CSU - Constellation Software

[mwtorock]

i have found glassdoor reviews or in general employee reviews to be highly correlated with perks and benefits the companies offer.  ;)

[Jerry Capital]

I noticed this press released form April 4 2011

 

"Constellation Software to evaluate strategic alternatives"

 

Admittedly not too relevant to today, but I do like knowing the history of companies that I own (and this was before I was involved in the company). Does anyone have any color on what the situation was and what they were thinking?

 

Thanks in advance.

 

http://www.csisoftware.com/2011/04/constellation-software-inc-to-evaluate-strategic-alternatives/

[Liberty]

I noticed this press released form April 4 2011

 

"Constellation Software to evaluate strategic alternatives"

 

Admittedly not too relevant to today, but I do like knowing the history of companies that I own (and this was before I was involved in the company). Does anyone have any color on what the situation was and what they were thinking?

 

Thanks in advance.

 

http://www.csisoftware.com/2011/04/constellation-software-inc-to-evaluate-strategic-alternatives/

 

You scared me for a second, I skimmed and clicked through and didn't notice the year, so I thought it was from two days ago...

[FiveSigma]

Yes, there used to be two large shareholders - OMERS and Birch Hill Equity Partners. I think they were the original backers of CSU and together held 20-30%.

 

They decided to get an 'exit' on CSU and, through their board representation, pushed for the company sale.

 

Mark Leonard briefly refers to this in his 2010 President's Letter (published on April 4th, 2011).

 

By total stroke of luck this happened around spring 2011 when markets suddenly corrected, spreads on debt blew out, and for some time the availability of financing to PE acquirers decreased, so no deal happened.

 

Once it became apparent that deal won't get done, they exited through a secondary offering of their entire stakes at $87.50 per share a year later.

 

I'll be honest, those were pretty anxious few months.

 

[Jerry Capital]

Five Sigma, thank you for that summary, I really appreciated it.

 

 

[Liberty]

https://25iq.com/2018/04/07/business-lessons-from-mark-leonard-constellation-software/

[chrispy]

Thanks for sharing Liberty. A high quality read which there aren't a whole lot of CSU or Leonard that I have found

[Shooter MacGavin]

I’m going to the $CSU.to AGM on April 26th.

 

Just booked train tickets and room. I’ll probably do ad hoc meetup/drinks at the C’est What on the evening of April 25th, like last year (will post about it closer to the date). Twitter and CoBF folks welcome to join!

 

http://www.cestwhat.com/directions

 

Awesome.  Thanks for arranging.  I'll be there.  Look forward to meeting in person

[KCLarkin]

Great news. I will be there.

[sane]

This week Corum published a recent interview with COO Mark Miller:

http://ow.ly/1kLX30jsWDW

 

 

[Shooter MacGavin]

This week Corum published a recent interview with COO Mark Miller:

http://ow.ly/1kLX30jsWDW

 

thanks this is great.

[Liberty]

This week Corum published a recent interview with COO Mark Miller:

http://ow.ly/1kLX30jsWDW

 

Thank you.

 

The rest of the interview is here:

 

https://overcast.fm/+efStk-TI

[SlowAppreciation]

I've been looking at this, and would appreciate any feedback on my thinking:

 

• Current Price: $690 USD
  
• If they cease all acquisitions tomorrow, and organically grow existing biz 3%/yr, DCF gives me around $450-$500 (10% hurdle rate)
  
• That leaves $200-$250 of value for yet-to-be-acquired businesses
  
• Historically ROIC has been around ~35-40%. If CSU can deploy capital at less than half that rate (call it 15%) in the future, that's easily another $100/share
  

 

So when using pretty conservative estimates of organic growth and ROIC, I get ~$550-$600/share. Current valuation doesn't seem too crazy.

[longlake95]

I too, did a back of the envelope valuation recently to get my head around CSU. Still more work to be done, but using similar conservative #'s I ended up with at steady state value of $650 ish USD ( bakes in the current growth rate for the next 5yrs ). When I sit back and look at CSU, it just doesn't seem "cheap". However, I have overlooked several great fast growing companies in the past because I didn't think they could continue to grow at such high rates. This seems to be in the same camp - except - I love Mark Leonard - he seems to be a better jockey than most. I think it's a matter of waiting for a pull back - then taking a small 1% work bench weighting. Then monitor and go from there. As you say, even if the ROIC's pull-in to the teen's range, that should provide a fine result over time for shareholders.

[Liberty]

Mark Leonard's letter to shareholders is out:

 

http://www.csisoftware.com/wp-content/uploads/2018/04/Presidents-Letter-April-2018-Final.pdf

[Liberty]

CSU also published its first written Q&A with analysts and shareholders:

 

http://www.csisoftware.com/wp-content/uploads/2018/04/QA-April-20-2018-Final-1.pdf

 

The first and last questions are mine. I'm liking this format already... Two questions answered vs. analysts mostly trying to fill cells in their Excel spreadsheets (to be fair, a few of them had consistently good questions, or by accident triggered good asides from management...).

[tripleoptician]

CSU also published its first written Q&A with analysts and shareholders:

 

http://www.csisoftware.com/wp-content/uploads/2018/04/QA-April-20-2018-Final-1.pdf

 

The first and last questions are mine. I'm liking this format already... Two questions answered vs. analysts mostly trying to fill cells in their Excel spreadsheets (to be fair, a few of them had consistently good questions, or by accident triggered good asides from management...).

 

Good questions Liberty and I agree this format is more useful than with the analysts.

Every time I read his annual letters I feel like I havent allocated enough with only a 7% holding!

 

 

 

[chrispy]

The new format is great.  It also shows how they are nimble and don't just do things because "that's they way we have always done it".  It is probably more fulfilling for them as well; similar to a band being able to connect and get feedback from their fans instead of answering to a reporter with zero interest in the music/culture.

 

It is quite clear that Leonard understands some shareholders are concerned with adjusted earnings and takes time to discuss and develop an alternative collectively.  He does not take it personally.  He seems like a very intelligent but humble individual; intellect - check, energy - check, integrity- check

[gary17]

Wish I could go!  Will follow on Twitter

[Shooter MacGavin]

Bummer My flight was delayed too.  I’ll head there for 7ish then

[Liberty]

Q1:

 

http://www.csisoftware.com/wp-content/uploads/2018/04/CSI-Press-Release-Q1-2018-Final.pdf

 

Q1 2018 Headlines:

 Revenue grew 29% (5% organic growth, 0% after adjusting for changes in foreign exchange rates) to $719 million compared to $555 million in Q1 2017.

 Adjusted EBITA increased $28 million or 21% to $159 million as compared to $131 million in Q1 2017.

 Net income increased 104% to $83 million ($3.90 on a diluted per share basis) from $40 million ($1.91 on

a diluted per share basis) in Q1 2017.

 Adjusted net income increased 51% to $143 million ($6.73 on a diluted per share basis) from $95 million

($4.46 on a diluted per share basis) in Q1 2017.

 A number of acquisitions were completed for aggregate cash consideration of $320 million (which includes

acquired cash). Deferred payments associated with these acquisitions have an estimated value of $47

million resulting in total consideration of $367 million.

 Cash flows from operations were $258 million, an increase of 42%, or $76 million, compared to $182

million for the comparable period in 2017.

 

Compare $320m in one quarter to the full-year numbers:

 

 

Looks like the new capital deployment plans are working so far.

[Liberty]

 

FX-adjusted organic growth for past 2 years (most important line is maintenance & other recurring, that’s where they really make money).

[SlowAppreciation]

Can someone help me understand the "Average Invested Capital" # in the annual letter? From the letter, it says Average Invested Capital is:

 

based on the Company’s estimate of the amount of money that our shareholders had invested in Constellation. Subsequent to that estimate, each period we have kept a running tally, adding Adjusted Net Income, subtracting any dividends, adding any amounts related to share issuances and making some small adjustments, including adjustments relating to our use of certain incentive programs and the amortization of impaired intangibles.

 

and for the past 5 years, it has been:

• 2017: $1622
  
• 2016: $1261
  
• 2015: $965
  
• 2014: $739
  
• 2013: $585
  

 

But the shareholder's equity from their financial statements has been a lot lower:

• 2017: $604
  
• 2016: $457
  
• 2015: $337
  
• 2014: $259
  
• 2013: $266
  

 

They aren't adding debt to the "Average Invested Capital" number, so any other idea why the discrepancy?

 

[Astrea]

I think the answer is that CSI are buying businesses with declining book values because of growing negative working capital and no need for incremental investment.

 

Let’s say that kind of business doubles its sales organically and, for simplicity, let’s assume this takes place during a period of zero inflation. That doubling of dollar sales immediately yields correspondingly more dollars in deferred revenues and payables which produces a larger negative working capital balance. So contrary to what happens at most businesses, working capital needs decrease in proportion to sales growth rather than increase. And the dollars employed in fixed assets don’t have to respond to the growth in sales as they would do in more mundane businesses because here growth requires no incremental investment. More negative working capital and a largely flat investment in fixed assets mean that net tangible assets decline and become increasingly irrelevant as the business grows.

 

 

[SlowAppreciation]

I looked at this again this morning, and I'm not sure that's it. I believe they're just saying adjusted income = true cash flow, and then they're adding that retained cash flow back to capital rather than GAAP income. Since adjusted income is higher than GAAP income, their total capital is also higher than GAAP book.