Edited Transcript of AIF.TO earnings conference call or presentation 7-May-20 9:00pm GMT

NEWMARKET May 9, 2020 (Thomson StreetEvents) — Edited Transcript of Altus Group Ltd (Ontario) earnings conference call or presentation Thursday, May 7, 2020 at 9:00:00pm GMT

* Robert G. Courteau

Stifel Nicolaus Canada Inc., Research Division – Director and Technology & Communications Analyst

RBC Capital Markets, Research Division – Director of Canadian Technology & Analyst

Good afternoon, ladies and gentlemen. Welcome to Altus Group’s First Quarter 2020 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to Ms. Camilla Bartosiewicz. Please go ahead.

Thank you, Michael. Good afternoon, everyone, and welcome to Altus Group’s First Quarter Results Conference Call and Webcast for the Quarter Ended March 31, 2020. For reference, our earnings results news release was issued after market close this afternoon and is also posted on our website along with our MD&A and financial statements. Please visit altusgroup.com to obtain these documents and for more information. Joining us today are Bob Courteau, Chief Executive Officer; and Angelo Bartolini, Chief Financial Officer, who will start with some prepared remarks, and then we’ll move right into the Q&A session.

If we miss any questions, please contact me directly by e-mail.

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

I would urge you please review the company’s filings with SEDAR or on the MD&A or on our website for more information about the risks and uncertainties of forward-looking information.

In addition, since we’ll be addressing our outlook with respect to anticipated impact from the COVID-19 pandemic, I did want to reiterate that the extent of potential disruption in 2020 cannot be known with any degree of certainty. We are closely monitoring COVID-19 as it relates to the company’s business and will adjust as necessary as events unfold.

And finally, be reminded that Altus Group uses certain non-GAAP, non-IFRS measures as indicators of financial and operational performance. In particular, we have introduced some new metrics this quarter, which are defined in our MD&A. These are not defined performance measures under IFRS, but we 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 now turn the call over to Angelo.

Angelo Bartolini, Altus Group Limited – CFO [3]

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Thank you, Camilla, and thank you all for joining us on the call and webcast this afternoon. We hope that you are all well and safe.

Given the nature of this call, we’ll be focused on our financial and operational performance. But what we did not — we did want to start by extending our sympathies and best wishes to those directly affected by the COVID-19 pandemic and to express our gratitude to all the health care professionals and frontline workers whose role in combating this virus is appreciated by everyone at Altus Group.

COVID-19 is top of mind for everyone, and we intend to cover its implications to Altus on the call today. I’ll begin by framing the quarter, shed some light on how the pandemic started to impact our businesses in late March and how it may impact us going forward. Bear in mind, the depth and breadth of the eventual economic impact of this pandemic

On the commercial real estate sector remains uncertain and would emphasize that the full extent of potential business disruption cannot be known for certain. We’re monitoring this very closely, and we’ll continue to keep you apprised should any material events unfold. What’s for certain is that we’re coming into this period from a position of strength, underpinned by a strong start to the year, a strong balance sheet and sound business continuity plans.

This puts us on strong footing to continue pushing on our growth strategy in 2020 and to help support our clients to manage through whatever challenges lie ahead in this ever-changing environment. Bob will address this further later in the call.

I’ll start by commenting on our consolidated performance and then move on to specific business segments. I’d like to point out that Geomatics has been classified as discontinued operations and

The numbers we are discussing on this call reflect results from our continuing operations only.

On a consolidated basis, our annual revenues rose 12% to $131 million, driven by 18% year-over-year growth at Property Tax and 11% growth at Altus Analytics, where our Over Time revenues were strong growing at 17% year-over-year. Our Valuation and Cost Advisory business grew by 4%. Earnings per share from continuing operations under IFRS were $0.04 while adjusted EPS was $0.20, and adjusted EBITDA decreased modestly by 2% to $13 million as the growth in revenues was offset by higher compensation from headcount additions, provisions and other operating costs, including incremental costs from the acquisitions of One11 and Caruthers.

We’re very pleased with our first quarter performance. We had a very productive and financially strong start to the year. Despite some short-term challenges I had due to COVID-19, we still see opportunity and an overall positive completion to the year as we’ll discuss further here today.

Turning now to the individual segments. At our Altus Analytics business, we began the year with the software business fully transitioned to a subscription revenue model. Effective January 1, all license sales were sold on a subscription basis only. And while we are prioritizing selling ARGUS Enterprise predominantly on the cloud platform, we’re still giving existing customers the ability to purchase the on-prem version for additional users. Consistent with what we shared with you in February, the market and our customers have been very accepting of this model.

Our Altus Analytics revenues increased 11% to $52 million, of which the acquisition of One11 represented 7% of the 11% growth. Most notably, our Over Time revenues, our new metric for recurring revenue consistent with IFRS revenue recognition, grew 17% on an organic basis to $40 million. Key drivers during the quarter included the benefit from the higher mix of subscription sales in the second half of 2019 and first quarter of 2020, which speaks to the higher economic value of subscription revenues. Overall, we continue to benefit from a good mix of add-on sales to existing customers, new license sales as well as cloud migrations.

We continue to see strong growth from our Appraisal Management solutions coming from both client expansion and new client additions. Our maintenance revenues remained steady, supported by a strong 96% retention rate for ARGUS Enterprise.

Note that at the end of the year, we will update our retention metric to also include ARGUS Enterprise subscription revenue retained upon renewal. And by that point, we will have the befit of a more meaningful number of subscriptions that will be eligible for renewal. And also Altus Data Solutions had a strong quarter across all important metrics: revenue, margins and bookings.

In addition to introducing Over Time revenues and formerly reporting on retention rates in the first quarter, we also started to report on the geographic mix of the Altus Analytics business, and we introduced a new cloud adoption rate. On a geographic split, although we continue to make solid inroads in international markets, we largely expect this split to remain steady for the remainder of the year as we continue to see ample growth opportunities in North America.

Our transition of ARGUS Enterprise to the cloud progressed on plan and in line with our expectations during the quarter. And at the end of the quarter, 6% of our total ARGUS Enterprise user base was contracted on the ARGUS Cloud platform. This includes both new ARGUS Cloud users as well as those who have migrated from the legacy on-prem version. We think this is a solid number and within the range we modeled when we laid out our long-term financial targets. Bear in mind, to date, the bulk of the cloud volume has been smaller- to medium-sized businesses, consistent with the expectations we previously shared with you, as those transactions are generally more straightforward.

For the larger enterprise deals, which Bob will get into shortly, it’s still largely a question of when, not if, and the current environment could help accelerate this. So all to say, everything progressed nicely, and we’re pleased to share that in mid-April, we had 600 ARGUS Cloud customers. On the impact of COVID-19.

We did see some slowdown late in the quarter as our clients began to transition their employees to work from home. As activities paused as a result of this move, a slowdown occurred primarily in some of the non-occurring — nonrecurring areas or what we’ve referred to as onetime revenues. More specifically, these were our software implementation consulting and the education and training areas where client availability became difficult during this time. For the same reasons, we also experienced a modest reduction in software sales volumes primarily in the SMB segment as customers shifted focus to the work from home transition.

On the earnings front, our margins in Q1 were impacted by the shift to more subscription revenues, reduction in onetime revenues that we experienced as a result of COVID, and higher expenses related mainly to increased headcounts, notably in the software consulting category that was primarily related to the One11 acquisition that we completed in July 2019.

Overall, going forward, we still expect that our spend will grow in proportion to revenue growth. Margins are expected to remain consistent in 2020 and begin to see a rebound in 2021 as we highlighted at our Investor Day this past December.

Looking out beyond Q1, COVID-19 is expected to continue to impact to our Altus Analytics business in the short and medium term, but the long-term opportunity is solid. We continue to be well positioned to deliver year-over-year growth in 2020 as we carry on with our transition to cloud subscriptions. Our view is supported primarily by Altus Analytics’ Over Time revenue base of 77%, healthy demand trends and our belief that our retention rates will be relatively stable as our solutions are considered mission-critical amongst our clients.

For those reasons and the insights Bob will share shortly, we remained — we remain committed and are on track with our aspirational long-term goals to get to $400 million in revenues for full year 2023, with associated 30% or greater adjusted EBITDA margins.

To factor in COVID-related disruption, this is how we characterize some anticipated trends for 2020. To start, I’ll reiterate that our standard growth avenues that include expanding customer wallet share, adding new customers and geographic expansion for both software and Appraisal Management solutions will continue to provide us with incremental revenue growth. We expect that the contribution of enterprise deals with our top 200 clients will also contribute to that growth. These growth drivers are solid even if the volumes may not come in the levels we had anticipated pre-COVID-19. As mentioned, with over 77% of revenues being Over Time, we believe this revenue base is fairly stable. This is supported by strong industry-leading retention rates and multiyear contracts and the fact that our solutions are considered mission-critical.

In fact, now more than ever, our solutions are helping clients navigate this challenging environment. For that reason, we expect retention rates should be relatively stable. Based on current trends, we remain confident that our existing customer migration to the cloud will continue throughout 2020 without material disruption, and our current software pipeline of opportunity remains healthy. Again, Bob will elaborate further.

In the near term, as a result of COVID-19 and in some of the challenges that poses on our customers to — ability to work remotely, short-term challenges may arise in completing transactions they — even getting contracts approved as multiple parties are involved, or in some cases, a customer reprioritizing as they are facing new pressures related to this crisis.

We’re doing our best to support customers and can already transact remotely, for instance, through electronic signatures. Also in the near term, some of the nonrecurring revenue streams such as the technology consulting from One11, implementation, education and training are expected to be impacted as clients — as client priority shift during the pandemic and that in-person meetings are restricted. We expect these services to resume to more normal levels as clients adjust to the new normal and as our services are delivered either on-site or remotely based on circumstances.

And finally, our Appraisal Management solutions, which are captured in the Over Time revenues are poised for healthy performance in 2020. This business has been — has historically been a beneficiary following times of market volatility as it supports the need of transparency and data-driven insights. We are fortunate that Appraisal Management clients are predominantly large institutional investors who are well-capitalized and who might see opportunities during this market. Having said that, we are likely to see a temporary slowdown in new client additions in the short term, but that could easily be offset by our existing clients who may add assets on our platform or simply require more frequent valuations and their efforts to assess risk.

Turning to our CRE Consulting businesses. It was a solid quarter of great contribution from all. CRE Consulting revenues were up 13% to $80 million, and earnings improved 10% to $13 million. Property tax revenues were up across most jurisdictions, and both the Valuation and Cost Advisory businesses delivered year-over-year revenue growth. On the earnings side, the growth in revenues was partly offset by compensation for increased headcount to grow the U.S. and U.K. Property Tax businesses.

In addition to reflect the credit risk introduced by COVID-19, we recorded additional provisions of approximately $1.5 million on our trade receivables and unbilled revenue balances, which impacted margins this quarter.

At Property Tax, we continue to see great returns from the investments we have been making in growing this business globally and specifically from the digital transformation that’s underway. In the first quarter, we continued to grow market share while building our pipeline with higher value contingency contracts and leveraging our data to maximize client success rates. The combination of higher volume of settlements and greater individual value drove 18% revenue growth to $53 million, along with 10% earnings growth to $11 million.

In the U.K., the acceleration of case settlements from the 2017 list continued into the first quarter as we’re now in the fourth year of the cycle. I should note that the U.K. government just announced an extension to the 2017 cycle by what’s expected to be an additional year, which would provide us the opportunity to continue with annuity billings into 2021. This was just announced yesterday, so we’re still assessing its full impact.

In Canada, Ontario was higher as we returned to normal levels of case settlements. We also experienced strong performance in Alberta and in Manitoba as Manitoba is now at the peak of their 2-year cycle. This helped offset some of the pressure we saw in BC as they experienced delay due to change in pre-roll assessments.

And in the U.S., consistent with our seasonal patterns, we had a very productive quarter in building our pipeline that will benefit us in future quarters.

With respect to COVID-19 impact, our Q1 Property Tax results were pretty much secured by the time the pandemic disruption was taking hold in late March. We do, however, see some impact in the short term, most of which we would characterize as short-term headwinds in 2020. Longer term, we see attractive opportunities coming out of this as we continue to grow market share and maximize the value of our pipeline. Fundamentally, this business is stable as property tax systems are not anticipated to go away In fact, our Property Tax revenues are highly repeatable as we have long-standing client relationships with an incredibly strong track record of success in our industry.

In response to COVID-19, to date, there have been some government relief measures introduced across a few of our jurisdictions to help businesses during this challenging time. For instance, in the U.K., as part of the COVID-19 subsidy program, 2020 ratings for companies in the hospitality, leisure and retail sectors have been suspended. Overall, our client base is fairly diversified, and we’re not overweight in these specific sectors. However, we do have some exposure, and this change will have some impact to the 2020 annuity billings and some other savings that we would have achieved from 2020 settlements for clients in these sectors.

In some jurisdictions, local governments are also providing tax abatements and other deferral programs that may have some impact on the company’s ability to invoice clients. But generally, this is small. The greater risk in the short-term is the ability for us to meet and show cases with government officials either in person or remotely. This is mostly out of our control and could translate into a slowdown in appeal settlement activity volumes that will ultimately shift some of our anticipated revenues into future quarters and into 2021.

The other risk I would point to is the potential for further provisions of our working capital accounts should the economic conditions worsen significantly. This is mostly in the SMB space within our Property Tax practices that have some exposure to certain industry segments, as mentioned earlier. Overall, as you know, this business generally exhibits quarterly variability based on the variety of cycles and jurisdictions, and the quarterly variability could be even more pronounced this year as a result of COVID-19. But based on the strong start to Q1, the visibility we have into our pipeline and the current pace of settlements, which still appears to be moving along, we are on balance positive for the year. We stated in our last report that we expected to achieve record revenues in Property Tax in 2020. And given the conditions I just outlined, we believe this target is still achievable.

Over the long term, we see great opportunity. There is a healthy pipeline of both Ontario and U.K. 2017 appeals that will spill over into the next couple of years, with volatility in property valuations that may lead to higher savings, and coupled with higher market share, should lead to continued strong future performance. In addition, the potential benefit of another year of annuity billing in 2021 in the U.K. could lead to another compelling year. Bob will again provide more color shortly.

Moving on to our Valuation and Cost Advisory practices. Performance was consistent, and we had good contribution from both the Valuation and Cost Advisory businesses. We did not experience any specific COVID-19-related impact in the first quarter. And as we look out, we anticipate the impact to be relatively modest.

A significant portion of the valuation business consists of periodic valuations of CRE portfolios with regular financial reporting requirements. So we expect the revenue stream of this business to remain relatively stable. We could see some increases in valuation frequency, however, any benefit could be offset by lower activities in the transactional areas such as due diligence and research assignments.

The Cost Advisory business depends, to a large extent, on an active CRE developer market, which could be temporarily stalled in the current environment. However, the long-term opportunity of this business remains intact as many engagements are multiyear. In addition, given the strength of our relationships and market leadership, we have opportunities to be engaged for workout assignments and lender services, should it come to that.

Turning to our financial position. I mentioned we entered this period from a position of financial strength, and as reported today, our balance sheet remains healthy. In support of strengthening our financial position, in late March, we amended our revolving credit facilities to increase borrowing capacity to $275 million from $200 million, extended the term by 3 years with an additional 2-year extension option and included other improvements, including greater flexibility in borrowing terms.

Of note, the new credit facilities are moving to an unsecured structure, allowing us to respond and adapt to the rapidly changing market environment with greater speed and efficiency. At the end of the first quarter, Altus Group’s balance sheet remained healthy. Bank debt stood at $176.1 million, representing a funded debt EBITDA leverage ratio of 1.85x, well below maximum limit of 4x. And that metric is without the application of cash and cash equivalents of $71.2 million.

While we remain on solid footing, we will continue to meet our financial and operating requirements and prudently invest in growth. We will also aim to contain and reduce costs where appropriate in order to enhance operating efficiency. While there are some obvious cost saving areas such as travel, marketing events and reducing nonrevenue-producing hiring, we will actively seek more compelling cost-saving measures. Like everyone else, we continue to monitor the situation as it evolves, and we’ll adapt to our approach as required.

In the spirit of full disclosure, there are risks. Things could get much worse. There are dependencies such as counterparty availability and participation in our Property Tax practice, the ability of clients to pay, the ability to close deals on a timely basis, the prioritization of commercial real estate as a key investment asset class, its globalization and its need for modernization and automation. These are trends that we believe are still in play.

In summary, we are generally feeling positive about our short-term outlook, but still taking a measured approach.

With that, I’ll now turn it over to Bob.

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Robert G. Courteau, Altus Group Limited – CEO & Director [4]

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Thank you, Angelo, and good afternoon, everyone. With COVID-19 top of mind for everyone, building on what Angelo shared, we feel that the commercial real estate industry has changed. The expectation for insight and transparency has increased to understand risk and capture opportunity. Digital transformation will be critical as our world has changed. We believe data sharing in our industry will be pursued more aggressively. The strong will become even more relevant to the industry, and we believe these trends will dovetail with our solution set, our current position in this industry that allow us to accelerate our strategic plans.

Let me just quickly start by talking about our business continuity measure, which we discover — discussed briefly at the AGM yesterday. And really, I wanted to use this time to walk through where we see the opportunities ahead because like in most periods of disruption and economic slowdowns, there will always be opportunities. And we’re determined to come out of this stronger than how we went in. We pride ourselves at Altus Group being a top employer in our industry, a community and industry partner and a good corporate citizen. This has definitely guided our response through this pandemic and reinforces our position as a leader in the industry.

Our primary focus during this pandemic has been and will continue to be the health and safety of our colleagues and their families, our customers and, of course, the communities in which we operate.

To start, we initiated our business continuity plan proactively in early March. We acted decisively and quickly. And in short order, we set up virtually all of our employees in all locations globally to work from home. This was in addition to other preemptive measures that allowed us to ensure employee safety, sustain productivity and enhance client support. Effectively, we did not miss a beat. I’m incredibly proud of how well our team has transitioned and applaud their efforts to adjust during this difficult time.

Our transition to remote work arrangements was effectively seamless with no client impact, and we continue to maintain solid productivity and full-service levels. This was underpinned by our operations being supported by modern cloud-based technology for our corporate systems and our client platforms. Having invested in this area in the past several years, our internal and client platforms stood up to the test. And this has been a serious test, and I’m really, really proud of how we have entered into this new normal.

As Angelo highlighted, although we’re in good financial shape, in the spirit of never letting a good crisis go to waste and to ensure we remain in the best position possible, we’re taking this opportunity to further optimize our operational efficiencies, especially as we prepare for the next normal in the aftermath of the pandemic and the economic slowdown.

While our focus remains on growth, the current environment will allow us to better realize efficient growth. This is a proactive approach to target our spend on new and emerging opportunities.

To be clear, our planned investments and support of our strategic initiatives will continue, and as it relates to M&A, we’re in no rush but given our financial strength, we remain open to opportunistic, transformative M&A opportunities that could become available.

No doubt, COVID-19 has presented unique challenges for all businesses. The precise impact on commercial real estate remains to be seen, and the effects will vary significantly by market and asset classes. Some companies, such as those with higher exposure to hospitality and retail, for instance, will obviously feel a pain more than others. And there are those who are well-capitalized and structured. And they continue to have plenty of dry powder, and they will be opportunistic. There will be hardships, and there will be opportunities. Our software, data analytics solutions and expert services are uniquely suited to help our clients navigate the complexities in this uncertain environment.

One simple example. We just ran a Webex seminar on sensitivity and risk analysis on ARGUS Enterprise, and we had over 1,000 registrants. That has been one of our highest turnouts yet. We’re here for our clients and the industry on both ends of the spectrum. This is reflected in our mission, to enable clients to maximize the value of their commercial real estate assets and investments.

In a way, there’s more modeling work taking place on Argus than ever, there’s a heightened focus on valuation. And as it relates to our Property Tax business, operating costs are being scrutinized now more than ever. And especially in the near term, client focus will shift from returns, to risk and cost reduction and our solutions solve for all of the above.

Look, our team rose to the challenge during this crisis. We’re proactively engaging with clients, and maybe on a more personal level, creating even deeper relationships. We’re here to help our clients navigate through this period of uncertainty, but we’re also thinking about what their needs will be in a post COVID-19 world. I believe that the high-touch points we’re having with all of our customers today will strengthen client satisfaction and loyalty. In times of crisis, there’s always a flight towards quality partners to deal with companies and people they can trust and towards those who will have influence in our industry. And that is Altus Group.

Given our corporate culture, and the exceptional quality of our professionals, quite frankly, productivity through remote work arrangements was never in question for me. We are busier than ever. We’re supporting our clients so they can get visibility on risk and opportunities, providing thought leadership on the industry, and we’re innovating with new relevant offerings and pursuing opportunities to grow market share. I’m confident that with the talent across our organization, we will emerge from the COVID-19 crisis with a strengthened competitive position and as we have done through a wide range of economic cycles in the past.

At Altus Analytics, if you take a longer-term view, we believe the pace of digital transformation amongst commercial real estate companies can be accelerated due to current work from home practices and data sharing requirements, especially for those companies who are late to the game. The technological modernization of the commercial real estate industry has been a dominant tailwind for our business. And this pandemic has revealed operational disadvantages for companies who haven’t invested in technology.

Being cloud-enabled has particularly provided a lot of advantage to our clients during this time, not only because it enables efficiency, especially while people work remotely, but it also enables better collaboration. And based on the conversation we’re having with our clients, interest has grown. As we reported today, our cloud transition progressed well during the quarter and remains on track. And based on the trends, we expect that the migration of our existing customers in the cloud will continue throughout 2020 without any material disruption.

With 6% of our total ARGUS Enterprise user base contracted on ARGUS Cloud and with over 600 customers on the platform, we are pleased with the progress. This includes both take-up from new clients, but also migrations from existing clients who proactively wanted to move over mid contract.

For context, we’re roughly 9 months in since our full launch, and we went from reaching 500 customers in late February to reaching 600 customers by mid-April. And as another reference point, it took us 2.5 years to get to 600 customers for ARGUS On Demand. The value is there.

Overall, consistent with our expectations, the early adopters continue to be largely from SMB customers who generally represent a handful of users. But we’re also enjoying positive engagement with the larger firms who would represent higher volumes of users. And for the larger firms, this is a strategic consideration now for many of them. Some will accelerate the decision in light of COVID-19, and others may temporarily postpone strategic technology implementations, reasons ranging from competing priorities to caution about new spend decisions in an uncertain environment.

We’re watching this closely, and it’ll likely impact SMB spending more but offset in time by the greater opportunity with large and global institutional companies that are planning for a more modern platform. Any short-term impacts in software bookings for Argus software should be cushioned by our now greater than 70% Over Time revenues, customer retention levels and the demand for our data and information, along with the strong performance of Appraisal Management and Altus Data Solutions.

To that point, we’re also experiencing strong engagement with our Appraisal Management clients who are leveraging our data analytics platforms and leaning on our experts to help them assess risks, account for impacts to valuation and evaluate opportunities. There’s nothing like a crisis to stimulate the need for transparency. And in fact, the last financial downturn in 2008 and 2009 was a key catalyst for growth of our Appraisal Management solutions, and we can see that happening again this time.

In 2008, 2009, commercial real estate values declined around 40% from their peak. It was painful for our clients. Some of them breached debt covenants and LTV caps as values decline, but they all survived and recovered. The net result was an overall increase in demand for our advisory and analytics solutions as clients and their investors called for more transparency and tried to get a clearer picture of the overall value and performance of this — their holding. There’s no reason, as I said, to believe it will be any different this time.

And at our Canadian Altus Data Solutions, we’ve recently signed important new multiyear contracts that strengthen this business. And through the launch of Altus data studio platform, our customers have improved and can be more efficient in getting access to our data through these tools.

Overall, I’d say the need for transparency has been heightened in the current environment as customers analyze risk and revisit valuations. A number of our solutions are considered mission-critical for our clients, and we believe that the current events will elevate the strategic value proposition of our full tech stack for global asset and investment management.

The Property Tax, despite some of the near-term disruptions that we’ve seen from COVID-19, we are very optimistic about the overall health and potential of this global business on a multiyear basis. Our revenue expectations for 2020 have been tempered from the exceptionally strong levels we are anticipating at the start of the year, but we believe a record year is still achievable.

The combination of the strong start in the first quarter plus the visibility we have in the pipeline and the current pace of settlements has strengthened our confidence considerably from the early days of government headlines and actions. It may not be a phenomenal year as we were headed for, but it will still be a very good year. Overall, the Property Tax business is stable regardless of market and economic conditions as the requirement to pay property taxes doesn’t go away.

In fact, this business thrives on market volatility. And we certainly have that, and we have potential to do even better in a down market as clients become more focused on expenses as property taxes represent one of the largest operating expenses in commercial real estate. The complexity of valuation, given COVID-19, against the backdrop of uncertainty will also create an opportunity to increase the value and the success rates for our clients. Our high-contingency model creates a win-win.

Now if we take a longer-term view, there could be further opportunities created by this disruption in future cycles. Our potential for higher at-bat wins in the next cycle strengthens. Drawing on our experience in past market disruptions, it’s always been the case.

The impact we’re seeing in 2020 due to COVID-19 also creates more opportunity for 2021 as the COVID-related disruption and appeal settlement activity volumes will shift some of the anticipated revenue into future quarters and further spill into 2021. And this spillover is likely to be higher than what we initially anticipated, creating opportunities over the next couple of years.

In addition, we’re really pleased with yesterday’s announcement that the U.K. government plans to postpone the proposed business rates reevaluation in 2021. This is a big victory for our United Kingdom team who have been leading this charge on behalf of the industry to protect our clients’ interest and work with the government to get it right. This is a huge win for our clients and reflects our thought leadership. These type of activities enhance our overall brand and value of our business and will ultimately lead to greater market share. And it also has some tactical benefits, including an additional annuity potential, more time to process the existing pipeline, and potentially, an additional year to add to our 2017 list that we file for that pipeline.

And given our global scale and how technology-enabled we’ve become over the years, we will be more than favorably positioned over many of our competitors, especially as we look at the U.S. market.

In a fragmented small rural market, the weakness of small companies that have not modernized will be obvious, and we’re already seeing layoffs in our industry when, in fact, we’re adding to our team. The news travels fast and far to our client base. And in the U.S., we have a significant opportunity to continue on the market share gains we’ve already made.

Altus is positioned to build loyalty with both employees and clients by being a stable leader in the market and potentially adding to our talent. This also gives us an opportunity to continue our great success in Canada, gaining market share, and there could be, of course, some attractive tuck-in opportunities ahead in a turbulent market. All good.

And overall, the strength of the 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 revenue growth for many years. And I would echo what Angelo said earlier. Our digital transformation and our move to make tax more of an information services business is creating incredible value as we build this global market share.

So in closing, number one, as always, our employees and customers are our top priority, and our actions through COVID-19 pandemic have been guided by prioritizing their health and safety. Our business continuity measures have been effective, and we’ve achieved a great balance in doing right by our employees in giving them added flexibility while being able to continue to serve our clients with a high level of service they expect from us.

Number two, we entered this period from the position of strength, had already — having already made our transformational investment and with a solid base of Over Time revenues in our Altus Analytics business and in our Property Tax business, which is stable and a high majority of our Property Tax revenue is highly repeatable.

And of course, as a company, we’re highly diversified by revenue streams and by geographies, and we have a strong foundation of long-standing blue-chip client relationships.

Number three, we deliver incredible value to our customers. This type of difficult period will challenge revenue streams but our end-to-end CRE offerings drive better decision-making for our clients, helping improve the visibility and flow of information through their critical business processes to maximize the value of our commercial — of their commercial real estate assets and investments. Our clients are facing both unprecedented challenges and opportunities in the current environment. And strengthening the long-term demand for our client and cloud-based solutions, our data analytics, and our professional services and our people across every one of our businesses are incredibly busy, supporting our clients and guiding them through this pandemic.

Number four, the long-term fundamentals of our business and the market opportunity ahead of us are even better than ever. The pandemic creates some short-term headwinds. But looking beyond, we see exciting opportunities ahead, and we will be very favorably positioned. In this crisis, many clients have turned to us for our insights and data to help them plan for their own business. This should accelerate our differentiation as we come out of this stronger on the other end, as we have done through a wide range of economic cycles in the past.

And number five, the company is in good financial health, and we have numerous levers available to us, enhanced financial flexibility should circumstances change, we remain laser-focused on market share, organic growth, maximizing cash flow, innovating while taking this opportunity to contain and over time, reduce some of our costs through innovation. We’re well positioned to execute on our thesis this year and for many years to come.

And with that said, let’s open it up for questions, operator.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question is from Daniel Chan at TD Securities.

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Daniel Chan, TD Securities Equity Research – Research Analyst [2]

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Bob, you mentioned that some customers may accelerate their migration to the cloud as a result of the pandemic, and some may be taking a pause, given the uncertainty. Maybe you can give us some insight on what you’re seeing in the pipeline and maybe some of the engagements that you’re having with the customers. Are you seeing more inbounds for the cloud given the work from home directives?

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Robert G. Courteau, Altus Group Limited – CEO & Director [3]

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Yes. I think what we’re seeing is that we had a really nice clip going on our small, medium business, which, if you think about our traditional AOD business, it was at the beginning also — weighed to that business, that category. In the last — I would say about early March, we started seeing pickup in what I call medium/large business, the plus 20 users. And that was one of the things that we’re hoping for. And when you get into those — once you get into those types of businesses and obviously, large enterprise, it’s actually less fulfillment and more selling. And so our selling paradigm was starting to kick in, and that’s going to be important for our user adoption, right? And then, of course, in the larger enterprises, it’s a much more complex sale because we’re talking to global companies about how this fits into their environment. And that pipeline is — has strengthened. We’ve seen a number of deals that are in our pipeline that are still proceeding. But look, we’re trying to be a little bit cautious here, right? There’s going to be a lag effect on how real estate companies behave. I think all software companies have to be concerned about bookings. So we’re trying to buy a little bit of room here, but the thesis is intact. We’ve got a really nice pipeline. We probably will see some delays just naturally because of what’s going on in the pandemic, but the thesis hasn’t changed.

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Daniel Chan, TD Securities Equity Research – Research Analyst [4]

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Okay. That’s helpful. And then moving on to the tax side. You also mentioned that taxes are one of the highest expenses for your clients and they may be looking to save those costs. Are you seeing an acceleration of tax appeal plans from your clients now?

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Robert G. Courteau, Altus Group Limited – CEO & Director [5]

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I would say that there’s a flight to quality going on. That’s why we’re so bullish on tax. Our market share, our pipeline, our earned value, our ability to organize to win new customers, the work that we’ve done in transforming the way we do business, we actually feel, and this is strong, like we’re mobilized, we’re operational, we’re moving, and many of our competitors are fairly flat footed. And we’re taking the high road, so not only what we’re doing well on pipeline and as measured by assets under contract and customers, we think this — because of the investments we made, we have an opportunity to even accelerate our market share. And the uncertainty of valuations, the ability to operate your business on a modern platform gives us an advantage to continue our business. And again, reiterate that we are going to have a very strong year this year.

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Daniel Chan, TD Securities Equity Research – Research Analyst [6]

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Okay. Can you comment on the ability of the courts to get tax appeals settled? Are they still processing them or is it all being pushed out?

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Robert G. Courteau, Altus Group Limited – CEO & Director [7]

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No. It’s jurisdiction by jurisdiction. And Angelo, why don’t you jump in here a little bit because you’ve been doing a bit of work on that.

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Angelo Bartolini, Altus Group Limited – CFO [8]

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Yes. It really does depend on jurisdictions. Most of them have been pretty good at continuing to process, I mean, albeit it’s slower than normal. So for instance, in the U.K., they’re still settling cases. Activity levels are down a little bit, just because, but they’re still proceeding. Ontario had a slowdown beginning in mid-March. That’s probably one of the only jurisdictions where we saw a drop-off on activity levels. The others are still continuing, and we’re starting actually to see sort — see a bit of a resumption. Ontario is planning to come back sort of in this month in May. And we’ll see a resumption going into the second part of this quarter.

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Robert G. Courteau, Altus Group Limited – CEO & Director [9]

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I think the benefit for us, and I alluded to it, is that we should — we’ve already declared that 2020 is going to be a good year. But more and more, there’s a whole bunch of factors here that are lining up 2021 to be exceptional, not only both in terms of the way the economics of tax have shaped up our competitive position, but also some of the actions, including the U.K., where, if they go back to the deferral of 1 year, it creates a real smoothing. And if we looked out the next few years, the year we are worried about was 2021 with a little bit of a fallout. And now it looks like it’s strengthening.

So look, we’re not declaring on 2021 now or on 2022, but the business looks like it’s lined up to have a hell of a run. By size, we won’t have the historical variability — extreme variability that we had in the past. And the U.S. is really coming on, and the U.K. is there and Canada continues to be good. It’s a — the business is in really, really good shape.

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Operator [10]

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The next question is from Stephen MacLeod at BMO.

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Stephen MacLeod, BMO Capital Markets Equity Research – Analyst [11]

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So lots of great color on the prepared remarks, so thank you, but I just wanted to follow-up on a couple of things. Can you talk a little bit about it? Like in the press release, you talked about 2020 kind of falling below what you previously thought. Is there any way to quantify like what you’ve built in into your assumptions so far?

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Robert G. Courteau, Altus Group Limited – CEO & Director [12]

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I think the only allusion to that is around tax and if I’m not mistaken, Angelo is flipping through the — we’re both looking at it quizzically here. We made comments in the prepared remarks that tax was headed for a phenomenal year. It’s still going to be a very good year, right? And so we’re trying to make sure that we guide that appropriately, obviously. And I think we’re going to even have more clarity coming out of Q2 on how this is going to play out. So — but then the only other thing that we might have been — if I answered the question without referring back to the context of the press release. Obviously, when you have a pandemic like this and you have winners and losers, we’ll get more clarity as the quarter goes on, on behavior — buying behavior around our Altus Analytics business. But in the short term, we’re seeing lots of activities. The metrics are good, but there’s going to be — we expect that there’s going to be a lag in real estate and we don’t know exactly how those behaviors are going to evolve. So that’s really what we’re guiding on.

Right now, if we had to guide it in a normal year, it’d be business as usual. Based on the metrics we have today, just to make sure you understand that. We don’t have any — we don’t a huge deterioration in our metrics. But remember, yes, you just have to see some of the — I just want to make sure you understand the point. We’re seeing some of these real estate companies are under serious duress, right? And so the metrics are strong. We feel good about the business. We’re guiding well on tax. We feel okay about the medium term for Altus Analytics, but we also want to offer some caution.

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Stephen MacLeod, BMO Capital Markets Equity Research – Analyst [13]

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Right. Okay. No, that’s very helpful. And then maybe just secondly, you talked about the 6% penetration rate for cloud. How do you expect that to ramp going forward? Like how was that — maybe you can remind us, how has that ramp previously assumed to your guidance to get to 2023?

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Robert G. Courteau, Altus Group Limited – CEO & Director [14]

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Well, it’s on track for 2023, probably ahead a little bit, and a lot of this planning is internal, right? But remember, 6% off mostly SMB customers, as we kick in some of the larger customers because it’s a user based metric, you’ll see quarters where it jumps up significantly. And so in our planning, we felt that the first year — the first part of this would be more weighted to an SMB kind of ramped approach. And then if you put a large, what do you call that , services company on it or one of our large customers, it will have an impact in the quarter. So no, we’re happy with that metric right now.

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Stephen MacLeod, BMO Capital Markets Equity Research – Analyst [15]

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Okay. That’s great. And then just finally, I just want to make sure I understood correctly, I believe it was Angelo’s comments. Did you say that you expect Altus Analytics margins to be roughly flat year-over-year?

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Angelo Bartolini, Altus Group Limited – CFO [16]

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Yes. Consistent with — pretty much with how we guided in back in December. So yes, they should be pretty — they’ll be in that range that we had provided to you earlier.

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Operator [17]

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The next question is from Paul Treiber at RBC Capital Markets.

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Paul Michael Treiber, RBC Capital Markets, Research Division – Director of Canadian Technology & Analyst [18]

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Just — I wanted to clarify the last couple of comments in terms of Altus Analytics reaching the longer-term targets, you had a graph that showed the progression of revenue over the next couple of years. Do you think you’re, where you stand when you look at the year, you’re on track to achieve the targets in the next couple of years, and it’s not becoming more back-end weighted?

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Robert G. Courteau, Altus Group Limited – CEO & Director [19]

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No. The only thing that’s happened, Paul, is we saw, obviously, a deceleration on onetime revenue, right, training, professional services. And that is off — we wouldn’t have factored that into our long-term plan. The actual more important Over Time revenue is on track, and we expect it to operate — it was 17% in the quarter. It might have been — probably would have been a little higher than that had we stayed the course. But the — if we didn’t have COVID-19. So a little bit of pressure on that, but we’re going to be like relative to our goals, we’re on track on Over Time revenues. And if this is a prolonged play-out, there might be some impact on the onetime revenues. And we’re — that’s one of the things that we’re monitoring because that guidance includes both, right, Over Time and the onetime revenue in the quarter. But by the time we get out there, onetime revenue will be fine.

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Paul Michael Treiber, RBC Capital Markets, Research Division – Director of Canadian Technology & Analyst [20]

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Okay, that’s helpful.

The — I mean, you sound very confident in terms of renewal rates remaining stable. What gives you the confidence there? I don’t know if based on the conversations you’ve had or just the nature of the usage. And then could you perhaps point back to what you saw in 2008, 2009 in terms of renewal rates and how that trended back then?

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Robert G. Courteau, Altus Group Limited – CEO & Director [21]

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Well, the reason we feel confident is because of the value of the software, but there’s also a little trick here. We do a high percentage of our renewals at the beginning of the year, and they pay upfront. So we’re not going to give their money back. So the timing is pretty good. And that was a little bit of a flip in common. I shouldn’t have made that one. But the reality is that we are expecting that there will be situations where we’ve got to help clients out. But so far, we haven’t seen a lot of that. And so — and in 2008, I think we looked at it. Do you have that? Go ahead, Angelo.

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Angelo Bartolini, Altus Group Limited – CFO [22]

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No. We didn’t see significant drop off even in 2000. That was before we actually had the margins software business…

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Robert G. Courteau, Altus Group Limited – CEO & Director [23]

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That was DCF.

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Angelo Bartolini, Altus Group Limited – CFO [24]

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But yes, it was DCF. It was single asset kind of solution. What we’re talking about today is a very different kind of product and very different installation. And it’s much more entrenched than it was even back then. So there would have — there was a small drop off. I mean, there was a modest one. But we’re — this time around, we really don’t have the expectation of that. And then just even on the subscription deals, the one thing I’d point out on that recurring base, most of those contracts are multiyear contracts. They’re not even annual, just north of 2/3 of those contracts will extend out for another — at least for a couple of years in most cases. And so we’re — that’s why we feel pretty strong about our position on renewal rates after — for the most part, we feel a lot of more locked in.

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Robert G. Courteau, Altus Group Limited – CEO & Director [25]

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And our pricing policies on maintenance, which is where you might see some slippage is that if a customer cancels their maintenance, they have to repurchase the product, and that’s not something that people want to give up easily, right? And it would force them immediately if they did come back into our cloud paradigm, which we’d be completely happy with.

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Paul Michael Treiber, RBC Capital Markets, Research Division – Director of Canadian Technology & Analyst [26]

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Just one last question. Could you summarize your investment plans and potentially cost-reduction plans in the light of COVID? I mean, is this an opportunity to double down on investment or is an opportunity to shift some discretionary spending into other areas?

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Robert G. Courteau, Altus Group Limited – CEO & Director [27]

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I think it’s — what we learned about — work from home creates some opportunities. We’ve had to change some of our models in terms of selling paradigms that we found to be fairly efficient. You might see a different form of marketing, less expensive, more frequent. We are repositioning — we’re thinking about how we can set up service, shared service models. There’s a lot of things that we have observed, have created better value as we’ve gone forward. So these are all things that could create a better economic model.

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Operator [28]

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The next question is from Deepak Kaushal at Stifel GMP.

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Deepak Kaushal, Stifel Nicolaus Canada Inc., Research Division – Director and Technology & Communications Analyst [29]

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Guys, on Analytics, I just had a quick question on the large enterprise side versus SMB. Are you able to give us a sense of the split on seats or licenses between large and SMB? Are we talking like 60-40 or 70-30 large enterprise in terms of value and seats?

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Robert G. Courteau, Altus Group Limited – CEO & Director [30]

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It’s a bit more complicated than that because the — no is the answer.

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Angelo Bartolini, Altus Group Limited – CFO [31]

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Not over the phone that easily. The — probably if you triangulated, and I’m probably on a limb a little bit here, but it’s probably like 40-40-20. 40, say, top 100 customers in the world; 40, next 400; and then 20 on SMB, something like that, if you took rule of thumb, Deepak. So…

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Deepak Kaushal, Stifel Nicolaus Canada Inc., Research Division – Director and Technology & Communications Analyst [32]

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Got it. And so might I understand correctly that the cloud transition started off faster with SMB, slower with large enterprise, but you expect that to slip due to COVID because the need for cloud is stronger for large enterprise. Is that the correct interpretation?

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Robert G. Courteau, Altus Group Limited – CEO & Director [33]

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No. No. What I said is that we’re now entering into the period of a transition where we’re starting to get large, medium and lower large customers, and we’ve got some good engagement with large. It’s no change. We — as the product strengthens and gets materially ready for a large enterprise, then you’ll start kicking in Argus as a global enterprise solution, right? We’re only — we’re in 3 quarters into cloud, and we’re releasing new functionality every quarter, right? So it’s going to strengthen. We always knew that. We knew we’d start with SMB. We’re now moving up to large, medium and lower large clients and 20 — the 20-plus type of users, and then we’ll keep it going from there. So the thesis hasn’t changed.

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Deepak Kaushal, Stifel Nicolaus Canada Inc., Research Division – Director and Technology & Communications Analyst [34]

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Okay. So I mean, I know it’s going into specifics here, but just last question on Analytics, and then I’ve got one follow-up. On the large enterprises, did you — the big large enterprise, did you have a certain number that you want to close this year? And has that number changed either up or down that you could close this year?

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Robert G. Courteau, Altus Group Limited – CEO & Director [35]

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I think it’s — I just finished my Board meeting. They asked me that question exactly. And the answer was, yes, we’re on track. We’re not — I’m not worried about that metric. The real play, if you’ve heard me talk about this before, is can we get at the upside this year, right? That’s the real opportunity. We’ve always closed 4, 5 good-sized deals every year. And I don’t see this year being different based on our pipeline, and I’m pretty active in most of them. And so the question is, is COVID-19 going to slow down the upside? So — and we — time will tell. We’re not — I think we’re painting here, not just for you, for everyone, that we’re on track. We feel really, really good. But the real — commercial real estate customer base has not completely settled down, right? So we’re not trying to make them — we’re not trying to make it look too easy, but all the metrics are very positive right now, and we’re confirming our direction. And Q1 was pretty good. And we got a few — we wanted to highlight where the risks are. And right now in Altus Analytics, the risk is really around bookings, like every software company, and onetime revenue. And we’re not hiding away from that. We expect to work through it. And we think the eventual outcome is positive.

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Deepak Kaushal, Stifel Nicolaus Canada Inc., Research Division – Director and Technology & Communications Analyst [36]

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Got it. And then just on that long-term structural change in real estate, like we hear a lot about talk on permanent work from home or private [capital] in the space. Have your experts internally kind of formed a view on this trend? And does that impact your strategy going forward?

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Robert G. Courteau, Altus Group Limited – CEO & Director [37]

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Okay. I can’t resist. So I asked Rick Kalvoda, who runs our advisory business globally, in case we got a question like that, to give us a few minutes on what his customers are saying about the changes in their customer base. So Rick, over to you.

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Richard Kalvoda, [38]

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Yes. Thanks, Bob. Deepak, yes, from the office side, work from home, I think that’ll still kind of flesh out over time. You hear kind of both sides of it. You hear that people are finding more and more that they can work from home. You might see an increase, the number of people doing that. You also see just from office use perspective is when people do go in the office, they’re going to want more space to work there, so there may be more demand. And this is from the commercial real estate side and from office, more demand for office space. Overall, I think on the margin, you are going to see more people working from home, maybe not permanently, but on some rotational basis. So that will increase the need for software, for ARGUS Cloud, for ways of working remotely, whether it’s us, whether it’s our clients, whether it’s just people in general. And that bodes well for what we’re doing. So no, it definitely looks positive from that perspective.

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Robert G. Courteau, Altus Group Limited – CEO & Director [39]

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Yes and I think…

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Deepak Kaushal, Stifel Nicolaus Canada Inc., Research Division – Director and Technology & Communications Analyst [40]

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That wasn’t a lay-up question to set up Rick.

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Robert G. Courteau, Altus Group Limited – CEO & Director [41]

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No, no. We invited him along. And we also have Colin Johnson who runs valuation in Canada on the call if anyone is interested in getting insight into our customer base and some of our activities. The other interesting thing is like, honestly, Deepak, nobody really knows. I think that’s part of the reason that we’re taking a measured, careful view of how our customer base is going to behave. So for example is if you have to keep physical distancing in the office level for the next year, that has flow through on restaurants, hospitality, retail, so people are working hard to understand that. But if you think about it, and I’ve said this before, many — much of our client base, the large client base is institutional. They’re taking a long-term view of how this goes on. And people might be starting to think about this in the construct of land banking or land accumulation, right? Hospitality has never been lower. One of the biggest PE firms in the world made — had their — their best deal ever, ever, ever, was Hilton. And so people are going to have thesis just coming out of that. And those thesis has create demand because they need to use — I mentioned sensitivity. Thousand people on a Webex tells you just how much people are thinking about really running scenarios, right?

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Operator [42]

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The next question is from Richard Tse at National Bank Financial.

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Richard Tse, National Bank Financial, Inc., Research Division – MD & Technology Analyst [43]

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Bob, you talked about acquisitions here that there could be some opportunities to surface here in the short term. I guess, the first question is are they leaning one way or the other like tax, technology and — I guess as a related question, where would you see the most opportunity from a valuation perspective?

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Robert G. Courteau, Altus Group Limited – CEO & Director [44]

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Yes. I think what we’re doing in the short-term is overweighting technology. We’re looking at some scenarios that fit into our longer-term strategic plan. But honestly, as I think Angelo said, we’re not in a rush. We’re not going to just buy because there’s bargains to be had. Always for us is critical that we get culture and strategy value. So I didn’t mean to imply that we’re — we’ve got a bunch of money and we’re getting ready to spend it, but there is more opportunity in this market. And then right behind that, I think in the medium term, I think some of these second-tier tax companies could be under pressure. And I included in the second tier everybody but us. So we think that that’s an area that we’re — we would be opportunistic on as it played out.

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Richard Tse, National Bank Financial, Inc., Research Division – MD & Technology Analyst [45]

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Okay. And then just sort of going back to the cloud transition for large enterprise. What would you say are sort of like the 1 or 2 top gating factors to have these large enterprises make that conversion?

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Robert G. Courteau, Altus Group Limited – CEO & Director [46]

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Yes. I — I said it before. Having spent the last 25 years in my career selling to large enterprise, it gets harder every year, right? It’s contractual. You have to hit the buttons of IT security. You’ve got to get your capital programs lined up. You got to be in their budget. It’s got to be part of their strategic decision making. You got to compete for other capital priorities, right? And it just takes time. And so we knew that. We have great conversations in play, and we have the value that moves it along, right? And so again, in the early days, we think we have a good line of sight on our existing customer base that could actually — have large customers that could move over, and we’re actually pitching, particularly in Europe, on to some of the large players about the benefits of globalization. So we’re on track. It’s like that hasn’t changed. If anything, to my point, like every other software company, the one thing about a crisis like this, a pandemic, is it usually puts pressure on decision-making, right?

So again, we’re being pragmatic versus anxious here. We’re leaving ourselves some room for the reality of the situation for our customers. But we’re not shying away from saying it’s going really well, and we figure that we’re going to be fine on the — on 2020 and as we go forward.

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Operator [47]

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(Operator Instructions) There are no further questions, Ms. Bartosiewicz. I would like to turn the conference back over to you.

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Robert G. Courteau, Altus Group Limited – CEO & Director [48]

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Okay. Well, thanks, everyone. Again, be safe. It’s more fun when we get to meet you in person. I can honestly say that.

But look, I’ll finish by saying we continue to appreciate the support of our investors and the investment community. I love what our team has done. I’m proud of them. I really believe that this is a game changer for our company. We have so many different opportunities in front of us that, frankly, have been accelerated. Again, we wanted to offer some caution around that in the short term, but this is an opportunity for growth, innovation and market share.

Thanks for joining us.

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Operator [49]

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Thank you. Ladies and gentlemen, your conference has now ended. All callers are asked to hang up their lines at this time, and thank you for joining today’s call.

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