Altus Group Limited

Thank you, Michael. Good afternoon, everyone, and welcome to Altus Group's fourth quarter and year-end results conference call and webcast for the quarter and year ended December 31, 2019.

For reference, our earnings results news release was issued after market closed this afternoon. It's 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. Joining us today is Bob Courteau, Chief Executive Officer; and Angelo Bartolini, Chief Financial Officer.

We're actually doing this call from our ARGUS office in Houston. We're also joined by some colleagues, Steve Bezner, Gordon Richardson and Eric Lau.

We'll start today with some prepared remarks, and then we'll move right into the Q&A session. And of course, if we missed anyone, please contact me directly.

Before we get started, please be advised that some of our statements and responses to questions on this call may contain forward-looking information. I would urge you to please review the company's MD&A on our website for more information about the risks and uncertainties of forward-looking information.

Also, please be reminded that Altus Group uses certain non GAAP, non-IFRS measures as indicators of financial and operational performance. These are not defined performance measures under IFRS, but we do believe that they are useful supplemental measures that may assist investors in assessing an investment in our shares and provide more insight into our performance.

And with that, I'll turn it over to our CFO, Angelo, 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 by framing the year and then dive right into relevant drivers.

Overall, we characterized 2019 as a pivotal year for Altus Group. The significant process throughout the year helped us reach a critical inflection point in our multiyear strategy.

Financially, we had a strong consolidated results and growth in key financial metrics with double-digit top line and earnings growth in our consolidated results. Our annual consolidated revenue rose 11% to $567 million, driven by record 21% growth at Property Tax and also, Analytics also delivered robust 10% growth during a key transition year.

The strong revenue performance led to a 24% increase in adjusted EBITDA to $88.1 million, driving a significant improvement to our adjusted EPS to $1.47. Our consolidated margins also improved notably to 15.5%.

The strong financial results from 2019 set a strong foundation and demonstrates our ability to leverage past investments in innovation and acquisitions and generating superior returns. And operationally, we achieved a number of very significant milestones critical to our long-term strategy.

A key milestone from 2019 was bringing ARGUS Enterprise on the cloud to market. As many of you are aware, this has opened up attractive long-term growth opportunities for our Altus Analytics business.

At the same time, we transitioned our ARGUS software pricing model to a subscription-based model that benefits clients while building a predictable and strong revenue base for Altus, helping support the long-term aspirational targets we outlined for you during the year. The transition to cloud is proceeding nicely.

Bob will provide you with some color on this a little later. Beginning in Q1, we will begin to provide you with new metrics that we had outlined at our Investor Day in December, specifically metrics covering cloud adoption rates, retention rates, over time revenue and geographic revenue mix.

For Altus Analytics, we finished the year on target and within the financial guidance we previously provided. Full year revenues increased 10% to $202 million, recurring revenues grew 18%, while margins came in at 18.2%.

With the move to full subscription pricing beginning in 2020, we had expected a greater mix of perpetual license sales to subscription sales. The variance on mix affected our revenues and margins for the fourth quarter but having said that, we are very happy with more subscription sales as they have a higher economic value over the longer term.

Another factor impacting our revenue comparability were 2 very significant subscription on-premise deals, one in Q2 and one in Q4, that as a result of IFRS 15 revenue treatment had sizable upfront point in time revenue recognition. On the earnings front, our margins were impacted over the course of the year by the factors I just mentioned.

One, the transition to subscription; and two, the investment we made to develop and bring the AE cloud platform to market. We expect going forward that our spend will only grow in proportion to revenue growth.

As a result of both factors, margins are expected to remain consistent in 2020 and begin to see a rebound in 2021, as we highlighted also at our Investor Day. Overall, we saw a lot of positive trends in 2019 from Altus Analytics, sustained strength in ARGUS Enterprise add-on sales, both from customers adding more seats and adding more functionality.

This made up approximately 70% of AE software license sales. Robust growth in our customer base, with particularly good contribution from the SMB space and healthy volume of new customers outside North America, a strong start to our AE cloud transition.

More on that from Bob shortly. And our Appraisal Management business had a very strong year, where we continued to benefit from customers adding more assets on our platform, adding new customers and expansion into Europe and Asia Pacific.

On property tax, sorry, on our Property Tax business had a phenomenal record year with a very strong finish in Q4. Strong Q4 revenue growth of 39% and a material increase in earnings contributed to full year growth revenue of 21% to $213 million, and earnings growth of 74% to $63 million.

Annual revenue and earnings growth was driven by the UK along with solid growth in the U.S. and Canada.

In the UK, we saw an acceleration of settlements from the 2017 list, especially in the second half of the year as well, annuity billings significantly contributed to revenues and expected to be even larger in Q2 2020. As a reminder, we recorded annuity billings of $9.9 million and $4.7 million in Q2 2019 and Q2 2018, respectively.

In the U.S., we had growth in our core markets and a good buildup of pipeline work in emerging regions where we have previously made organic investments. And in Canada, we called the first half had strong performance in Western Canada.

And then in the second half, Ontario settlements started to rebound. This demonstrates the strength of our national model in Canada, where the multiple cycles provide for more balanced performance.

Overall, the strength of this business goes beyond any specific jurisdiction or tax cycle. But rather is rooted in the strength of our competitive advantages that have allowed us to deliver steady annual growth for many years.

With cycle factors aside, when we look at our internal KPIs, we see really positive trends and increased values of contingency contracts, strong success rates, pipeline volume, driven by improved business development, value of appeals maximized driven by the strength of our data, and overall operational productivity, which has been improving as we have added more technology and automation to our delivery model. There is no doubt all contributed to strong 29.5% margins we posted for the year.

Moving on now to our Valuation and Cost Advisory businesses. Performance was consistent both for the full year and in the fourth quarter, driven by strength in our Canadian cost division.

These businesses enjoy strong market leadership hence, why growth has been modest. We are building upon the organic strengths of these businesses and optimizing with technology initiatives, year after year, they proved to be solid operators and drive strong client value as exemplified by the superior client and project retention.

At Geomatics, as you are aware, subsequent to quarter-end, we announced that we'll be spinning off our Geomatics business with WSP's Geomatics operations. So I'll just spend a minute on that.

Fundamentally, we came to conclude that this joint venture structure would generate the best possible value for all stakeholders and most favorably position Geomatics for long-term success in its core market with a strong partner. Combining our collective technical expertise and breadth of our people creates Canada's largest pure-play Geomatics firm that will provide them with numerous competitive advantages.

In addition to revenue synergies, this will also offer them more services to clients with a national scale to take on the largest and most complex projects, while remaining agile enough to be competitive at the local level for smaller projects. We expect this will create positive opportunities again for our clients and employees.

And overall, there is a strong cultural fit with mutual respect on both sides. For Altus Group, we always strive to maximize value of all our business assets and this check the box.

While Geomatics was once an important contributor, over the years, we've pivoted our strategy to become more focused on key CRE offerings, it inevitably became noncore. We believe that this solution provides the best option in maximizing value.

With respect to the transaction, we're on target to close in the second quarter. We expect to have an equal ownership split with WSP, just under 50%, and we will account for this under the equity method.

In Q1 and for part of Q2, the Geomatics segment will be reported as a discontinued operation and removed from our consolidated results. Finally, our corporate division, corporate costs trended higher at $28 million, representing 5% as a percentage of revenues compared to 4.5% in 2018.

This is consistent with our previous comments that corporate costs would increase as we continue to scale our business. I'll wrap up by reiterating that our balance sheet and debt ratios are in great shape, providing us with solid financial flexibility to continue investing in our future growth.

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

Angelo, thanks so much. Good afternoon, everyone.

As you just heard, we had a strong finish to the year, and we fully expect that, that momentum carry forward into 2020. This could not have been accomplished, if not for the incredible talent on our team.

Honestly, we have the best team in the industry. As I reflect on the achievements from 2019, looking beyond our financial results, it was a remarkably productive year across the entire organization.

At Altus Analytics, we bought ARGUS Enterprise on the cloud to market and rapidly shifted our organizational focus from a billing phase to sales execution with good success. Our geographic expansion investments continue to bear fruit, and we made good inroads into the markets we invested in.

We welcome a lot of new customers and continue to broaden the use of our Altus Analytics solutions with existing clients. At our Property Tax business, we continue to gain market share and made notable advancements in improving our economic model and strategy to pursue sustained growth over the long term.

Our Valuation and Cost Advisory business sustained their market leadership position, and as Angelo just discussed, we found an attractive alternative for our Geomatics business. Above all, we delivered incredible value for our customers.

Our end-to-end commercial real estate offerings drive better decision-making for our clients, helping them to improve the visibility and flow of information through their critical business process to maximize the value of their CRE assets and investments. For that reason, Altus Group as a company continues to enjoy exceptionally strong client across every one of our business lines.

We've earned a very privileged position in our core markets with exceptionally strong moats around 2 key growth businesses, Altus Analytics and Property Tax. Throughout the year, our strategic initiatives help protect and strengthen those moats while providing us with the foundation for sustained profitable growth over the long term.

We're very excited about what's ahead for 2020. So let me start there.

First of all, our Altus Analytics business reached a critical inflection point, setting us up nicely for 2020 and beyond. The accomplishments in the past year enabled 2 notable changes to our operating model in 2020.

First, our flagship ARGUS Enterprise product will be predominantly sold on the cloud. And then second, we're now fully on a subscription model, offering all of our software products only on subscription terms going forward.

Having just recently held our annual internal ARGUS sales conference, I can tell you, our sales team is fired up. The energy level is as high as it's ever been, our hard work to get the product to market and to operationalize our cloud infrastructure is largely behind us now.

We already have a solid user base on our cloud platform, and our sales force has done a great job adopting to the new pricing model, while building a healthy cloud pipeline of opportunities for 2020. The functional building blocks are in place, going forward, it's all about the execution, and I have full confidence in this team.

Client interest in ARGUS Enterprise and Cloud is solid, and the conversations we're having with clients validate that's a question of when and not if. Clients definitely recognize the value of being on the cloud and how it aligns with their internal strategic goals.

The cost savings related to reduced IT infrastructure simply become a positive byproduct for all our clients. We're very encouraged by our customers accepted as the new pricing model.

Q4 was our last quarter selling ARGUS enterprise on perpetual terms for existing customers. And while we saw some customers buy additional perpetual license late in the quarter, many of our customers were fairly agnostic, and we enjoyed strength in our subscription sales.

This is a solid indicator for our expectations for 2020. Overall, we made great progress in expanding the use of ARGUS Enterprise globally and specifically on the cloud.

We start 2020 with a healthy cloud pipeline of future opportunities. Our pipeline includes a good mix of volume from smaller-sized transactions and some large deals that are planning to take advantage of what ARGUS on the cloud offers.

Plus, we feel optimistic of the migration of our existing customer base will accelerate in 2020. And as you know, starting in the Q1 report, we'll commence reporting on our cloud adoption rates represented as a percentage of the ARGUS enterprise user base contracted on ARGUS Cloud.

As an intermittent indicator of progress, though, I thought I'd share that we're approaching 500 cloud customers at 7 months in. We're significantly further along than we were with either ARGUS on demand and with a, when both were first launched.

This includes take-up from new clients, many migrations from existing clients who proactively wanted to move over mid-contract and consistent with our expectations, the early adopters have been largely from SMB customers, but we're also enjoying positive engagement with the larger, more influential firms who will help drive adoption through the ecosystem. Some trends from those recent conversations.

From the customers who want to migrate over the cloud proactively mid-contract primarily from the mid-SMB, or the SMB space, the primary reasons include more efficient deployment, data collaboration with their team and elimination of allocated service space and software management. This is a recurring theme.

For new customers, AE is only available on the cloud. Pickup has been very strong, with many customers already operating a cloud-only strategy.

This forward-thinking is becoming more prevalent in our industry. And as customers see value in the cloud software and in key features in ARGUS cloud like a centralized database that customers can access from any computer.

So really, we haven't had any pushback from new clients by not offering an on-premise alternative. We're in some advanced discussions with a number of key service providers and expect a number of them will make a commitment to the cloud platform in 2020.

ARGUS Cloud not only offers significant internal benefits to the service providers, it also provides value in how they deliver their service to their customers. So we're on track with our plan.

On top of all of this, we're also having conversations with some of the largest CRE customers in the world where the move to the cloud will be core to their internal strategies. And in many cases, the conviction to move is there, of course, these migrations will happen when the timing is right for them internally with their IT groups as there is numerous complexities to account for with these large accounts.

In many cases, we expect our top 200 customers will take that opportunity to broaden the use of ARGUS Cloud globally as the cloud simplifies their customer environment and enables global data injection. This represents an attractive upsell opportunity for us.

And recall, less than 5 of our top 2 end customers have deployed ARGUS Enterprise globally. As mentioned, we have some larger opportunities in the pipeline.

But if the volume of these larger deals accelerate, this presents attractive upside to our model that we presented to you. We continue to have high conviction that this industry is shifting towards platform solutions, and we're seeing some strong indicators by way of new RFPs and the conversations we're having with our largest and global customers.

This continues to be one of the most exciting opportunities for our company. And with the cloud platform, we're in good shape to address the market needs.

At this point, we've not issued any specific guidance for Altus Analytics, but we do want to reinforce that our expectations for 2020 are consistent with our aspirational long-term goal to achieve Altus Analytics revenues of $400 million for full year 2023, with an associated adjusted EBITDA margin at over 30%. We expect to track in line with the potential revenue and adjusted EBITDA trajectory we reiterated in the long-term financial potential slide at our recent Investor Day.

At ARGUS, the general run rate of the drivers, Angelo covered off, from 2019 is expected to continue into 2020. Expect that this year, we have shifted all products to be only sold on subscription terms.

And that compares with last year when only half of 2019 still had a high majority of license sales on perpetual terms. Overall, the 70% add on trend of AE licenses that Angelo referenced has been very consistent over the last couple of years and should continue into this year.

As we discussed at length on our recent Investor Day, the cross-sell, upsell opportunity remains substantial. We've been improving our operating model to go after this more aggressively, including a very focused segmented sales model.

Similarly, we expected continued momentum with new customer wins and continued geographic expansion into Europe and Asia Pacific. We expect all of our new AE deals to be on the cloud platform, which has a modest premium on a software license price.

This will be a moderate contributor. We also have a growing pipeline of multi-product deals, as mentioned.

And we also expect sustained growth from our data and Appraisal Management solutions. The drivers there will continue to reflect the trends Angelo covered off from 2019.

So all to say, we are making the shift to be an enterprise company. And this is defined by global adoption of ARGUS Cloud as a data and valuation standard, a commitment to the full stack of solution related to CRE portfolio and fund analysis, broaden and overlapping relationships with our Appraisal Management and Data Solutions offerings, global partnerships with the largest, the world's largest service providers, differentiated solutions that will support the major CRE workflows and large global transactions as we become the standard platform for global asset and investment management.

Look, we feel really good about the next stage of growth for Altus Analytics business and our ability to get back on the path to long-term steady double-digit top line and profitable growth at expanded margins. The market fundamentals remain exceptionally attractive and support our growth ambitions, and we're very well positioned for the opportunity ahead, especially with our cloud strategy, which allows us to improve the economic value of our contracts.

With the cloud execution further along, in 2020, we're now in a position to double down on new innovation areas to further our long-term growth plan. This would include opportunities in data-driven insights and adjacent market verticals on complementary workflows, where we currently have very limited penetration.

Let me talk briefly about our CRE Consulting businesses. In commercial real estate, institutionalization continues.

The trend for outsourcing for CRE specialized services remains resilient. This speaks to the steady demand and the market opportunity, but also reflects the reality of increased competition for talent.

2019 was a phenomenal year for Property Tax, and 2020 is poised to even be better on an organic basis. Two of our biggest markets, the UK and Ontario will be in their final years of their respective 4-year cycle, which typically represent peak revenue potential as case settlement volumes typically pick up, and recall that the high majority of those revenues were based on a contingency basis and therefore, directly hit the bottom line.

While it's common to see an acceleration of settlement activities in the final year of a cycle, there's always a continuation of settlement activities that spill over into the following years of new cycles. Also in the UK, the last year, the cycle experiences the highest annuity billings of the entire cycle.

It increased from $4.7 million in 2018 to $9.9 million in 2019 and will even be higher in 2020. So again, Q2 should be our seasonally strongest quarter of the year, but note that the annuity goes away in the first year of the new cycle in 2021.

And looking ahead to the first quarter, we expect that our Canadian revenues will face a modest headwind in BC and experience a delay due to the change in pre-roll assessments. However, we expect that to be offset by stronger performance in Ontario and Manitoba on a year-over-year comparative basis.

Again, this speaks to the strength of our national model where you see different cycles contributing at different times and with growing scale. This provides for a more balanced revenue performance.

I should also say that the U.S. performance was very strong in 2019, and we see this as one of our growth plans as we move into 2020 and 2021.

Overall, this high-margin business is a strong contributor to cash generation and continues to have an attractive growth profile associated with it. We have a robust pipeline of appeal work that is expected to continue for many years.

And this also provides us with a good backdrop for our consolidated performance, while we continue to feel the impact of the transition of our Altus Analytics business in 2020. Plus, as you heard today from Angelo, and as we discussed at our Investor Day, we've been making significant process improving the economic model of this business.

We're on track with our long-term strategy and remain well positioned to continue growing market share organically, while improving operations by leveraging technology and data. I was just in the UK last week, they are well on their way on this digital transformation.

So exciting to be with the team and see that performance as they fundamentally changed the industry in the UK Congrats to Alex Probyn and his team. So in closing, I would just like to thank our shareholders for your ongoing support and the confidence and trust you place in our team.

We're very fortunate to have a stable base of long-term oriented owners who we consider to be business partners. Finally, as you may be aware, we'll be hosting our annual North American ARGUS Connect Customer Conference at the end of April.

The event has grown to be one of the premier real estate industry gatherings, attracting over 400 industry participants growing every year and continues to attract a lot of very senior professionals in the industry. This is a solid validation of the growing importance of our solutions across their organizations.

If you'd like to attend, please contact Camilla. She'll be happy to get you organized.

And with that said, let's just open it up the line for questions. Operator?

So good growth and the recurring revenue this quarter. Just wondering if you can give us some color on whether that was more driven from Appraisal Management growth or whether that's from subscriptions on the ARGUS Enterprise cloud side of things?

I think it was both. Actually, the hard part of the last couple of quarters is to forecast demand.

And as Angelo said, we're really, really happy with the subscription revenue in ARGUS Cloud. And in general, we've got 2 core businesses, Appraisal Management and now ARGUS Cloud, that really should cause really nice recurring and, as we transition to over time revenues as we go into 2020.

So it was a nice performance on both sides.

Okay. And then you mentioned, Bob, that you're having some really good conversations with some large global players.

Can you help us understand what the sales process entails to have these larger customers adopt ARGUS cloud globally? And where would you say you are in that sales process?

Yes. I think it's, the way we've been trying to represent it is that we're going to count on, and we always have had a number of large deals in pretty well every year over the last 5 or 6 years.

And because of, and the second part of it is, as I mentioned, the service providers are critical. And in both cases, as large CRE companies go global, they're looking for a technology platform to be able to control their data, manage their data, get visibility, do a global forecast and change the way they run their business.

And that's really, really pronounced for the service providers. They really have to start thinking about how they can control data, to create innovation, to find different ways of doing business and to meet the new customer demand.

And so the conversations are going great, obviously, because we're causing them to think about deploying a global enterprise solution. You're going to talk to more people, there'll be more decision-makers, both financial and technical.

And so when we talk about becoming an enterprise company, we got a team in place that knows how to do these larger transactions, they're going to take time, naturally. But they're for the most part, on top of our economic model.

We believe that a run rate of a transition of our business to the cloud is going to really drive great economic value. We'll get our 2, 3, 4 deals a year that go with it.

And then we're trying to move this thing to be the platform for the industry. And so that will take a little bit of time.

Good quarter. I just want to circle back, Bob, on the larger deals.

Just how would you characterize the pipeline as it sits today versus 3 to 6 months ago? And have your expectations on when you can bring in some of those deals changed over that time?

We didn't really have a pipeline 3 to 6 months ago for cloud. So it's way better.

Look, we brought out the, you got to remember, we brought up the product really in July. We got a series of technology updates that we got to do through 2020.

What's cool is, we're into really great conversations with a lot of companies about what they're trying to achieve in the cloud what their functional requirements are. We're in a, it feels a little bit like when we brought out AE, and we had some of those early adopters, except we're way better at it.

Back then, we had real data migration issues. We did a superb architectural job and created a high bid, easy-to-transition type of environment.

And so now we're talking about what are you trying to achieve from a data aggregation perspective, how are you thinking about workflows, how are you integrating with your partners in the market. And so our pipeline has got a lot better because we're literally meeting the demand of these large CRE customers who are all building data strategies.

And so I'd characterize it as a lot better. I said in my comments, that we reiterated the guidance that we gave in, given over the next few years.

And my hope, my goal is that as this becomes a standard, a central standard to these companies then it's going to really drive over performance to our expectations as we transition. But now it's going well, both with the service providers and with the large customers.

But hey, look, they're, they're putting expectations in front of us before they're going to transition to a new, a full new platform on a global basis. So we've got some work to do.

Okay, that's fair. I just want to switch to tax in the quarter, strong numbers.

Were there any contingency wins or anything to call out in the quarter in Q4 for tax?

No, not anything specific, Yuri. Just overall, we saw Ontario, Ontario's volumes come in stronger.

It was weaker, as you know, in the earlier part of the year. Similarly, in the UK, we experienced the same thing.

And the U.S. came in pretty strong as well.

It just had a longer tail to its seasonality. But there wasn't anything, it wasn't like there was 1 or 2 large contingencies.

It was pretty evenly spread out.

Yes. Look, we've been talking on Ontario and UK for some time now as core areas of growth.

And what you're seeing is the strengthening. But honestly, I would say that I gave kudos to Alex.

We already know that the Canadian team is amazing, and we've got such a great position. But boy oh boy, the U.S.

team is really coming on. They had significant wins in the quarter that are really going to help us going into 2020 and 2021 that really has these guys having their legs under them.

We've, Tabrizi, who runs the U.S.-made a bunch of changes in the U.S. at the beginning of the year about how we work, the kind of markets that we're going after, real new focus on large accounts, a real different orientation and already our success in Q4 was way ahead of what we would have expected in the U.S.

and their backlog is awesome. So I think what you're seeing is, you'll probably hear us stop talking about UK and Ontario because this is going to, this is a highly balanced set opportunities throughout Canada and the UK Some great adjacencies going on in the UK Business is really moving well.

And we called out, and we will tell you at the end of the quarter, the annuities for Q2 out of the UK, and we're doing that just so people don't get too consumed by that. And our goal will be to run by that as we go into 2021 with a completely balanced business.

So the tax business is firing in all cylinders. That ain't going to stop.

It's going to be great.

I just wanted to get my head around just a little bit about around the EBITDA, year-over-year EBITDA performance in Altus Analytics. Like how much of the decline was attributable to last year being a tough comparable?

Or is that not the right way to think about it?

It's a combination, Stephen. It really is.

It's a combination of having had that point in time revenue recognition in Q4 of last year, which was a significant amount coupled with the switch to greater subscription sales in the fourth quarter. We still had a, we still had some perpetual licenses, but we hit more on the subscription side.

And then just sort of the tail end of the investments that we had sort of ramped up in the late part of 2018, early part of 2019. And so the quarter still had a bit of that impact.

So it's kind of a balanced across all.

And it was in line with our guidance. And I'd also say that as we went through this transition and through the success of our subscription agreements, it was the hardest thing to really get a good handle on.

But still, we were in pretty good shape when we were done. And we like our backlog going into 2020.

Yes. Okay, that's great.

And then, Bob, you talked, there's of commentary, obviously, on the conversion. But here we are in 2 months into the new cloud offering.

Is there anything that has surprised you very materially to the upside or the downside? I mean, I know you talked about some wins.

And I'm just curious like how things unfolded relative to your expectations?

I think on the upside, it's been like 0 friction, no. We got a high integrity environment.

Customers are signing contracts. We had a couple of transactions in there that were accelerated.

I would call transactions, 1 with a pretty important service provider that they wanted to go to cloud right away. It was faster than we expected.

We had another 1 where the client came to us with some really interesting ideas about what they wanted to do with cloud, and we're going to work with them to get that environment set up. So look, I think the, think it's been positive.

I don't know, Steve, what do you think? Was there anything on the guide, I did the positive stuff.

Anything on the downside, Steve Bezner, who runs overall development for us.

No. Overall, it was very positive.

And I think it came out of the shoot faster. We've put a lot of work into scale to scale a target that we've set up for the end of the year.

We have done a lot of work around latency and continue to do work around latency. And so all things were positive and just a lot of work to do still.

Next year is all about adding more infrastructure, more resiliency and those types of things.

Yes. Yes, that's great.

Perfect. And then that's very helpful.

And then just finally, on the UK tax business. Is there any way to quantify what the incremental Q2 impact would be this year?

Like does it, will it be something that is proportionately similar to what, how it grew between 2017, 2018, 2019?

Yes, I'd say that would be pretty fast. Trend is pretty obvious.

Yes. I think, 1 year, 2 years, 3 years.

Yes, a couple of questions. First off, Bob, I think in, earlier in your prepared comments, you mentioned how selling or convincing a key influencer to adopt cloud encourages adoption, the broader ecosystem beyond the firm.

I was wondering if you could explain more about how that works. And perhaps give an example of what you see as the potential there?

Yes. We absolutely believe that as customers develop a global data strategy then ARGUS is going to be central to them.

So the ability to move data into ARGUS from multiple sources from an API. So for example, ERD into ARGUS is usually, it usually happens during a valuation or where people are doing research or companies are trying to get some visibility on their data.

And it usually happens in some relationship with a appraiser or a loan. And more and more, we want to create this environment where if a customer wants to develop a workflow that automates the way they collect that data, it will force their partners to take ARGUS as part of their workflow, their network.

And the whole cloud strategy is designed to be able to drive workflows between companies. And so if the largest companies in the world want to operate ARGUS Cloud on a global basis, then the appraisers have to be able to deliver ARGUS files.

Property managers will have to give information to collect the data into ARGUS or into our data strategy. And so it's not that different with where we went with ARGUS Enterprise, where if CBRE GI or Invesco ask for ARGUS files around the world then the suppliers of those customers have to adopt ARGUS Enterprise.

It's just now we're going to do it at scale. And it's going to have high-value in terms of not only for the service providers but for the customer.

And we think that we can create some pretty cool value out of that because if, once customers start sharing and normalizing ARGUS files, we can use that to create benchmarks to start thinking about indexes to give visibility to share information both ways from ERD into ARGUS, ARGUS into ERD and really set up workflows for the industry. So we think there will be a natural and, a lift or network effect, but it will be accelerated relative to the network effect we got out of ARGUS Enterprise.

Okay. That's helpful.

And then when we think about the discussions you're having with the large global CRE firms in their cloud strategy. Is, ARGUS Enterprise in the cloud, will that be paced by other cloud adoption, enterprise software like ERP systems or other kind of back-office systems that they might have or can these be done independently?

Or are these customers mostly deployed in the cloud and other systems, and now it's just these tools?

I think the 1 of the, if you think in financial systems, there's 2 big players, MRI and ERD, of which we're working with the ERD right now to develop a strategy about how we develop solutions, but don't underestimate internal systems. Still, Excel internal data systems, reporting systems are all going to be able to take advantage of some of the tools that we're building, right?

So that creates workflow opportunities. And then on top of that, there's a bunch of emerging companies that are doing some pretty cool stuff like VTS and others.

And over time, we'll find ways to interoperate with those. And so, look, we want to solve customer problems and the byproduct of that is that we should be in the center of data flow for the industry.

Because at the end of the day, the big thing that we're trying to help is the improvement of reporting, the ability to do a global forecast to understand capital planning to understand sensitivity on a global portfolio basis, and that requires input, not just from ARGUS Enterprise, it's from other systems as well. And the more we do that, the more that we become integral and central to how data moves around our industry.

Okay, great. I do have some follow-ups on your guidance commentary.

I don't want to dominate the call. But with half of your ARGUS center for Analytics software last year being perpetual and this year, it will be all subscription.

Are you kind of suggesting there will be a dip in revenue in 2020? Or can you naturally grow through that and do [indiscernible] to 12%?

Yes. We're not providing today any strict guidance.

But if you go back to our Investor Day, and if you looked out to our outlook to 2023, you'd sort of see the revenue curve continuously growing. So we're not expecting any dip and you could use that as sort of a, at least optically as a guideline for now.

Okay. And then similarly, on the tax side, I mean, clearly, if you're expecting the growth in annuities in the UK to double in Q2 year-over-year versus Q2 last year, you're not expecting the overall taxes doubled year-over-year.

Can growth accelerate versus 2019 or decelerate?

No, no. So what we've said is in our outlook that we have in other, we're expecting another record revenue year this year.

And it's part, partially, it's the incremental annuity billings that will recognize as revenue and partly is just the overall strength of our pipeline and continued increase in settlements that we'll expect to achieve again this year.

Yes, just to clarify, we didn't say annuity would double. I think Steve just sort of asked previously about the trend from Q2 2018 to Q2 2019, and we sort of confirm that, that would be a similar trend but not a doubling.

Just on AA, in terms of the mix of subscription versus perpetual in the quarter, you mentioned that the mix was skewed positively towards more subscription versus perpetual. But why, could you elaborate on why the buying pattern changed versus your original expectations based on your feedback from customers?

Yes. We saw that a number of buyers that would have pent-up demand for on-premise licenses would be worried about pricing risk going into 2020.

But I mean, we saw a little bit of it, but it didn't materialize, and we definitely didn't fan the flames on that. We weren't out there saying, we weren't in previous years, or sorry, when we went to DCF AW just to draw parallel, we saw them in the last 2 quarters, leading up to it.

By the way, AE is going to be really expensive. So you better load up in DCF to then load up on AE, we did a couple of those cycles.

We didn't do that this time. We didn't signal that on-premise subscription revenue would be significantly higher, and we actually made our salespeople neutral.

We preferred to take bookings up, create a better backlog and so our reps were conditioned not to go for that. And I think probably the third thing is more and more of the industry prefers, it's probably their customers prefer cloud is what proved out.

So the timing has worked out pretty well.

And can you share an estimate of the equivalent perpetual revenue that may have been recognized or recognized as a subscription or were fall into bookings instead?

No.

I thought I'd ask.

What, we actually started toying with that and then you get into some interesting conversations about would they have taken more licenses if it was perpetual. So look, I would say it's not an apples-to-apples comparison.

Okay. And moving on to profitability at AA, you mentioned it probably be similar to, in 2020 is similar to 2019.

Just how do you see operating leverage versus your investments progressing through the year?

Well, we've given, like at least long-term guidance on margin. And look, the way I look at it is, we basically put a lot of pressure on margin the last few years on a combination of investments in the cloud, the DevOps environment that you need to operate the cloud, new selling paradigm, the work you have to do to get prepared to do it.

And so we think a lot of that is in place. And so what we have now is the ability to create leverage through revenue.

Like we've always said that at the end of the day, we're going to see margin improve through this cycle that we're in now, but we want to do it with revenue, and there's a lot of operating leverage in the model because we put the infrastructure in place.

Okay. And then just one, last one for me.

With the joint venture for Geomatics, should we anticipate corporate expenses would drop proportionally? Or are they mostly fixed?

Yes. No, not materially, they would not drop.

I mean, it's pretty stand-alone operating unit. So there would not be any significant drop.

Yes. The other thing I'd say, Paul, is we're looking at our whole allocation methodology around corporate expenses and just in general, we put a lot of money into consulting last year for a whole bunch of reasons, and we're tracking a plan here that would allow us to really actually get a lot more scale at a lower operating cost, including corporate costs.

We want to get some leverage out of that as well.

Bob, of those 500 cloud customers, how many of those were existing customers versus new customers?

Okay. Gordon, I can't remember.

Do it for [indiscernible].

We're not really providing a detail, but I think it...

I'd say it's, well, Gordon, why don't you give us a little bit of color.

1/3 is existing customers.

1/3 existing? Okay.

So there is your answer.

Okay. And then have you made any changes to your sales incentive or compensation to really kind of push cloud here going forward?

I think we neutralized or overpaid on cloud. And part of that cost, as you know, and part of the challenge of moving to a subscription-based model is where, this is the time of the year we're paying higher commissions.

And so that adds, when you're asking the question about EBITDA, that's factored into the cost of push, the transition towards subscriptions and paying them. And we overweighted that coming into the quarter, like, again, like our recording is over time growth coming into 2020.

That's the thing we're focused on. That's the number we want to give you and have you be excited about.

And so we may have given up a little bit on expense or EBITDA to get the cloud machine rolling. I think 500 is a really good number for any company.

And we were happy to pay for that because we're playing a long game. And as Angelo said earlier, this is revenue that has better economic value associated with it.

Okay. And then just the mechanics for existing customers converting to cloud.

So you paid for a license before. Are you essentially replacing the maintenance with subscription, and if so, what's sort of the average incremental price difference on that?

Gordon, do you want to do that one?

Sure. And this is, we sort of talked about this at the Investor Day as well.

It's, for existing customers, it's roughly around a 40% uplift on what they're paying us today in maintenance when they maybe migrate over to the cloud. So that's sort of the general level on what the sort of their fees would be.

And then just technically, if they have an instance license perpetual. Does that, do they sort of still keep that on-premise while paying that subscription?

Or is it sort of going to move into your infrastructure?

They don't keep that on-premise infrastructure. They move their data and everything into the cloud.

And so they're, once they've done that, they are operating now in the cloud.

Maybe I'd just add. So there's 3 scenarios.

Just keep paying maintenance, you have an on-premise. You want to add an on-premise customer, sorry, user then you have to buy an on-premise subscription license.

And if you want to go to cloud, you have to have a cloud subscription license. Those are the 3 scenarios that contribute to overtime revenue.

Well, thanks, everyone. Great finish to the year, but I'm way more excited about 2020 as this thing is rolling.

And we feel really, really good about our ability to deliver on our customer promise. And I'd just finished by saying that we've got a tremendous investor base, and we're looking forward to that partnership that I described earlier, continuing to grow for both of us.

So thank you.