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Edited Transcript of IBG.TO earnings conference call or presentation 8-Nov-19 1:30pm GMT

Q3 2019 IBI Group Inc Earnings Call

TORONTO Nov 9, 2019 (Thomson StreetEvents) -- Edited Transcript of IBI Group Inc earnings conference call or presentation Friday, November 8, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Scott E. Stewart

IBI Group Inc. - CEO & Director

* Stephen B. Taylor

IBI Group Inc. - CFO

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Conference Call Participants

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* Frederic Bastien

Raymond James Ltd., Research Division - MD & Equity Research Analyst

* Maxim Sytchev

National Bank Financial, Inc., Research Division - MD & AEC-Sector Analyst

* Michael Tupholme

TD Securities Equity Research - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to the IBI Group Third Quarter 2019 Results Conference Call. Please note that the IBI's complete financial statements and management's discussion and analysis for the period ended September 30, 2019, were filed on SEDAR and have been posted on IBI's website at www.ibigroup.com.

(Operator Instructions) As a reminder, this conference is being recorded, Friday, November 8, 2019.

Some of the statements made on today's call might contain forward-looking information. Listeners are cautioned not to place undue reliance on these forward-looking statements since a number of factors could cause the actual future results to differ materially from the targets and expectations expressed. The company undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, unless expressly required by applicable securities law. For future (sic) [further] information on risk factors, please view the company's annual information form filed with the Canadian Securities Regulatory Authorities and available on the company's website, the SEDAR website or by contacting the company.

All amounts discussed today are in Canadian dollars, unless otherwise stated. I would now like to turn the conference over to Mr. Scott Stewart, Chief Executive Officer of IBI Group. Please go ahead.

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Scott E. Stewart, IBI Group Inc. - CEO & Director [2]

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Good morning, and thank you for joining us to review IBI's third quarter 2019 results, which were released yesterday afternoon. I'm here with IBI's Chief Financial Officer, Stephen Taylor.

Through the third quarter, IBI demonstrated the strength of our business model, which is centered on urbanization and the 3 operating segments: intelligence, buildings and infrastructure. I'm very pleased with our strong Q3 results. Not only did IBI generate adjusted EBITDA of $12.3 million and a margin of 13%, but also secured several major project wins and closed the key acquisition that further advances a strategic pivot to a technology-driven design firm. As we continue the success of the execution of a technology-focused strategy -- strategic plan, I'd like to review highlights of IBI's operational accomplishments for the third quarter, following which Stephen will share an overview of our financial results.

In Q3, we achieved notable wins and traction on several of our recently launched products, including our Traveler Information solution, TravelIQ, launched earlier this year and our asset management solution, InForm, and our Smart City platform with an already significant presence across North America, including deployments in Ontario, Alberta in Canada as well as New York, Massachusetts, Connecticut, Southern California, Arizona, Louisiana and Florida in the U.S.

In Q3, we contracted for additional services with Wisconsin and Alaska. These combined contracts will provide for long-term multiyear recurring revenue for the firm and just from initial launch of our TravelIQ model where we see significant opportunities for growth across North America. We continue to engage with many clients across different sectors on our asset management solution, InForm. We will also be leveraging InForm as part of our recently announced City of Toronto accessibility upgrades project. This $18.5 million project, which adds to our building sector portfolio, will see more than 350 buildings across the city upgraded in accordance with the Accessibility for Ontario and Disabilities Act.

We've also won a project to implement our advanced traffic management system for the Ohio Department of Transportation. This project will incorporate the management of all active devices along the major roadways managed and operated by ODOT, providing an extensive traffic management network solution throughout the state.

We have won a Smart City platform contract for Rachakonda, India as well as continuing with the implementation of our Smart City platform in Cyberabad, which is in addition to the previous work that we're doing in building the mesh wire in India. Also, we've had success in Honduras at San Pedro Sula, where our Smart City platform has been implemented, included the deployment of multilingual interface, enabling the platform to be more readily deployed to other broadline markets as well as being a gateway to the deployment in Latin America. The Smart City road map that we have developed for a 50-acre mixed-use development in Silicon Valley announced last quarter is now waiting for approval for the next phase, which will include the deployment of various IBI Smart City solutions. We are using this road map as a framework to take to our larger developer clients across North America as a consulting service and also as a relative market for our solutions.

Subsequent to the acquisition of Aspyr, that specializes in information communication technologies for smart buildings and cities, both IBI and Aspyr were awarded contracts on BC's $1.3 billion Royal Columbia Hospital redevelopment project. The project will extend through to 2025 and represents a tremendous opportunity to showcase our Buildings and Intelligence sector expertise. Another major milestone in our Intelligence sector in Q3 was the successful launch of our first U.S. toll system on the Mackinac Bridge in Michigan. The 6-year project went live in September and has opened doors to other pursuits in the United States and internationally, where we are now in negotiations on a number of multiyear projects. These projects will add to our growing portfolio of toll projects already in place in Greece, India, Mexico and the United States, contributing to our global installed base of approximately 1,000 toll lanes and also where we are collecting revenue on behalf of our clients in excess of $1.25 billion. In our Buildings sector, there were a number of noteworthy projects in addition to the City of Toronto accessibility project. Included in these new projects is the Ford Dearborn Campus transformation. IBI is the Architect of Record for a new research and engineering center at Ford's world headquarters in Michigan. We are exploring with the client additional ways in which we can support the technology side of their needs in the project by applying our insights, our design capabilities and our technology.

This represents a notable opportunity for our Smart City's platform technology approach that we apply in the design and operation of buildings. The project adds to IBI's global portfolio, designing R&D facilities and corporate headquarters, including ExxonMobil’s R&D campus in Clinton, New Jersey and at the Harwell Science and Technology innovation campus in Oxford, U.K. Another exciting project, which adds to our Living+ portfolio and which was launched earlier this week is the "Untitled" condo development in Toronto with internationally acclaimed musician, Pharrell Williams, and our clients, Reserve Properties and Westdale Properties. IBI is the design architect in this project, which is already generating significant media and industry attention. We are continuing to execute our U.S. growth strategy, levering our body of work and the expertise of our design teams in Canada. Our U.S. West Coast offices brought in meaningful Living+ project during Q3 collaborating closely with our Vancouver office.

Additionally, our award-winning urban planning and place making practice brought in a number of new contracts in the quarter, adding to our total of over 100 master planning projects currently underway, representing some 41,000 acres of urban redevelopment. In Q3, we won 3 new operations and maintenance facilities contracts, many in association with transit projects -- or transit expansion. And this represents now a total of some 12 contracts underway across North America in operations and maintenance facilities.

In our infrastructure sector, I'm proud to announce that we have been awarded the contract to lead the detail design of the Hurontario LRT as part of the Metrolinx consortium, where we will be managing a multidisciplinary team of architecture and engineering partners. The project adds to the firm's global expertise designing transit infrastructure, including current projects, Eglinton Crosstown LRT, Edmonton Valley, Ottawa Confederation Line and Tel Aviv. This is -- it further establishes a profile of IBI globally. What is of particular note is that along the Hurontario corridor, we are designing for the private sector, some 25 towers, representing 12 million square feet of development. And it highlights the unique qualities of IBI in defining urban environments where we are key elements -- or key partner in the design of the asset or the infrastructure and then working for the public sector and then work for the private sector in the design of the assets that then develops along the corridors. What is particularly important, therefore, is that when we look forward to the opportunities in the public transit across North America, we have a long list of opportunities. Certainly, at the moment in the pursuit phase in Hawaii, British Colombia as well as other petri opportunities in Ontario. We are maintaining our 2019 total revenue forecast at approximately $374 million with approximately $411 million at work that is committed and under contract for the next 5 years, translating to approximately 12 months of backlog.

The company also continues to forecast that with the ongoing investment in new technologies and software by the end of 2020, our target is to achieve 20% of the firm's overall revenue generating in the Intelligence group, 20% EBITDA.

I will now hand over the call to Steven Taylor, our Chief Financial Officer, who will provide an overview of IBI's key financial results.

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Stephen B. Taylor, IBI Group Inc. - CFO [3]

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Thank you, Scott. IBI's quarter 3 net revenue of $94.6 million exceeded expectations and was largely driven by our U.S. buildings and intelligence practices, which posted revenue increases of 20% and 4%, respectively, over Q3 2018. These positive results drove total adjusted EBITDA of $12.3 million, 21% higher than Q3 2018.

For the first 9 months of the year, adjusted EBITDA of $35.2 million was 24% higher than the same period in 2018. IBI's building practice delivered strong performance in Q3 2019, with adjusted EBITDA increasing 68% over quarter 3 2018 to $9.6 million, largely driven by increases in U.S. buildings business unit. The ongoing positive trend of our U.S. segment continued and generated $3.4 million of adjusted EBITDA in Q3 and $6.7 million for the first 9 months of 2019. Relative to the prior year periods, these increases are significant and reflect our ongoing cost savings associated with expanded technology use and the impact of operational restructuring in the region. Intelligence revenue in Q3 was $16.5 million and year-to-date increased 6% to $50.9 million with the U.S. segment contributing meaningfully as revenue increased 3.5% in Q3 and over 10% in the first 9 months of 2019 compared to the same periods in 2018.

Although, we benefited from strength out of the U.S. segment, overall, the adjusted EBITDA and margin performance of our intelligence practice, reflected the impact of IBI investing in new software technology during the quarter. This investment required redeployment of assets in Q3, which resulted in approximately $3 million being directed to build out this future software, which would normally have been allocated to intelligence revenue. While this is expected to positively contribute to our adjusted EBITDA from our intelligence practice in future quarters, in Q3, our margins were impacted. In terms of our infrastructure practice, previously mentioned delays in the approval and advancement of new larger scale Canadian infrastructure contracts led to a decline in net revenue for the last couple of quarters of 2019 relative to 2018 due to various Canadian government changes. Despite this slight hiatus, we do expect to see demand for infrastructure projects increasing throughout the latter part of 2019 and into 2020, particularly related to the large transit infrastructure projects Scott mentioned earlier.

Looking at the U.K., while our adjusted EBITDA in Q3 2019 and year-to-date improved over the same period in 2018, we remain cautious about future growth in light of continued Brexit uncertainty. However, our U.K. intelligence practice have been leaders, and we see great opportunity to take our health care practice, which is already quite strong and extended into the health care market elsewhere. With the capabilities afforded by Aspyr, we plan to take further advantage of the opportunity it presents for growing our U.K. segment.

IBI's other international segment has experienced a relative decline in revenue recognition for the past few quarters compared to the same period in 2018, which is not indicative of a change to the level of work performed in these regions. Given IBI's prudent and conservative approach to revenue recognition, booking of revenue for certain international projects can occasionally be delayed until the achievement of various milestones. We anticipate this situation will be reversed in Q4 2019 and Q1 2020, once the milestones are met and associated revenue can be booked.

IBI's third quarter net income from operations was $6.8 million, $0.18 per share basic and diluted, which is 79% higher than Q3 2018 and 21% higher than Q2 2019. Net income for the period totaled $8.7 million, a 9% increase over Q3 2018 and 123% higher than Q2 2019, largely due to the impact of adopting IFRS 16.

Cash flows from operating activities for Q3 2019 were $8.3 million compared to $12.8 million for the same period in 2018 and were $21.8 million for the first 9 months of 2019, an increase of $10.5 million over the same period last year. IBI continues to prioritize improving our balance sheet and successfully reduced debt levels in Q3 with a $2.1 million repayment on the bank line. IBI is well positioned to realize our target of approximately $10 million in debt reduction by year-end and achieve a targeted debt to adjusted EBITDA ratio that falls between 2 and 2.5x. Longer term, IBI expects to be in a position to revisit capital allocation and look at other alternatives to deploy free cash flow, which could potentially include tuck-in acquisitions that support our technology strategy, consideration of a dividend for further strengthening of the balance sheet.

With that, I'll turn it back to Scott for some closing remarks before we take questions.

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Scott E. Stewart, IBI Group Inc. - CEO & Director [4]

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Thanks, Stephen. IBI represents a truly unique opportunity for investors, given we are disruptive in the architecture, engineering and design space with our application of technology and the fact that IBI does not have construction risk. We are defining the cities of tomorrow while offering exposure to an innovative company that's focused on targeting higher recurring revenue streams, expanded adjusted EBITDA multiples and improved capital allocation flexibility.

That concludes our formal remarks. Operator, we are now ready to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Michael Tupholme from TD Securities.

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Michael Tupholme, TD Securities Equity Research - Research Analyst [2]

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You saw very strong growth in the U.S. Just wondering if you can comment on to what extent do you believe that it's a function of some of the initiatives you are pursuing in terms of driving growth there versus the market strength itself as we have seen strong growth from a number of the other engineering firms in the -- publicly traded engineering firms in the U.S. this quarter?

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Scott E. Stewart, IBI Group Inc. - CEO & Director [3]

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The -- well, we certainly see our strategy of focusing first on urban environment and then also levering off of the strength of our presence in skills and capacity in each of the major sectors in Canada that is the West in Canada then driving that capability down on the West Coast in the U.S. In many cases, following our clients as they look to find new opportunities for them to grow. And that's certainly the case in the private sector. And that strategy is something we're applying both along the eastern -- western seaboard as explained, but also along the eastern seaboard from the Greater Toronto area down to Boston and Washington and further south. The -- so we see that strategy is working because in the space that we are operating and we are certainly unique at all levels. In terms of the planning that we do, the architecture that we do, the focus on the urban environment and the scale of what we do. So the strategy is working. We see that we have a great opportunity to grow there organically beyond what is the strength of that market and what we're seeing, again, because of our uniqueness in the market.

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Michael Tupholme, TD Securities Equity Research - Research Analyst [4]

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Okay. That's helpful. Steven, just to clarify, with respect to the comments you made around the performance of the intelligence practice this quarter. I just want to make sure I understand correctly. So the adjusted EBITDA number that I believe you reported was $1.9 million. I think you talked about $3 million of impact due to these investments you're making. So I guess my question would be, what -- had you not made those investments, what would be sort of a normalized adjusted EBITDA performance for intelligence in the quarter?

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Stephen B. Taylor, IBI Group Inc. - CFO [5]

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Mike, I think the point is that we took roughly $3 million worth of our capacity and devoted it towards building assets. We have quite strong backlog in the Intelligence group, and so a significant portion of that $3 million would have flowed through to the bottom line and EBITDA if it hadn't been diverted for use in building products for the future.

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Michael Tupholme, TD Securities Equity Research - Research Analyst [6]

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Okay. And is this expected to be something we should -- we will see in future quarters? Or was this unique to this -- the third quarter?

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Stephen B. Taylor, IBI Group Inc. - CFO [7]

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I think that some of it will continue on into 2020, in particular, products like InForm. We have been doing a lot of work as we roll it out and introduce it to the marketplace to make changes and enhancements to it based on customer and client feedback. So we will see some of this rolling over into 2020.

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Michael Tupholme, TD Securities Equity Research - Research Analyst [8]

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Okay. And without trying to hold you to a very precise numbers on this, if we look forward to Q4 and then into 2020, if some of it does continue, should we be thinking about sort of half the rate we saw in Q3? Or what would be sort of a good way to think about the order of magnitude?

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Stephen B. Taylor, IBI Group Inc. - CFO [9]

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Well, I think that you need to balance it off against what we would anticipate in terms of future revenue streams coming in from some of these products as they start to come on stream. So our focus is very much on achieving the target of 20% of overall revenue and 20% margin in the intelligence sector on -- by the time we get to the end of 2020. And we think that, that will build slowly over the course of next year -- incrementally over next year, and that's where we're focusing all of our attention.

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Operator [10]

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The next question comes from Frederic Bastien from Raymond James.

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Frederic Bastien, Raymond James Ltd., Research Division - MD & Equity Research Analyst [11]

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You explained the lumpiness around your other international markets and pointed to an improvement in revenues in Q4 and Q1 of next year. Just wondering, do we end up back to the run rate you had prior to Q3?

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Stephen B. Taylor, IBI Group Inc. - CFO [12]

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I think that for Q4, that we stand a pretty good chance of getting back to that run rate that we were running at earlier in the year. We've had some very good intake of order in -- orders in India, in particular. Our Mexico business is doing well. Our business in Israel is pretty -- was built around one of these transit projects, and so it's pretty state -- steady state revenue. The milestones situation largely exists in the rest of the Middle East where we expect to see some of those milestones being met and improvement in revenue there in the fourth quarter.

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Frederic Bastien, Raymond James Ltd., Research Division - MD & Equity Research Analyst [13]

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Okay, that's helpful. And do the milestones, the way you recognize revenues, does that also impact the other regions? Because I've been finding that not so much to revenue, but the margins have been fluctuating fairly significantly from quarter-to-quarter. So I was wondering if there is -- some of that was related to the milestone sentence.

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Stephen B. Taylor, IBI Group Inc. - CFO [14]

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Yes, to a certain extent, but I think that -- where you have the bigger bodies of work, the sort of milestone-related work makes up a smaller percentage of it. So it's not really the reason why I think what the fluctuation in the other regions tends to be as a result of larger projects coming to an end, new projects coming on stream and seasonal variation in terms of when people are taking vacations. And that's still because we need people here working in order to generate the revenue, that also causes some fluctuations.

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Frederic Bastien, Raymond James Ltd., Research Division - MD & Equity Research Analyst [15]

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Okay, great. The next question...

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Stephen B. Taylor, IBI Group Inc. - CFO [16]

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Big projects are more of an impact in North America.

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Frederic Bastien, Raymond James Ltd., Research Division - MD & Equity Research Analyst [17]

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Okay, got it. Next question's around the United States. We've seen a very nice improvement in margin going all the way down to 12% in Q3. What do you think is a sustainable run rate on a go-forward basis?

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Stephen B. Taylor, IBI Group Inc. - CFO [18]

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I think we've said in the past, and we would continue to stick by it that our objective is to try and get the margin in United States back to the level of the margins that we would be presenting to the outside world. So we think that we'll -- I think the margin was particularly strong in this particular quarter, but our objective is through Q4 and rolling into the first couple of quarters of next year to get back to the sort of 11%, 12% range that we would be committing to as a corporation overall.

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Frederic Bastien, Raymond James Ltd., Research Division - MD & Equity Research Analyst [19]

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Okay, great. So back to -- effectively back to the margin that you've been projecting for the entire company?

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Stephen B. Taylor, IBI Group Inc. - CFO [20]

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Yes, that's right.

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Frederic Bastien, Raymond James Ltd., Research Division - MD & Equity Research Analyst [21]

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Last comment, you have been getting some very good momentum in the U.S. However, the market, at least, the architectural billings index is starting to level off. Can you comment on where you think the U.S. market has headed?

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Scott E. Stewart, IBI Group Inc. - CEO & Director [22]

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We still see it as a strong market. And the areas that we're operating in are also very strong, both in the uniqueness of the cities or the specialty cities that we're in L.A., San Francisco, San Diego, Seattle, Houston are all very strong on the West Coast. And we see that, by example, in Raleigh and Washington, D.C. area, those are very, very big markets. And we have tremendous room to grow in those markets because we're a relatively small player, and we think we have a very -- no, let me put it differently, we have a very unique offering that other A&E firms don't have. And it is a real distinguisher as we meet with new clients and they hire us because to do traditional A&E work because we bring a unique skill set to them and another perspective to make the building smarter, to make the community smarter. And so we see tremendous growth.

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Operator [23]

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The next question comes from the line of Maxim Sytchev from National Bank Financial.

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Maxim Sytchev, National Bank Financial, Inc., Research Division - MD & AEC-Sector Analyst [24]

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I was wondering if it's really possible to get any more color on the strength in buildings in this particular quarter? Was there anything unusual and how sustainable can that margin momentum be if you don't mind commenting on that?

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Scott E. Stewart, IBI Group Inc. - CEO & Director [25]

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Well, on the margin, we have such a scale of work that -- maybe I should -- in the Ontario stuff answer that what we've been focused on in the Toronto office, and particularly in the architectural sector was getting planning approvals in place because of some changes with the new government and the regulations around development. And all of our effort was -- major portion of our effort was focused on getting entitlements and densities for our developers. And that's all in the planning stage. And that's a step toward our downstream work. We still don't see and certainly in the east, any downturn in the economy or in the demand for the kind of service that we're providing in mixed-use high-rise in the Greater Toronto area. And we also are providing services into the Montreal area, which is one of the strongest redevelopment markets in -- certainly in Canada. In the west, as mentioned earlier, we have a very, very strong presence in Vancouver and leadership and the design of mixed-use high-rise and our Living+ brand. We've expanded into Kelowna in large part because we need access to staff to be able to do the work that we have in hand, not only in the Vancouver area, but also down along the West Coast because, as I mentioned, we're following the developers out of BC down into Los Angeles, as an example. And those are very strong markets. And I would also offer that we are located in all of the -- in the U.S. in 8 of the 10 major knowledge centers with major universities and firm and new technologies, systems and software development and the like and those centers are growing rapidly. What we are looking to do is to diversify and strengthen their offerings in some of the other related housing areas of student housing, again, especially in those knowledge centers and also senior housing so that we're broadening our offering to the market. So we see a very strong market. And to the extent that we can continue to apply productivity tools, we would see that the margins would -- and we have scale, we'll have strong margins in those areas.

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Maxim Sytchev, National Bank Financial, Inc., Research Division - MD & AEC-Sector Analyst [26]

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Okay. No, that's very helpful. And just a clarification. So for example, during the -- providing architecture services for student housing, senior housing, the margin profile is going to be very similar to what you guys are doing right now, is that a fair assessment?

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Scott E. Stewart, IBI Group Inc. - CEO & Director [27]

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I would say so.

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Maxim Sytchev, National Bank Financial, Inc., Research Division - MD & AEC-Sector Analyst [28]

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Okay. No, that's helpful. And then maybe the other question that I had just pertains to, as you're rolling out the new products, whether it's on the transit side or the asset management solutions, maybe if you step back 12 months ago, how do you think you're tracking relative to kind of the expectations you set at that time and the attach rate or the success rate that you're getting right now from the clients. Just trying to gauge a bit of that momentum if it's possible, please?

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Scott E. Stewart, IBI Group Inc. - CEO & Director [29]

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I would say, in the TravelIQ world, which we launched 9 months ago, I believe, we are tracking very nicely. We already had a product in that marketplace, but it was structured more as a product that was unique to each client and tailored and installed for each client. The new model is that of a single platform made available through configuration to new clients and broadening our client offerings and the marketplace that we can operate in from instead of just being states and provinces into cities. It creates a whole new market opportunity for us in terms of the number of clients, but the price point is also quite different and the way to go-to-market is quite different. We are continuing to realize success, as I noted with Wisconsin and in Alaska. But I don't see that we will fully realize the extent of the objectives of TravelIQ for another year, given the investment that we're making in the product. In the InForm area, the big opportunity for us in the near term is that it's an adjunct to our architectural practice, our design practice. And as noted, we are applying it into the housing project here in Toronto, the 350 buildings. It -- that's the way we see going to market initially. It's through the architectural practice because, a, it distinguishes us on the architectural side to win that with and then sets up a long-term ongoing revenue stream from that. I see that as a bit of a slower success rate because, initially, we're going to be relying on -- or going through our architectural clients.

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Maxim Sytchev, National Bank Financial, Inc., Research Division - MD & AEC-Sector Analyst [30]

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Okay. No, that's very helpful. And then just last question for Steve, if I may. On -- how should we think about the free cash flow heading into Q4? I'm just trying to get the collections right from a working capital perspective, if it's possible?

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Stephen B. Taylor, IBI Group Inc. - CFO [31]

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Max, I think we've -- I said we think we can get to the $10 million of debt reduction. We're just over 3 to the end of the 9 months. We have been planning on a strong fourth quarter to get to the $10 million number. And I think we'll be able to achieve that. So the free cash flow coming out to reduce debt should be in excess of 3x what it was in Q3 in the last quarter. We've had very strong collection months in the last 45 days. It's been a very good period for us in terms of bringing in cash.

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Operator [32]

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There are no further questions at this time.

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Scott E. Stewart, IBI Group Inc. - CEO & Director [33]

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Okay. Well, thank you, everybody, for joining us this morning, and have a great weekend.

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Operator [34]

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That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.