CSU - Constellation Software

[Liberty]

They break out the organic growth in the MD&A:

 

 

Note that most of the value comes from the maintenance and recurring line, which is the sticky, high-margin revenue. They will often reduce or cut less profitable professional services and hardware sales at acquired companies if they don't feel it creates enough value, so it can be a headwind to the aggregate number without affecting much how much economic value is being created.

[jschembs]

They break out the organic growth in the MD&A:

 

 

Note that most of the value comes from the maintenance and recurring line, which is the sticky, high-margin revenue. They will often reduce or cut less profitable professional services and hardware sales at acquired companies if they don't feel it creates enough value, so it can be a headwind to the aggregate number without affecting much how much economic value is being created.

 

I'm sure you're the most knowledgeable CSU follower on COBF, so I'm curious how you model this business over the longer term? Even the sticky organic revenue only grows at 3-4% annually. Also, if the sticky, high-margin revenue represents an increasingly large proportion of legacy revenue, why do EBIT margins hover around 15% (which also seems quite low for a collection of slow-growth software businesses)?

 

Do you add back the acquisition-related intangibles in thinking about FCF? Seems for a core business growing 0-3% annually, that is heavily reliant on acquisitions to deliver the growth that the multiple is predicated upon, those are real expenses. I remember folks arguing VRX intangibles should be added back because they weren't ongoing expenses, which is true, but not consistent with the economics of a serial acquirer. I'm not implying this is VRX, just curious your view on the intangible expenses.

[Liberty]

I think this has been discussed earlier in this thread. Probably not a good use of time to go over it de novo. There's also a shareholder letter where Mark goes over amortization.

[Liberty]

Looks like more details on the larger one that was press-released at the CSI level not that long ago:

 

https://www.globenewswire.com/news-release/2019/07/17/1884292/0/en/Volaris-Group-a-Constellation-Software-Company-Completes-Acquisition-of-MDS-Global-Ltd.html

 

 

[jschembs]

I think this has been discussed earlier in this thread. Probably not a good use of time to go over it de novo. There's also a shareholder letter where Mark goes over amortization.

 

Great, thanks!

[sane]

If the MDS Global acquisition cost at least $50 million that makes valuation at least 11x free cash flow ($4.5 million, adj. EBITDA $4.8 million) and 1.7x sales ($29 million: all FYE Dec 2018).  Course it could be much higher. 

 

16.3% adj. EBITDA margins, 89% of sales in UK with rest also to Europe. 

 

Seller was 66 year old founder, with non-owner exec team in place.

 

"Gary Bunney, who remains the CEO of MDS Global, said, “We are very excited by this acquisition. As part of the Volaris family of companies, we can further invest in, and grow, our business. We are now part of a larger network of like-minded organizations dedicated to delivering world-class solutions in very specific and focused industries. This will allow us to scale more rapidly beyond our historical base in the UK and Europe to address the needs of new disruptive MVNOs, IoT providers, and next-generation B2B operators across the globe.”  https://www.mdsglobal.com/2019/07/18/volaris-acquires-mds-global-adding-a-market-leading-cloud-based-bss-platform-to-their-communications-and-media-portfolio/

[Liberty]

If the MDS Global acquisition cost at least $50 million that makes valuation at least 11x free cash flow ($4.5 million, adj. EBITDA $4.8 million) and 1.7x sales ($29 million: all FYE Dec 2018).  Course it could be much higher. 

 

16.3% adj. EBITDA margins, 89% of sales in UK with rest also to Europe. 

 

Seller was 66 year old founder, with non-owner exec team in place.

 

"Gary Bunney, who remains the CEO of MDS Global, said, “We are very excited by this acquisition. As part of the Volaris family of companies, we can further invest in, and grow, our business. We are now part of a larger network of like-minded organizations dedicated to delivering world-class solutions in very specific and focused industries. This will allow us to scale more rapidly beyond our historical base in the UK and Europe to address the needs of new disruptive MVNOs, IoT providers, and next-generation B2B operators across the globe.”  https://www.mdsglobal.com/2019/07/18/volaris-acquires-mds-global-adding-a-market-leading-cloud-based-bss-platform-to-their-communications-and-media-portfolio/

 

A little more details:

 

 

 

 

"MDS signed three new customers outside the UK in late 2018, including one £8M contract (there aren't a lot of telecos out there...). They also extended contracts with their biggest customers for the next 3-5 years, one of them = £8.8M"

 

 

Looks to me like they're paying for some of that forward revenue.

 

And if they expect that they can eventually bring margins to company average, the multiple is further reduced by a significant amount.

 

Chances are that the effective multiple is within their traditional range.

[sane]

Looks to me like they're paying for some of that forward revenue.

 

And if they expect that they can eventually bring margins to company average, the multiple is further reduced by a significant amount.

 

Chances are that the effective multiple is within their traditional range.

 

Agreed.  Thanks for the links.

[Liberty]

Another press release at the CSI level, which should denote $50m+:

 

https://www.csisoftware.com/docs/default-source/press-releases/tss-signing---acquisition---july-2019.pdf

 

H/t @pearnick

[Liberty]

Acquisition at Harris:

 

https://www.harriscomputer.com/en/news/?data-ipsquote-timestamp=1563854400&article=harris-rsquo-local-government-division-acquires-ims-enterprises-inc-

 

IMS Enterprises Inc., a division of Harris Local Government, is a full-service credit and debit payment processor that specializes in providing payment processing software solutions to government and public sector organizations.

 

h/t @pearnick

[Liberty]

Volaris published something on their acquisitions so far this year:

 

https://explore.volarisgroup.com/acquisitions/h1-2019-acquisition-update

 

In the first half of 2019 Volaris Group acquired over a dozen businesses in diverse verticals and geographies. New to Volaris Group are 2 vertical market software companies in Latin America, 2 in Australia, 5 in Europe, and 5 in North America. Volaris strengthened its presence in its core markets and entered the Healthcare, Social Welfare and Banking verticals.

[Liberty]

One at Vela in Australia:

 

https://independentsolutions.com.au/vela-software-group-acquires-independent-solutions/

 

H/t @pearnick

[Liberty]

New acquisition at Volaris, this one in Australia:

 

https://www.volarisgroup.com/news/article/volaris-group-welcomes-valuepro-to-property-valuation-vertical

 

Volaris today announced that it has acquired ValuePRO Software Pty Ltd. (ValuePRO) based in Brisbane, Australia. ValuePRO is a leader in enterprise-grade software platforms for Property Valuers and represents Volaris’ first company in the Property Valuation vertical.

 

ValuePRO offers property valuation professionals around the world a proven, easy to use and feature-rich platform for running their business. “ValuePRO has built a reputation for reliability, great customer service and market-leading innovation over the past 15 years”, said Piers Macrae Cockram, Founder & CEO of ValuePRO. “Now as part of Volaris, we can invest even further and faster in strengthening our product and growing our platform for the mutual benefit of all of our customers, partners and hardworking team.”

 

h/t @pearnick

[Liberty]

TSS buys one in France:

 

https://www.globenewswire.com/news-release/2019/08/01/1895625/0/en/Total-Specific-Solutions-a-Constellation-Software-Company-Completes-Acquisition-of-Salvia-Développement-SAS.html

 

"a French provider and integrator of software solutions for private companies, real estate- and local public entities."

[Liberty]

CSU Q2:

 

https://www.csisoftware.com/docs/default-source/press-releases/csi---press-release-q2-2019---final.pdf

 

A number of acquisitions were completed for aggregate cash consideration of $82 million (which includes acquired cash). Deferred payments associated with these acquisitions have an estimated value of $28 million resulting in total consideration of $110 million.

 

Subsequent to June 30, 2019, the Company completed or entered into agreements to acquire a number of businesses for aggregate cash consideration of $190 million (which includes acquired cash). Deferred payments associated with these acquisitions have an estimated value of $30 million resulting in total consideration of $221 million.

 

Ex-FX, CSU's organic growth for licenses and maintenance were 8% and 4% respectively in Q2. It's professional services and hardware (lower ROIC, less valuable businesses that they sometimes cut on purpose after acquisitions) that dragged things down. Looks solid to me.

 

 

Private sector organic growth of licenses ex-FX was 20% in Q2. That's after being 11% and 18% the previous two Qs sequentially. Some big sales going on there...

[Liberty]

New acquisition at Jonas:

 

https://www.newswiretoday.com/news/171105/Jonas-Software-Announces-the-Acquisition-of-ITWERCS-Point-of-Sale/

 

“We are thrilled to welcome the ITWERCS team into the Jonas family,” says Matt Otchet, Portfolio CEO at Jonas. “ITWERCS adds a tremendous platform to our growing POS portfolio. They have developed cutting edge technology serving the needs of food and beverage professionals in a multitude of business environments from quick serve to fine dining.”

 

ITWERCS CEO Chris Duncan had this to say,“We are eager to work with Jonas to continue building on and growing the ITWERCS business. Myself and our employees have already been impressed with what we’ve seen so far, and are excited to realize the opportunities that are possible with Jonas’ backing and resources.”

 

About ITWERCS

 

ITWERCS (itwercs.com) was founded in 2016 in Marietta, Georgia, USA. Their cloud platform was originally launched in 2007 inside a major restaurant brand and provides a robust and comprehensive solution which covers POS, payments, kitchen display systems, scheduling, inventory, marketing & loyalty, and waitlist & reservations.

[Liberty]

A few more from earlier this month:

 

https://www.volarisgroup.com/news/article/volaris-group-enters-the-isv-vertical-with-acquisition-of-akuiteo

 

Volaris Group Inc. (“Volaris”) today announced that it has acquired Akuiteo Développement (“Akuiteo”) based in Lyon, France. Akuiteo is a leading provider of SaaS based software for software manufacturers and represents Volaris’ first company in the ISV (independent software vendor) vertical.

 

https://www.volarisgroup.com/news/article/volaris-group-welcomes-portfolio-to-banking-credit-union-vertical

 

Portfolio+ connects financial institutions with customers and partners using innovative technologies. Its banking software & digital financial solutions are widely used by financial institutions and represents Volaris’ third company in the Banking and Credit Union vertical.

 

https://www.totalspecificsolutions.com/about-us/transaction-updates?tid=46

 

Total Specific Solutions (“TSS”) has taken its first steps into the domain of legal content management and distribution with the acquisition of Square Information Solutions, supplier of solutions for libraries and knowledge centers. Square focuses especially on the public sector and law firms. By joining TSS, Square takes the next step in its growth.

Square began developing information management software solutions in the seventies. One of its products is BIBIS, a library system to register (e-)books, and other documentation. EASY is a portal to search simultaneously online and in internal information sources. And Square has XPOSI, a publisher independent software solution for the use of e-books. Furthermore, it also offers additional products such as SIGN.

 

h/t @pearnick

[Liberty]

One more at the real estate group:

 

https://www.prweb.com/releases/the_constellation_real_estate_group_acquires_assets_of_smartzip/prweb16512401.htm

 

The Constellation Real Estate Group (“CREG”), has announced today that it has acquired certain assets of SmartZip Analytics Inc. (“SmartZip”), a pioneer in predictive analytics and award-winning provider of data-driven marketing automation and lead generation products for the real estate industry.

 

The acquisition includes SmartZip’s SmartTargeting platform, patent-pending predictive analytics, data solutions, and automated referral-building content system, Reach150. The addition of SmartZip, which closely follows the recent acquisition of the Offrs.com business in July, marks CREG’s second predictive analytics company and fourth new portfolio business in 2019, and aligns with CREG’s strategy of investing in forward-thinking technology companies with a focus on strong solutions and its commitment to being a long-term, stable technology partner for the real estate industry.

[Liberty]

Looks like a distressed asset acquisition in France by Harris:

 

https://www.cegedim.com/Communique/Cegedim_Pulse_Disposal_20190828_ENG.pdf

 

"According to Cegedim's website, Pulse Systems consists of 6 healthcare software products."

 

H/t @pearnick

[sane]

Liberty, do you recall Mark Leonard writing about newspapers as an attractive business?  At this year's AGM, when asked about non-VMS acquisitions, he made a random reference to newspapers.  I cannot understand if he was joking.  Are you familiar with the reference he made?

 

"So we have been looking for some other companies that have been able to find multiple platforms around which they have been able to do significant numbers of acquisitions because we think that that is stuff that we would be good at.  And we have found a few.  The difference between companies that succeed in one vertical and just rolling up or buying up in one vertical, and those that do it in multiple verticals is something that I don’t yet understand.  But I suspect from what I have seen so far is just that they run out of space in the little vertical that they chose as their first one.  And they end up going to a second and a third etc.  So I am trying to study them and figure out what other people have done and how they might have blown their brains out and how we can avoid doing that – the brains blowing out part – ourselves as we start to look around for other things to do other than Vertical Market Software.  That newspaper thing that I wrote about sounded kind of cool, maybe we can do that."

[Liberty]

Liberty, do you recall Mark Leonard writing about newspapers as an attractive business?  At this year's AGM, when asked about non-VMS acquisitions, he made a random reference to newspapers.  I cannot understand if he was joking.  Are you familiar with the reference he made?

 

"So we have been looking for some other companies that have been able to find multiple platforms around which they have been able to do significant numbers of acquisitions because we think that that is stuff that we would be good at.  And we have found a few.  The difference between companies that succeed in one vertical and just rolling up or buying up in one vertical, and those that do it in multiple verticals is something that I don’t yet understand.  But I suspect from what I have seen so far is just that they run out of space in the little vertical that they chose as their first one.  And they end up going to a second and a third etc.  So I am trying to study them and figure out what other people have done and how they might have blown their brains out and how we can avoid doing that – the brains blowing out part – ourselves as we start to look around for other things to do other than Vertical Market Software.  That newspaper thing that I wrote about sounded kind of cool, maybe we can do that."

 

I'm sorry, I don't remember the context of what he's referring to right now. I doubt he meant that he thinks newspapers are a good space, it's probably something else or a joke, IMO. Maybe it'll come back to me, or someone else remembers.

[Jerry Capital]

He discussed this in his 2017 letter. So I think the context may be a joke. See attached.

[sane]

Great, that makes sense.  Thanks both of you for your replies.  One more question on this subject to anyone interested:

 

"When we do invest in another sector, we’ll keep it as quiet as legally possible."  https://www.csisoftware.com/docs/default-source/investor-relations/shareholder-q-a/qa-september-2018-final.pdf 

 

What "legal" obligations would they have to disclose a non-VMS acquisition?  Their current policy of a $50 million acquisition threshold for disclosure, or..? 

[Liberty]

Volaris acquisition in Australia:

 

https://www.volarisgroup.com/news/article/expanding-risk-and-compliance-offerings-acquisition-of-holocentric

 

Holocentric provides organisations with solutions to help capture, understand, change and optimise every detail of their business – from strategy, people, and processes to compliance obligations. Volaris saw Holocentric as a great opportunity to work with a mature organisation with great leadership and a blue chip client base.

 

h/t @pearnick

[Liberty]

Another one at Harris too:

 

https://www.harriscomputer.com/en/news/?data-ipsquote-timestamp=1567742400&article=harris-school-solutions-acquires-castle-learning

 

Harris Computer Corporation, through its Schools Group, has acquired Castle Software, Inc (Castle Learning), a software company focused on providing content specific learning technologies. Castle Learning will be integrated into the Harris Education Solutions business. Castle Learning’s former president, Scott Fischer, will take on the role of Director of Business Development and become a vital part of the Harris Education Solutions leadership team.

 

Also one at Jonas:

 

https://www.jonassoftware.com/About_Us/Latest_News/Jonas_Software_Announces_Acquisition_of_Uniware

 

Uniware is the leading, proven provider of EPoS systems for the hospitality and retail industries with more than 600 customers worldwide. Uniware is passionate about providing EPoS & Payment solutions that enable clients to maximize revenue, improve customer loyalty and increase stride within their hospitality & retail businesses.

 

One at Vela too:

 

https://www.fogsoftwaregroup.com/fog-acquires-volo-commerce/

 

UK-based Volo Origin is a powerful, multi-channel e-commerce platform with a broad feature set that has been serving customers for over 15 years in the UK and abroad. FOG has deep retail and e-commerce experience and saw the Volo Origin platform as a great opportunity to expand its reach into the UK market with a strong product and a dedicated, passionate team.

 

h/t @pearnick