cloud offerings, we expect to see an emphasis on recurring revenue growth in the second half of 2018 and absolutely going into 2019.

Look, there's significant upside opportunity for Altus Analytics software products and services globally. ARGUS Enterprise, which provides global portfolio analytical capabilities with multi-currency adaptability, is now the standard in North America, very quickly becoming the standard in U.K.

and EMEA and is off to a great start in Australia and Asia. Our goal with ARGUS Enterprise remains to significantly increase our market penetration through a dual approach, taking our top 200 clients globally, thus, creating a network effect and by increasing our sales and marketing efforts to new clients in these markets.

Our top 200 clients are among the world's largest CRE investors, and only a few have deployed ARGUS Enterprise globally. We have developed support programs to help our clients more efficiently and effectively deploy globally, and network effect is created as client partners will require ARGUS Enterprise in order to support and transact with these clients in local markets.

As mentioned earlier, we continue to make investments to solidify our market leadership position and adapt the innovation of our solutions. One of the areas we've been working on is the AE platform for the cloud.

We have increased investments in our development teams and will continue to add resources as we modernize the current ARGUS Enterprise platform and develop new web applications.

The early phases of our cloud strategy consist of first developing new applications that will be cloud based but synchronized with the ARGUS Enterprise on-premise solution and the ARGUS On Demand product to application programming interfaces and portal functionality. These new applications will bring many new users to the ARGUS Enterprise environment, and the web applications will be sold separately on a SaaS basis and should generate new incremental sales to existing customers as well as bring new customers in new markets to the ARGUS Enterprise platform.

And the addition of Carl Farrell to our executive team, which I'll elaborate on shortly, and our recent investments in the U.K. and solutions in the cloud are all examples of recent investments in growth that we make with confidence for the future.

Top global firms are requiring greater insights and transparency into the performance of their CRE portfolios. The right technology and expert knowledge are key enablers in allowing for timely information and decision support.

Our Appraisal Management solutions with data and analytics functionality are already a standard in North America, U.K. and Australia with relatively few deployments across EMEA and Asia given its market potential.

We can extend our AE customer base from approximately 3,500 customers today to 8,500 customers in future years, and we have some exciting new Appraisal Management deals in 2017, including a number of debt fund valuations work as well as we create this adjacent market. And now we're working a number -- a new number of open-ended debt funds and see much potential in this space not only in the U.S.

but in the Europe and Australia.

Our leading Expert Services and Altus Analytics business collect valuable and detailed CRE industry data. This provides us with a unique, long-term opportunity to utilize and eventually, monetize this data to drive differentiation, launch new products and strengthen our recurring revenue streams.

We've been laying the groundwork for this opportunity by developing technology that capture and organizes the data that we collect across each of our businesses and now through innovative partnerships.

In the long-term, this infrastructure will enable us to better integrate our current products to pursue more data sharing partnerships and to leverage the data to develop new applications and data-driven products. Our goal is to use this infrastructure and capability to ultimately launch new products globally.

And while we're on the subject of Altus Analytics and growth, I did want to touch on Carl Farrell joining our executive management group subsequent to year-end. As most of you are aware, Carl has been a fellow board member and at many times for me, a great partner in providing valuable input into the build-out, growth and success of Altus Analytics.

And given his vast experience at SaaS and the point of inflection which we find Altus Analytics, we enter a new phase of global growth with an emphasis on data monetization. I couldn't think of a better person to lead the charge and to take these business segments to new heights and as we work together in pushing hard towards our target of becoming a global software and data analytics platform.

This allows me to focus on the acceleration of our strategic plan as we look to the future, help with the modernization of our Property Tax business and to build a larger high-margin company servicing the CRE markets. Carl joining our team has certainly added a new level of energy already, and I really appreciate the outpouring from the technology community in response to Carl's decision to join our company as a leader in the space, and it is very, very encouraging and highly positive.

Turning to the CRE Consulting, Property Tax, and Valuation and Cost Advisory. We continue to demonstrate the market leadership in their respective practices, both delivering continued top line and adjusted EBITDA performance, especially with the strong finish in Q4.

We continue to see ourselves as the market leader and innovator in property tax as well as a consolidator. And Property Tax continues to represent an attractive growth area for our business, both in the U.S.

and the U.K. and as we modernize in Canada as well.

We'll continue to augment our growth with acquisitions. Organic growth will be driven by market share gains, increased critical mass productivity as well as through innovation and technology.

We will remain focused on acquisition opportunities in the U.S. as this is a fragmented market.

The U.K. is a tremendous growth opportunity for us.

And as you will recall, during Q4, we announced the acquisition of U.K.-based CVS. This acquisition will further solidify our presence and market position in the U.K.

as we enter this new reevaluation cycle and prepare ourselves for the significant growth cycle for our U.K. practice as one of the largest players in the market.

Looking ahead, albeit with quarterly fluctuations, as a result of the timing of contingency settlements and other factors like varying tax assessment cycles across jurisdictions, which have a big impact in our quarterly performance, the Property Tax practice is poised for growth over the next few years. We expect our success here to be driven by both organic growth and strategic tuck-in acquisitions.

And our organic growth in this category will also be -- continue to be driven as a result in the increasing property value, which inevitably drive our contingency revenues higher as a percentage of value. Long term, Property Tax has a significant potential for innovation and modernization, and I'm really excited about this opportunity.

The Valuation and Cost Advisory business units also delivered strong organic growth, benefiting from revenue diversification in key geographies. Both businesses continue to be key differentiators in our CRE Consulting category, allowing us to touch real estate assets virtually at every phase of the life cycle.

This business segment also had a strong quarter with nearly double-digit top line performance and a 27.4% increase in adjusted EBITDA. Our valuation practice, predominantly operate in Canada continues to benefit from strong client retention, and our cost practice in North America continues to diversify its client and industry focus.

And in Asia Pacific, we continue to leverage our global relationships and drive opportunities.

Finally, Geomatics, where I'm pleased with the impact of our cost-cutting initiatives and headcount reductions that we've already undertaken in 2016, which resulted in improved profitability in 2017. Even though, we're seeing improved activity levels in this space, we maintain our cautious outlook for this time.

As some of you might know, after a long and distinguished career, Dave Gurnsey currently recently decided to announce his intention to retire. Dave's leadership at Geomatics was instrumental, especially as we navigated through some tough times.

I want to thank Dave for his years of dedication and wish him the best. Going forward, very pleased that Mitch Ettinger will succeed Dave as President of Geomatics.

Mitch will joined Altus in 2014 and has extensive experience in the industry. Really looking forward to working with him closely.

Our outlook remains positive. As I mentioned, our pipeline is solid with growing global growth opportunities.

We have a very strong team in place, and we will continue to make investments where required to enable us to capitalize on these opportunities and grow with the largest CRE investors around the globe.

As many of you heard me say repeatedly, we like running our business under Rule of 40, which enables the balance between growth in revenues, profits with growing margins while affording to make investments in the mix. We are really committed to these principles.

I am going to open the line in a minute for some questions, but I just want to take a minute to thank and recognize the hard work and commitment of every one of our employees who contributed to the significant progress in 2017. We have an incredible amount of talent, and in 2017, we added to the team and we accomplished much together.

In addition to the many financial and operational accomplishments, which we described here in 2017, it was also an important year in further enhancing our information services platform, a model that captures the delivery of analytics applications and services, and this best encapsulates how we see ourselves going forward and how our clients increasingly see us and will work with us. Our business model will continue to shift more to information services, whereby we'll increasingly leverage data, deliver insights and outcomes to help our clients maximize the value of their real estate assets and portfolios on a global basis.

We thank you for your support. And now we'd like to open the line for questions.

Thank you.

Bob, I was wondering if you can comment on the pipeline. You said you're seeing a strong pipeline in Analytics.

What is that mostly comprised of? Are they still DCF upgrades?

Or are you seeking ValCap upgrades on your customers?

Yes. I think the contribution to our performance in 2017 is because of the breadth of our pipeline.

And if you look at how it's evolved over the last few years, where it was mostly an upgrade story, now we get revenue from continuing upgrade of the remaining DCF customers. We're going to benefit in the back half of the year of 2018 and going into 2019 from some ValCap migration.

We continue to roll out new customers as we go forward. Our same customer growth is up.

It's the biggest category over the last few categories where customers are deploying ARGUS not only here inside their individual businesses to new parts of the business, but some of our larger customers are going global now. Obviously, the application sale with budget and sensitivity analysis is going well.

And we really are doing well in new markets like Europe and international. So I really, really feel comfortable going into 2018 because we got a really much more balanced pipeline.

And then as we go into 2018 and start putting cloud app, cloud solutions in the market, we'll start seeing a pickup in recurring revenue. And our strategy is cloud solutions should encourage a broader adoption of ARGUS Enterprise classic as we go forward as well.

And so we've really got a balanced pipeline going forward, and the big change in our coverage is we're investing in large account selling to really go after large contracts, MSA agreements with some of the largest companies in the world. So going forward, we're confident about our ability to continue to make investments, hold our margin and get the license growth we need to do that.

Sounds good. Just want to switch gears a little bit to the Property Tax side.

Last quarter, you guys talked about how you may need a couple quarters to figure out the CVS integration strategy. Just wonder if you can shed any more light on that, whether you're going to continue to invest to gain market share or start to cut costs to improve margins there.

Primary focus is continue to go after share. We absolutely are doing extremely well against all of our share metrics and new customer addition.

It's going really, really well. Give me 1 more quarter to do a little bit of an update on synergy and whether we can accelerate the profit on this deal as we go forward.

But it's going really, really well.

So should we think about further investments throughout the rest of the year? Or we should...

Well, I said give me another quarter. So keep your models in place, and hopefully, I'll overachieve them.

Bob, the Altus Analytics margin was a little bit off from what I was looking for. I think I captured the bonuses, which happen every year.

I think the delta was really the investments you talked about in the MD&A. So can you just -- number one, it'd be great if you can quantify that, what that amount was.

And is that going to stay for the next couple of quarters, just what that looks like to help with modeling?

Got it. The best way to answer that is if you look back the last 3 quarters.

I mean, we blew out the margin in Q3 -- sorry, Q2 and Q3 even though we had already started our investments. We had started to ramp up.

And number two, I want to operate this business like I have where we actually may time these investments such that we can continue to operate at margins between -- I give myself a lot of room, between 20 and 30, but we don't want to make these investments where we degrade those margin, that margin profile substantially. You want to make the investments within parameters that are reasonable, which tie back to that idea to the Rule of 40, where we can sustain margins, maybe dip a little bit because we're really accelerating our investments.

But I don't want to have you guys bet on next year. We want to operate our margins in -- to move mid-20s as a rule and depending on license performance, go up or down a little bit around that.

But no, we're not going to -- you're not going to see us dip into the teens on margin, absolutely not. And the big driver on that is the license revenue, which we feel good about going into 2018.

Right. But did the level of investment change from what it was in the -- as a run rate leading into Q4?

It went up somewhat but not substantially.

Okay. On the M&A side, I know since you've joined, most of the efforts, except for Voyanta, have been on the tax side.

Are you seeing anything on the software and data side? One would think that you've developed this market with AE over the last 4, 5 years.

Have there been any competitors that have kind of grown out of the market you've created that look like attractive targets at this point?

Well, the hardest thing to explain to investors, not you guys, is when we first meet them is the absence of competition, which equals the absence of acquisitions. There -- we've carved this market up pretty nicely.

The competitors are the new ones, or the potential market acquisitions are early-stage companies that are building innovative things. We have been looking -- I think I've told a few of you that we've been looking at different scenarios in the debt markets.

We closed deals in the last few quarters with banks in and around using ARGUS on the debt side, and there are some interesting companies out there. But if I thought there was a dearth of innovative technology companies on the equity side, it's almost even worst on the debt side.

So it's not like obvious, but more and more, we're looking at some companies that we think we could potentially change fairly quickly. With some combination of ARGUS and some of the things that we're doing with debt valuation and the like.

So we haven't given up, but it's not completely obvious.

So Bob, I don't mean to put you on the spot here, but I'll ask this question. In terms of the Altus Analytics, are you expecting that kind of be in that double-digit growth range for 2018 and for the full year?

Well, if I had to get the Rule of 40 and make the investments align, that's how we're planning for sure. And the wildcard on this is currency, in my opinion, because we have 2 big dynamics.

The U.S. is going to still be our biggest revenue market for sure, and we've got good growth planned in there.

But we have a secondary effect. We have a really big cost base with our development organization in the U.K., and what happens is as the U.K.

pound goes up the way we are right now, that negatively impacts our position in the market -- or, sorry, our results. Having said that, one of the exciting things of buying CVS is it becomes a natural buffer as we start moving that into the market.

And so our plan is to outrun that problem both with Property Tax and the acceleration of ValCap and finally, by making that, both the U.K. and continental Europe, key markets as we go forward.

But in the medium term, those are definitely headwinds that we got to watch.

Okay. And then the U.K., I think I recall last year in your sort of fourth quarter commentary that it should have been kind of a bit stronger because I think that the tax cycle was sort of timed for pickup in Q4 or Q1.

Does that mean that -- I don't know we saw it necessarily this quarter, but it was CVS plus that. Could we see a real pick up here in terms of that business over the next few quarters?

I think the devil's in the details on what you think is a real pickup versus what I'm thinking as a real pickup. We are incredibly excited about the U.K.

We think we can start driving decent results at the front end but picking up through the back end of 2018 and really position ourselves for real market share and then real market share growth, like really accelerating our position. And then what's going to happen is as we start getting paid for all this work, we can pull back on cost in that business as we go forward.

So this is honestly setting up for a really, really strong cycle. And we think we're going to hurt our competitors a little bit and it might even create some acquisition opportunities going into the end of 2018, 2019 to really push the agenda in the U.K.

And Angelo wants to add.

Yes. And what I would say is that our focus for this year, it's still very early on the cycle, and so we are still going for market share.

So we still are pressing hard in that regard. And the other thing I would mention is that the process is a little bit different this time around in this cycle, and so there is a rush to get clients signed up off the gateway and registered and go through the check process.

So there's a little bit of that happening. So as we've talked about, we really -- what we'll see is a steady incline up but really strong performance as we enter into sort of the midpoint of the cycle and towards the end.

Okay. And just the last one for me.

You have 3,500 clients in the Analytics area. What would you say are sort of the top 2 to 3 product opportunities there to upsell into that base?

Doing what we've done with Blackstone is with the top 25 or 30 customers over the next 6 quarters, where they roll out ARGUS Enterprise globally, is a huge opportunity for us. The DCF migration in the U.K.

is going to create some medium-term growth opportunities, and then our rest of world selling, as we go forward, is we're nicely positioned to do, where we're -- and it's one of Carl's focus, where we're bringing an enterprise selling approach to the largest customers in continental Europe, of which we would sell MSAs. We'll look at managed service, and we'll even integrate third-party products.

And that -- those 3 things are the real opportunity going forward. We move from a high-volume upgrade-oriented kind of revenue model to one where large deals can make a big difference in the quarter, of which that drives our variability that I was talking about before.

But we're getting organized, and Carl's pretty good at selling. I'm pretty good at selling, and we're going to sell a bunch of stuff to the biggest companies in the world.

Okay, great. Well, I just want to slip up a quick one in.

So has your sales team kind of been reorganized to sort of take this approach that you're trying to pursue right now?

Absolutely.

I've got a couple of follow-ups. Just on -- just a follow-up on Richard's last question.

You mentioned earlier in the call you had about 200 of the largest global customers and that you want to expand these into multiple countries. When you mentioned repeating the Blackstone success with this customer base, are you talking about converting 10% of these over the next 6 quarters?

You mentioned 25 to 30.

That would be a good goal, and I'd loved to overachieve that goal. How's that?

Yes, perfect. And so when you go from 1 country to, let's say, 2 or 3 or 5 territories, I mean, how should we think of the multiple of revenue that you got with each territory you expand to with a single customer?

Well, let's just say that the top 50 are uniform, and they take basic ARGUS Enterprise, you're talking about $750,000 deals to $1.2 million deals. You can make them bigger with budgeting.

We can make it bigger with managed services that we bring. We signed this partnership with Taliance.

We can grow it that way. We could actually bring some of our valuation capability into this.

So we're thinking about a fully integrated model for those customers, and we're -- we have it in our mind that, over time, we'll move to much more of a MSA or subscription-type agreement with those and could be multi-year, multimillion-dollar deals. That's kind of where we're headed.

Okay, excellent. And then just a follow-up on the lender market, the debt market side.

You mentioned you picked up a couple banks. What was kind of the -- what's the learning been so far as you enter this market, what it means to you on the product side and on the sales side to accelerate pickup?

And anything in the pipeline meaningfully on this?

Well, we've got a lot -- we've got -- as part of our strategy, we actually hired people that had banking relationships, banking experience going back a year, and we've done the same in the U.K. So at this point, it's taking the core product and selling it as a database environment enterprise solution where you can put in mid and large CRE transactions like lending transactions and then start doing modeling sensitivity analysis around your loan portfolio.

And as I said with the -- on the debt side with our RVA team, we're starting to do debt valuation, and we're working with the ARGUS team to start doing modeling around that and educating those customers about how they can use ARGUS Enterprise on that side without investing in a bunch of functionality because we've got a long list of things that we want to build for global -- for cloud and for other functionalities. So at this point, the idea is to back into -- use ARGUS Enterprise to back into that market.

And as we evolve, we'll probably put that on the road map as well.

Okay. So in terms of the growth pipeline for the near term for ARGUS Enterprise, is the debt and lending side significant or any portion -- or a material portion [indiscernible]?

It wasn't on my top 3. But like the way I always look at it in the context of waves.

Did they set SAP? I'm sure, Carl did this at SaaS?

You have things that are core for the next 6 quarters, and then you're preparing things to be in core in the 6 quarters after that. I could see debt being one of the core offerings starting to come in 5, 6 quarters out.

Got it, okay. And then just a question for Angelo, you mentioned earlier in your comments the impact of the end of maintenance fees on DCF.

Wondering if you could quantify that impact on your recurring revenue. And what might we expect with the end of life for ValCap?

We didn't actually put a number out there, Deepak. I think what you'd see is, if you went back to Q3 on the recurring revenues, you would have seen sort of single-digit impact.

And so that's when we first felt it. And with every subsequent quarter, it's growing, and we'll continue to grow.

So we just haven't put out a number, but it was quite exposed in Q3.

But Deepak, like the second part of your question, we had to -- like in a perfect world, we would have found a way to sustain that maintenance with those customers. Effectively, what a lot of other countries have done is like, yes, just kidding.

We're not taking it away from you. Just keep paying us maintenance, right?

If we had done that, we would have not moved the ValCap business in the U.K. We just wouldn't have.

And we have more flexibility with ValCap, and we don't expect we're going to have a burn-off on the ValCap at the end of the year around maintenance. We think we can move it and not have the same burn-off that you have with -- that we saw with DCF.

Okay. And is the DCF headwind done?

Or is that a headwind to growth in your revenue this year?

Well, it has been a headwind, and as Angelo said, it's getting better every quarter. And we're converting some of those legacy customers.

So we just -- look, when you move variability, the impact on recurring revenues is the cost of moving over 3,000 clients onto a new platform, right? We had to do it.

Now we're the standard in the U.S. We're the standard in -- we've won the standard in the U.K., and we're going to be a global standard.

It was one of the more difficult decisions where we knew we were going to impair recurring revenue. But we did it, and now it's getting better.

Just looking at license revenue again for the quarter, just trying to better understand a little bit. The shortfall, was that a surprise internally when you looked at your plan?

And then how much would you attribute was in your control versus how much was outside the control of the company? And then is there any changes that you might make to sales operations to either mitigate something like that in the future or just have better visibility to the license expansion at customers?

In a perfect world, Q3 would have been a little less and Q4 would have been a little more. But we're very confident in our sales team.

We feel really good about the pipeline. We believe that we got a healthier pipeline because it's more balanced.

And I think I called the variability early in the year, and when I did, back in Q1, sort of late Q1, the share price went down because everyone was worried wasn't going to come really well. In Q3, we showed the good side of variability.

In Q4, we showed the bad side of variability. But don't forget it was our fourth best quarter ever and that talked -- and that's without a significant contribution of DCF end of life.

It's about the new pipeline that we've created. So look, we're feeling pretty good going into 2018.

So it sounds like you're confident that there's nothing pulled forward into 2017 from '18. When you look at '18, I mean, you sort of addressed this but maybe just putting it more out there, is what do you see is the biggest potential sources of upside to your outlook.

And also conversely, what are the biggest potential sources of risk?

Yes. Risk is all currency.

Like, we would have -- if we had currency in 2017 work in our favor, we would have blown away the Rule of 40. So that's the big risk.

There's no structural issues. We have a better pipeline.

We have the -- we -- not only pipeline but backlog in our services business, we've got a lot of good stuff going on. Upside, I think if we execute on all 3 things that I talked about, then we get some upside.

I'm not planning like we will. No, you never do.

But the 3 big ones that I talked about, the ValCap migration, the top 100 and the ability to go global, we execute on those like we're away to the races here.

Okay. And then just one last one for Angelo.

Just no mention, at least in your comments, on U.S. tax rates.

Could you just provide a high-level view of where you see your tax rates going in 2018?

Sure. Well, we will definitely benefit from the lower tax rate in the U.S.

There's always a bit of movement in terms of the mix of where your earnings are, so it's not an exact science in terms of predicting exactly where your tax rate is going to land. But if you look at our tax now and if you were to back out sort of the onetime kind of adjustments to the tax rate number, you'd normalize to at around a 28.7%, call it, a 29% tax rate.

What we're seeing is, next year, we'll definitely be lower than that by potentially a couple of points. But the one thing that is currently not helping us just from a taxable standpoint is that we've got a -- because of the acquisitions in the U.K., we've got a greater goodwill amortization number, which causes a larger tax benefit going forward.

But it reduces your -- it's sort of -- it impacts your tax rate. So eventually going forward, we'll continue to see improvement.

My projection is moving towards the 24% to 25% effective tax rate.

So I just wanted to touch on your cloud plans a little bit. You talked about it in terms of your overall strategy for '18.

But would you perhaps be able to elaborate a little bit just on one comment that you made around seeing your cloud product as synergistic in terms of potentially enticing people to, I think you called it, the classic product, which I assume you mean on-premise, which is kind of the opposite of what you might typically expect with a software business, where, often, the cloud might cannibalize a little bit of the on-premise. Can you just discuss that dynamic a bit and how you're thinking of it?

Okay. So we just took somewhere around 3,000 customers through an upgrade.

And if I was to just cannibalize that product and go start telling Blackstone and JPMC and all these large customers, "Hey, good news, I've got into cloud now. We're taking you through an upgrade again," it won't be all that well accepted.

So that's number one. Number two, with ARGUS On Demand, we've discovered that there is demand for cloud and we build the capability to give them that alternative.

But again, ARGUS Enterprise classic for those customers that want to be in the cloud, what we don't want to do is -- or sorry, what we do want to do with our cloud strategy is build incremental demand, new applications, applications and workflows that benefit from being in the cloud environment. And over time, no time track on this, we will have all the functionality that people have ARGUS Enterprise in the cloud, but we'll do that through the shift in applications.

And what this does is it enhances the current offering. It creates the ability for -- we believe what it'll do is, with our first few applications, is encourage more a global rollout that allow you to aggregate data on a global basis and start presenting it.

So it's the best of both worlds without cannibalizing.

Okay. And then just one final question on the Geomatics division, and I don't think it's been brought up yet.

But just wondering what your view is for that business going forward. Understand that the environment in Alberta is changing all the time, in Western Canada around commodity prices.

So that makes it challenging from a short-term perspective. But what do you think is going to sort of go on strategically with that business over the next little while?

Well, sure that's got to get the pipeline. That's the first thing, create some demand.

That is actually a game changer. There's stuff going on in parts of Alberta that are positive.

It's clear that this is a landlocked province, and they have -- still have value in the commodity, albeit it's got price pressure because of the quality of oil. And luckily, we took cost out in 2016.

We took cost out in 2017 -- or, sorry, in the 2017, and we'll continue to be a high-quality low-cost provider. We're not going to give up our large customers.

And it's still wait and see. There's no slam dunk on a panacea for this market, and we have some ideas about how to continue to sustain some level of profitability in this business.

I just wanted to just focus on -- you made some comments around Carl's appointment -- just around data monetization. And I'm just wondering, how do you prioritize that when you look at kind of those top 3?

I mean, you talked about your top 3 priorities. But how does that data monetization fit into the overall strategy over the next 12, 24, 36 months?

Okay. So we have quietly in the background created a number of initiatives that are about controlling data, presenting data, first, to our Professional Services teams or Expert Services teams in terms of driving.

Secondly, our Altus data business in Canada is doing really, really well. Gross up, margins up.

And we absolutely see that team as taking on a broader mandate in terms of the monetization of data, first in Canada but then as we move globally. We see -- when we bought EstateMaster, we saw an opportunity to build product, one of the first places where we could actually build product over time that allows you to use cost data right inside the software, and we've got a couple of initiatives going on there.

Early days, all of this stuff like in terms of the globalization of this, but we have real projects going on that can materially change the way we collect data and present it. And then finally, if you look at our road map.

And what we do in RVA in Canada, the -- or, sorry, in the U.S., the combination of ARGUS Enterprise as a collection and presentation tool; DataExchanges, a workflow tool; and DataBridge as an analytic tool, will over time be one of the capabilities that we build out as part of our road map. And we've got a team working at the modernization of DataExchange and DataBridge towards a more cloud-based solution.

We could imagine that we could sell that capability in the market on a give-get basis, where we take data from market participants not unlike what we do with the Odyssey Index in new markets. And so we got conversations going around that.

So what Carl will do will bring the heavy lifting of having -- like the biggest thing that Carl's got to work on is we're both going to work on our top 200 customer strategy, but he's going to build a software and data platform that can support 8,000 to 10,000 customers. And that's our strategy, is to sell ARGUS globally, make the data available in the cloud and then imagine partnerships and presentation relationships that really monetize that data on a global basis.

So medium term, that's where we're going. Long term, that's where we're going, and that's the payoff on being the -- we're already the company that has the most software customers in the industry, and we're just getting started.

And then just more specifically, Bob, you talked about the Rule of 40 pretty frequently over the last few quarters, if not, longer. And I'm just curious, I just want to confirm like, when you talk about the Rule of 40, you think about that on an annual basis, not a quarterly basis.

Is that right? I mean, the quarterly variances will be what they are.

I like it on both. The big issue -- the big change is that, because of the bigger deals that we're getting that you might see more variability than we have in the past but definitely on an annual basis.

If we throw a tough quarter at you, we are trying to invest and grow around the idea of not trying to like create a bet for investors. We're trying to actually do it in a managed way.

We've done it for 5 years. That hasn't changed.

And honestly, Stephen, currency threw us for a little this year on that for sure, and we, hopefully get some good news on currency. That would really help us.

It's the one controllable that I didn't have when we're trying to time our investments against our growth. We felt good about our pipeline.

We felt good about our margin. It's a wildcard.

Bob, going back to your -- the investments you're doing on ARGUS and bringing functionality to the cloud and the web applications and so forth, what's the time line to get that fully done?

We will never be fully done. Our time line to get it started is the first -- the second half of the year.

We'll be showing basic directional capability at ARGUS Connect, which is in April, and we will start delivering our infrastructure solutions in -- going into the second half of the year.

Okay. And I guess, does that -- I mean, as you kind of progress into this continual development of web applications that bring on the cloud functionality, does that change your selling strategy?

I mean, because selling a license deal versus a cloud subscription is kind of like some -- there's nuances. Does that change your overall selling strategy?

Yes. And it opens up the door for all sorts of different type of agreements as we go forward.

We think that as you cross over and get ValCap into being the standard in the U.K., then the dependency in ARGUS goes up not only in those 2 markets but on a global basis. And by having subscription-based offers, SaaS-based offers in the market, it gives us some innovative pricing potential.

Okay, fair enough. And you kind of like alluded to the fact that now your -- there's more variability on the business on these -- the timing of these large deals.

But as you progress in the cloud offering, should -- and that goes with greater adoption on cloud solution. Should that variability now go away?

Or is the variability here to stay in your...

Variability, when that happens, as you know, shifts to bookings. And in the selling world, there's always variability.

You got to get the bookings or the revenue number. But clearly, what I said was we come in out of 2018 and going into 2019, we'll overweight recurring revenue for sure.

Great. I think we're done then.

Well, listen -- oh, one more? No?

Okay, well, thanks, everyone, for the call. You got a team here that really feels very excited about 2018, and we think this is a gateway year to an amazing run for our company.

But appreciate the questions and the support, and thanks for joining our call.