CSU - Constellation Software

[FiveSigma]

Q1 results are out:

 

https://www.globenewswire.com/news-release/2020/05/07/2030020/0/en/Constellation-Software-Inc-Announces-Results-for-the-First-Quarter-Ended-March-31-2020-and-Declares-Quarterly-Dividend.html

[Liberty]

FCF up 24%, tiny impairment of 5m (guessing some businesses they recently bought in the most impacted verticals (hotels, restaurants, travel?). Looks like it's chugging along...

 

The online AGM will be tomorrow morning (8 AM EST), for those who want to take part:

 

https://www.csisoftware.com/category/press-releases/2020/03/26/constellation-software-inc-announces-change-to-annual-general-meeting-format

 

Update: Meeting has started.

[walnut]

A worthwhile read on thinking about Constellation-type serial acquirers: 

[dutchman]

is there a recording of the meeting anywhere?

Thank you

[PJM]

 

"his idea of extreme overvaluation from the 2001 tech bubble is in the range of 5-6x revenue, and CSU is currently trading above that, at 6.54x revenue."

 

If a business with no profits and a very uncertain future is trading at 6x revenue, that's very different from a business with high FCF margins, very sticky cashflows, and a very high internal diversification by industry verticals and geography is trading at 6x revenue. The tech bubble took place in a very different context (nascent commercial internet) with different kind of companies (growth at any cost without profits or barriers to entry for most of them).

 

At a normalized FCF margin of 30% (which isn't too extravagant for this kind of software -- it can seem lower because they keep acquiring things that have lower margins, which has some transaction costs, and then they drive up margins over time), 6x sales is 20x FCF. Is 20x FCF that high for CSU when the SP500 trades where it trades and many other high quality businesses trade at 50x FCF? (look at TYL or MKTX or whatever).

 

If CSU is supposed to trade at 3x sales, that's like 10x FCF at 30% margins. Or 15x FCF at 20% margins. Does that make sense?

 

As for the JKHY example, if you go and look, JKHY peaked at 11.5x sales and 38.4x EBITDA in 2000, and yet it only just barely underperformed the SP500 by 1% over the next 10 years. That seems a positive data-point to me. I'd say that we're not in a 2000-like tech bubble right now.

 

Mark is used to buying VMS at 1-2x sales, so 6x sales sounds very high. But CSU isn't a VMS. These businesses don't have reinvestment opportunities, they are mostly cash cows that grow at maybe 1-2x GDP. CSU has a long-track record of high ROIC re-investment, which makes its cashflows worth a lot more than the cashflows for a single VMS.

 

 

Hi - Was just going through this thread while reading Mark's letters. How did you get 30% FCF Margin? Yes you are right that 30% FCF margin is not extravagant in software business but historically CSU has been around 20% margin and given very low or negative top line organic growth, how do you expect CSU to increase the FCF Margin, also considering the fact that most units are run independently without trying to do any cost rationalisation? Thanks

[Liberty]

 

"his idea of extreme overvaluation from the 2001 tech bubble is in the range of 5-6x revenue, and CSU is currently trading above that, at 6.54x revenue."

 

If a business with no profits and a very uncertain future is trading at 6x revenue, that's very different from a business with high FCF margins, very sticky cashflows, and a very high internal diversification by industry verticals and geography is trading at 6x revenue. The tech bubble took place in a very different context (nascent commercial internet) with different kind of companies (growth at any cost without profits or barriers to entry for most of them).

 

At a normalized FCF margin of 30% (which isn't too extravagant for this kind of software -- it can seem lower because they keep acquiring things that have lower margins, which has some transaction costs, and then they drive up margins over time), 6x sales is 20x FCF. Is 20x FCF that high for CSU when the SP500 trades where it trades and many other high quality businesses trade at 50x FCF? (look at TYL or MKTX or whatever).

 

If CSU is supposed to trade at 3x sales, that's like 10x FCF at 30% margins. Or 15x FCF at 20% margins. Does that make sense?

 

As for the JKHY example, if you go and look, JKHY peaked at 11.5x sales and 38.4x EBITDA in 2000, and yet it only just barely underperformed the SP500 by 1% over the next 10 years. That seems a positive data-point to me. I'd say that we're not in a 2000-like tech bubble right now.

 

Mark is used to buying VMS at 1-2x sales, so 6x sales sounds very high. But CSU isn't a VMS. These businesses don't have reinvestment opportunities, they are mostly cash cows that grow at maybe 1-2x GDP. CSU has a long-track record of high ROIC re-investment, which makes its cashflows worth a lot more than the cashflows for a single VMS.

 

 

Hi - Was just going through this thread while reading Mark's letters. How did you get 30% FCF Margin? Yes you are right that 30% FCF margin is not extravagant in software business but historically CSU has been around 20% margin and given very low or negative top line organic growth, how do you expect CSU to increase the FCF Margin, also considering the fact that most units are run independently without trying to do any cost rationalisation? Thanks

 

Steady state margin would likely be in that range. Margin is depressed by acquisitions because it takes time for their margin to be brought up after acquisition (they do cost rationalization and implement best practices and sometimes get rid of low value things like hardware sales or consulting), plus acquisition costs.

[Liberty]

Acquisition in Spain by TSS:

 

https://www.totalspecificsolutions.com/about-us/transaction-updates?tid=57

 

Spyro, one of the leading suppliers of software solutions for the Spanish manufacturing vertical, has joined Total Specific Solutions (‘TSS’). This is the second company in Spain to join the European VMS group, following Ofimática, and the third in the industry vertical.

 

The VMS company Spyro has a flagship software product for industry and specifically for the machine tooling and metal casting sectors. Their core product is an ERP solution called Spyro, which is a multifunctional suite covering the strategic, production, management, and support processes for the industrial sector. Spyro ERP gives clients further control over the entire supply chain, helping them manage the operational processes as well. And it provides online mobile add-ons for direct access and ease of use.

 

"65 employees

250+ customers

35 years"

 

h/t @pearnick

[Liberty]

Perseus acquisition in the US, consolidating two competitors:

 

https://www.tune.com/blog/new-ownership-expands-tunes-market-position/

 

TUNE is the second acquisition in performance marketing under the Perseus Operating Group within Constellation. You might recall that the first was CAKE last year, TUNE’s longest-standing rival in affiliate software. We have often considered what a merger or consolidation might look like with CAKE, and now we’ll be joining forces with the backing of a major acquirer behind us. While TUNE and CAKE have different approaches to the market, we have an incredible amount of learnings, opportunities, and efficiencies we can now share. Combining this know-how, our market share, and plans for more acquisitions in performance marketing, I believe we’ll be able to deliver better, more sustainable software for our customers than ever before. Needless to say, TUNE and CAKE playing on the same team is a really big deal to those that know our ecosystem, and I can’t wait to see many more acquisitions on the horizon.   

 

"LinkedIn shows 166 employees"

 

h/t @pearnick

[Liberty]

TSS combining with Topicus:

 

https://www.globenewswire.com/news-release/2020/05/20/2036291/0/en/Constellation-Software-Inc-Reaches-Agreement-to-combine-its-TSS-Operating-Group-With-Topicus-com-to-form-a-new-Operating-Group.html

 

to purchase 100% of the shares of Topicus.com B.V. (“Topicus”), a Netherlands-based diversified vertical market software provider. 

 

Once the transaction is completed, TSS and Topicus will operate together under the operating group name “Topicus.com”. Under the guidance of Constellation, Topicus.com intends to explore opportunities for a future public listing of its shares.  Pursuant to such listing, it is anticipated that Constellation would remain a significant shareholder of Topicus.com, and that the current Constellation shareholders would be entitled to receive, pro rata and via dividend, common shares in Topicus.com.

 

The purchase of Topicus will be financed with TSS’ cash on hand and its existing revolving line of credit and requires no funding from Constellation.  Consideration will be in the form of a cash payment plus the issuance to the Seller of approximately 9% of the shares of the new operating group Topicus.com (the merged TSS and Topicus economic entity).  Annual gross revenues of Topicus for 2019 were approximately €101M and total tangible assets at December 31, 2019 were approximately €7M.  Topicus employs approximately 1,000 employees (870 full time equivalents).  The transaction is currently expected to close in 2020, subject to the satisfaction of certain standard closing conditions including clearance from the Dutch Competition Authority.

 

Mark's funny:

 

Mark Leonard, President of Constellation, said: “I cannot think of another vertical market software company that has achieved Topicus' size without using outside shareholder funding.  I look forward to spending more time with the Topicus founders as travel becomes easier.  I'm an old dog, but I'm certain that they have new tricks to teach me. More importantly, they have experience and practices that can benefit all of the Constellation operating groups.

[Liberty]

CSU CFO told me about the Topicus listing: "We are still working on this, but will definitely list on a Canadian exchange." (also told me I could share the info)

[Jurgis]

CSU CFO told me about the Topicus listing: "We are still working on this, but will definitely list on a Canadian exchange." (also told me I could share the info)

 

You'll have to create another topic for it then.  8)

[Liberty]

CSU CFO told me about the Topicus listing: "We are still working on this, but will definitely list on a Canadian exchange." (also told me I could share the info)

 

You'll have to create another topic for it then.  8)

 

Create a new... TOPICUS  8)

 

:-X

[LC]

CSU CFO told me about the Topicus listing: "We are still working on this, but will definitely list on a Canadian exchange." (also told me I could share the info)

 

You'll have to create another topic for it then.  8)

 

Create a new... TOPICUS  8)

 

:-X

 

Incredible how a history of years of quality contribution....can be evaporated in one comment.  ;D

 

More to the point. I want to own CSU. How do you suggest thinking about valuation? Obviously it is very acquisition heavy. Do we have a sense of how acquired companies are performing over time? I think the software roll up biz is a good one. Also one other item is, how do you think about Leonard's age in terms of key man risk?

[Liberty]

Incredible how a history of years of quality contribution....can be evaporated in one comment.  ;D

 

¯\_(ツ)_/¯

 

More to the point. I want to own CSU. How do you suggest thinking about valuation? Obviously it is very acquisition heavy. Do we have a sense of how acquired companies are performing over time? I think the software roll up biz is a good one. Also one other item is, how do you think about Leonard's age in terms of key man risk?

 

Have you read this thread? I think these points have been discussed.. I'd also recommend the president's letters and the transcripts of the AGMs. It all helps think about what the company is worth, which you can then compare to the price the market is asking for it vs your own personal hurdle.

[LC]

I've followed the thread lightly over the years and yes valuation methodology has been discussed in the past, was wondering if your perspective has changed in the recent year or so.

[Liberty]

I've followed the thread lightly over the years and yes valuation methodology has been discussed in the past, was wondering if your perspective has changed in the recent year or so.

 

Not really changed too much. I'm glad to see the progress of the KYC and decentralization of capital deployment experiments, and of geographical expansion into new areas. How that works out will have an impact on valuation, so it's something to track.

[arcube]

CSU CFO told me about the Topicus listing: "We are still working on this, but will definitely list on a Canadian exchange." (also told me I could share the info)

 

How much do you think CSU owners will hold in the the spinoff entity?

[Liberty]

Interview with CEO of Topicus (in Dutch, can use Google Translate):

 

https://managementscope.nl/magazine/artikel/1371-daan-dijkhuizen-topicus-semipublieke-sector

 

The corona crisis also gives the company the wind in its sails. Ceo Daan Dijkhuizen: 'In a week, the number of users rose to a number that we hoped to reach in 2025.'

 

No, the reason for the crowds is that there is a lot of demand now for the applications, platforms and systems that the company has developed in recent years for government, healthcare and education. Topicus is also a service provider to RIVM, the government body that fights the pandemic caused by the coronavirus. For example, Topicus is building a platform that must record, analyze and merge research information from seven laboratories. The aim is to test approximately 500,000 healthcare workers, after which the test group may be expanded. Such semi-public assignments require great haste. 

 

The company has increased tenfold in the number of employees over the past ten years and is therefore the fastest growing employer in Overijssel.

decentralized structure of the company: employees form groups of seven to ten people, each with a relatively independent market focus. The groups are free to develop and exploit their own products - the pioneers also have the opportunity to take an interest.

 

With an average employment of eight years, the company turns out to be an attractive employer.

 

Take our video service Spreekuur.nl, which makes digital appointments with your GP possible. Since the quarantine, that service, which was intended to be used especially during evening shifts at the out-of-hours GP post, has often been used in the day shift.

 

Take our product Gynzy, an online platform where primary school students can practice core subjects. In recent years we have had to make a lot of effort to have 50,000 children on that platform. Now we saw the number of users increase from 50,000 to 300,000 students in a week, a number that we hoped to reach in 2025.

 

Parro, our messaging application for education linked to the education administration system ParnasSys, processed about 300,000 messages every ten minutes up to the quarantine measures. Now more than a million messages are sent every ten minutes.

 

Until the outbreak of COVID-19, acquisition around Gynzy meant for us that we went school after school to talk to the most digitally skilled teacher. Primary schools are simply organized locally. Acquiring customers was slow - around 14 percent of primary schools used our software. Now demand is increasing rapidly, towards 50 percent of primary schools.

 

In 2015, the company had 47 cells with 37 different company names. This caused problems with customers, who could be approached individually by our cells and subsequently discovered that they were contacting one and the same company. To avoid that kind of inconvenience, we have centralized more and adopted Topicus as the umbrella name.

 

The question of what an appropriate degree of centralization is for us has been a source of debate every day ever since. The balance between central and local needs permanent maintenance with us

 

 In the company, 25 employees - some of whom are responsible for our products ParnasSys and Somtoday - have an equity interest in their cells. Such a co-investment usually arises as an internal startup, from an idea of one of our employees. From that idea a product can emerge, which can become a company again. If we believe in this, the initiator will have a chance to build capital with it. We take care of the financing.

 

Via

[chrispy]

I finally got to catch up on this - exciting development.  Sounds like a great organization

[Liberty]

Pearnick has found more good stuff on Topicus, I'll just post a link to his thread here:

 

[gary17]

This feels like a good acquisition to me.

[villainx]

This feels like a good acquisition to me.

 

This is a big-ish acquisition?  Like needle moving type?

[Liberty]

This feels like a good acquisition to me.

 

This is a big-ish acquisition?  Like needle moving type?

 

We don’t have the exact financials, but it’s likely their biggest deal since TSS, and this sounds like a faster organic grower than their usual.

[chrispy]

and more dutchies, lets gooo

[stockkevin]

Still a good buy at these prices? What's the probability this will double in the next 3 years?