CSU - Constellation Software

[Liberty]

And another one:

 

http://www.pennenergy.com/articles/pennenergy/2017/07/oil-and-gas-news-petrosys-announces-acquisition-by-vela.html

 

Oil and gas technology company Petrosys is pleased to announce its acquisition by Vela Corporation, a subsidiary of Canadian public company Constellation Software Inc.

[Liberty]

And another one:

 

http://m.marketwired.com/press-release/-2226880.htm

[Astrea]

I’ve seen that Tyler Technologies is having great success growing organically with products that are both capable and national in scope. At its last analyst conference, Tyler also explained that its ultimate objective is to add a layer of connectivity between its applications to create a “Tyler ecosystem” for local government that its competition would find hard to replicate.

 

On the other hand, Constellation Software seems to be pursuing a more local (“small is beautiful”) strategy; in other words offering capable products that are more local in scope.

 

I understand there are many different types of verticals within the public sector and so perhaps Tyler’s model works better in certain verticals whilst Constellation’s works better in others. I’d however be interested to hear your thoughts on whether you see both kinds of models co-existing successfully in the public sector going forward or whether you see Tyler’s model increasingly winning share as it scales and rolls out national products in markets which were previously serviced by local providers like Constellation’s group of businesses.

 

[Liberty]

Q2:

 

http://www.csisoftware.com/wp-content/uploads/2017/07/PR_Q2_2017.pdf

 

Q2 2017 Headlines:

 Revenue grew 14% (1% organic growth, 2% after adjusting for changes in foreign exchange rates) to $600 million compared to $529 million in Q2 2016.

 Adjusted EBITA increased $24 million or 18% to $155 million as compared to $131 million in Q2 2016.

 Adjusted Net Income increased 25% to $112 million ($5.30 on a diluted per share basis) from $90 million

($4.24 on a diluted per share basis) in Q2 2016.

 Net income decreased 7% to $51 million ($2.41 on a diluted per share basis) from $55 million ($2.60 on a

diluted per share basis) in Q2 2016.

 Sixteen acquisitions were completed for aggregate cash consideration of $71 million (which includes

acquired cash). Deferred payments associated with these acquisitions have an estimated value of $14

million.

 Cash flows from operations were $60 million, a decrease of 17%, or $13 million, compared to $73 million

for the comparable period in 2016.

 

I had forgotten about it, but they have an option to buy the minority stake in TSS in 2024.

 

Also, In the first six months of 2017 vs 2016, they used $131m for acquisitions vs $72.9m during the same period last year.

[Liberty]

https://globenewswire.com/news-release/2017/08/03/1072359/0/en/Constellation-Software-Announces-Appointment-of-Lawrence-Cunningham-to-its-Board-of-Directors.html

 

Constellation Software Announces Appointment of Lawrence Cunningham to its Board of Directors

 

[Astrea]

That's interesting. I remember chatting to him at the CSU AGM this year and he was very positive about CSU's culture and decentralised model (he'd just prepared a report on this subject for the board). It was comforting to hear this from someone like him who'd been able to "take a look under the hood" of this rather unique roll-up story.

[Liberty]

http://www.csisoftware.com/2017/08/volaris-group-a-constellation-software-company-completes-acquisition-of-insurance-software-provider/

 

Volaris completed the acquisition of BBT Software AG (“BBT”), a provider of Insurance software based in Switzerland. BBT joins Primoris, Silvervine, Travisoft and Wellington IT in Volaris’ Financial Services vertical.

 

A little more info here:

 

http://www.bbtsoftware.ch/en/about-us.html

[clutch]

Just curious, how do you make sense of these acquisitions in general? Are you just following up with what they are doing or are you measuring these up against some particular thesis?

 

I've owned CSU before but it was pretty much  based on the blind faith on the CEO / business model / industry. I'm curious if you have some other ways of assessing their business based on their individual actions?

[Liberty]

Just curious, how do you make sense of these acquisitions in general? Are you just following up with what they are doing or are you measuring these up against some particular thesis?

 

I've owned CSU before but it was pretty much  based on the blind faith on the CEO / business model / industry. I'm curious if you have some other ways of assessing their business based on their individual actions?

 

I keep track of how much capital they deploy each quarter/year to see trends, and I keep an eye on press-released acquisitions because I know these are >$10m, so if over time their number increases, that's another good sign. It's also interesting to see which industries they deploy capital in.

 

But in general, you can't track things at the BU level, you have to look at the aggregate. In the end what matters is organic growth (especially in maintenance revenue -- they're ready to sacrifice other things to focus on the high-margin, recurring stuff), capital deployed, ROIC, and whether they can land a big company like TSS once in a while. Leonard also provides extra info once in a while about what's going on underneath the aggregate-level numbers. For example, he talked about some large shrinking assets that they bought in the past few years that made organic growth look low, but they were still meeting their hurdles on these assets (in other words, they got them cheap enough that the IRRs are still high -- I think it's very good that they'd rather create value than focus on the optics).

[Liberty]

http://www.csisoftware.com/2017/09/2778/

 

has acquired the business of Amazing Charts, LLC (“Amazing Charts”), a business providing Electronic Medical Record (EHR), Practice Management (PM) software and Medical Billing services to primary care and specialty outpatient practices. Amazing Charts is an affordable and easy to use solution for independent physician-owned practices. Nearly 4,000 medical practices (20,000 clinicians and office staff) are using Amazing Charts throughout the U.S. and abroad to enhance patient care and improve practice operations.  Jerry Canada, President Harris Healthcare Group, commented, “The completion of the Amazing Charts acquisition represents another step in our efforts to expand our outpatient focused software business unit. We are excited to add such a large number of general and specialty practices while increasing our internal team of knowledgeable healthcare professionals.”

[clutch]

Just curious, how do you make sense of these acquisitions in general? Are you just following up with what they are doing or are you measuring these up against some particular thesis?

 

I've owned CSU before but it was pretty much  based on the blind faith on the CEO / business model / industry. I'm curious if you have some other ways of assessing their business based on their individual actions?

 

I keep track of how much capital they deploy each quarter/year to see trends, and I keep an eye on press-released acquisitions because I know these are >$10m, so if over time their number increases, that's another good sign. It's also interesting to see which industries they deploy capital in.

 

But in general, you can't track things at the BU level, you have to look at the aggregate. In the end what matters is organic growth (especially in maintenance revenue -- they're ready to sacrifice other things to focus on the high-margin, recurring stuff), capital deployed, ROIC, and whether they can land a big company like TSS once in a while. Leonard also provides extra info once in a while about what's going on underneath the aggregate-level numbers. For example, he talked about some large shrinking assets that they bought in the past few years that made organic growth look low, but they were still meeting their hurdles on these assets (in other words, they got them cheap enough that the IRRs are still high -- I think it's very good that they'd rather create value than focus on the optics).

 

Thanks for the answer.

[Liberty]

“Volaris Group announced that it has completed its sixth acquisition in the Communications vertical“

 

http://www.marketwired.com/press-release/volaris-group-expands-position-communications-vertical-with-acquisition-mdm-kaas-assets-2235582.htm

[Liberty]

“Volaris Group Welcomes Edumate to Education Vertical”

 

http://www.marketwired.com/press-release/volaris-group-welcomes-edumate-to-education-vertical-2235755.htm

[Liberty]

One more for Harris:

 

https://globenewswire.com/news-release/2017/10/26/1154385/0/en/Constellation-Software-s-Harris-Division-Completes-Acquisition-of-Offender-Management-Systems-Provider.html

[Liberty]

Q3:

 

http://www.csisoftware.com/wp-content/uploads/2017/10/CSI-Press-Release-Q3-2017-Final.pdf

 

Q3 2017 Headlines:

 Revenue grew 17% (4% organic growth, 2% after adjusting for changes in foreign exchange rates) to $637 million compared to $546 million in Q3 2016.

 Adjusted EBITA increased $21 million or 15% to $162 million as compared to $140 million in Q3 2016.

 Net income decreased 20% to $54 million ($2.56 on a diluted per share basis) from $68 million ($3.18 on

a diluted per share basis) in Q3 2016.

 Adjusted net income declined 4% to $116 million ($5.45 on a diluted per share basis) from $121 million

($5.70 on a diluted per share basis) in Q3 2016. Excluding the impact of unrealized foreign exchange (gains) and losses recorded in Q3 2017 and Q3 2016 Adjusted net income increased 3% to $123 million ($5.81 on a diluted per share basis) from $120 million ($5.65 on a diluted per share basis) in Q3 2016.

 Fourteen acquisitions were completed for aggregate cash consideration of $52 million (which includes acquired cash). Deferred payments associated with these acquisitions have an estimated value of $12 million.

 Cash flows from operations were $123 million, a decrease of 11%, or $15 million, compared to $138 million for the comparable period in 2016.

 Subsequent to September 30, 2017, the Company entered into agreements to acquire seven entities for aggregate cash consideration of $41 million on closing plus cash holdbacks of $9 million for total consideration of $50 million.

[Liberty]

And a new acquisition above 10m in the food industry:

 

https://globenewswire.com/news-release/2017/10/27/1154727/0/en/Volaris-Group-a-Constellation-Software-company-Enters-into-Agreement-to-Acquire-Software-Provider-in-the-Food-Service-Industry.html

[Liberty]

http://www.csisoftware.com/2017/10/constellation-softwares-jonas-operating-group-completes-acquisition-of-mcr-enterprise-solutions-and-its-wholly-owned-subsidiary-mcr-systems-limited/

 

Constellation confirmed that its wholly-owned subsidiary, Jonas Computing (UK) Limited (“Jonas”) acquired MCR Enterprise Solutions Limited (“MCR”), the parent company of MCR Systems Limited, a leading provider of software and electronic point of sale technology to the hospitality, catering and leisure industries. MCR has an installation base of thousands of point of sale systems and a proven track record supplying and supporting leading multi-site, multi brand and multi-concept organisations.

[gary17]

I see two problems with the way the company is reporting adjusted earnings

 

a) Assuming 100% of amortization expenses are non-economic.

 

To take an example, if the company has say 250 different vertical market software products, it is tough to accept that nearly all of them would remain viable, even with R&D, 25 years from now. I would assume some of them would be supplanted by other firms and new technologies may obviate the need for the software.

 

The company logic seems to be that, fine even if 50 of these products are supplanted, if the remaining 200 products have revenue growth that can exceed the combined revenue of the 250 products, then in aggregate there is no need for amortization.

 

This is a very reasonable view and I cannot disagree all that much, but for conservatism sake I would incorporate a small portion of the amortization expense as economic.

 

I think this may have been asked before and I was kind of asking this a while ago about what happens if CSU stops M&A activities…  I have been learning more about this as I recently started looking at a smaller vertical market software company and want to see how I can apply what I know about CSU to the new co I am looking at…

 

So going back to Vino’s observation above… CSU’s use of adjusted net income is to add amortization of acquisition back since this is a non-cash item.  The argument that this is reasonable is because

 

1) We can assume these businesses don’t have significant internal software development costs that will be amortized…. ?

 

2) That assuming 1) is true, then let’s say CSU has 250 software products; 50 will become obsolete and the other 200 will keep growing so there is no need to amortize…  but does this not mean that over time… over a long time… may be 100 or 150 or eventually all 250 will become obsolete; so the business is dependent on making acquisition of new software products/companies so as to make adding the amortization for adjusted income reasonable…    so then does this not mean that the cost of acquisition is an economic cost of the CSU business?    This is where my brain stops working and can’t really figure out how to think about this LOL.

 

3) Is it reasonable for an investor looking at a single software company (not like CSU), to add amortization of software development back to determine adjusted earning?

 

[KJP]

I see two problems with the way the company is reporting adjusted earnings

 

a) Assuming 100% of amortization expenses are non-economic.

 

To take an example, if the company has say 250 different vertical market software products, it is tough to accept that nearly all of them would remain viable, even with R&D, 25 years from now. I would assume some of them would be supplanted by other firms and new technologies may obviate the need for the software.

 

The company logic seems to be that, fine even if 50 of these products are supplanted, if the remaining 200 products have revenue growth that can exceed the combined revenue of the 250 products, then in aggregate there is no need for amortization.

 

This is a very reasonable view and I cannot disagree all that much, but for conservatism sake I would incorporate a small portion of the amortization expense as economic.

 

I think this may have been asked before and I was kind of asking this a while ago about what happens if CSU stops M&A activities…  I have been learning more about this as I recently started looking at a smaller vertical market software company and want to see how I can apply what I know about CSU to the new co I am looking at…

 

So going back to Vino’s observation above… CSU’s use of adjusted net income is to add amortization of acquisition back since this is a non-cash item.  The argument that this is reasonable is because

 

1) We can assume these businesses don’t have significant internal software development costs that will be amortized…. ?

 

2) That assuming 1) is true, then let’s say CSU has 250 software products; 50 will become obsolete and the other 200 will keep growing so there is no need to amortize…  but does this not mean that over time… over a long time… may be 100 or 150 or eventually all 250 will become obsolete; so the business is dependent on making acquisition of new software products/companies so as to make adding the amortization for adjusted income reasonable…    so then does this not mean that the cost of acquisition is an economic cost of the CSU business?    This is where my brain stops working and can’t really figure out how to think about this LOL.

 

3) Is it reasonable for an investor looking at a single software company (not like CSU), to add amortization of software development back to determine adjusted earning?

 

This has been discussed earlier in this thread, such as the discussion starting around post #180.

 

 

[gary17]

I see two problems with the way the company is reporting adjusted earnings

 

a) Assuming 100% of amortization expenses are non-economic.

 

To take an example, if the company has say 250 different vertical market software products, it is tough to accept that nearly all of them would remain viable, even with R&D, 25 years from now. I would assume some of them would be supplanted by other firms and new technologies may obviate the need for the software.

 

The company logic seems to be that, fine even if 50 of these products are supplanted, if the remaining 200 products have revenue growth that can exceed the combined revenue of the 250 products, then in aggregate there is no need for amortization.

 

This is a very reasonable view and I cannot disagree all that much, but for conservatism sake I would incorporate a small portion of the amortization expense as economic.

 

I think this may have been asked before and I was kind of asking this a while ago about what happens if CSU stops M&A activities…  I have been learning more about this as I recently started looking at a smaller vertical market software company and want to see how I can apply what I know about CSU to the new co I am looking at…

 

So going back to Vino’s observation above… CSU’s use of adjusted net income is to add amortization of acquisition back since this is a non-cash item.  The argument that this is reasonable is because

 

1) We can assume these businesses don’t have significant internal software development costs that will be amortized…. ?

 

2) That assuming 1) is true, then let’s say CSU has 250 software products; 50 will become obsolete and the other 200 will keep growing so there is no need to amortize…  but does this not mean that over time… over a long time… may be 100 or 150 or eventually all 250 will become obsolete; so the business is dependent on making acquisition of new software products/companies so as to make adding the amortization for adjusted income reasonable…    so then does this not mean that the cost of acquisition is an economic cost of the CSU business?    This is where my brain stops working and can’t really figure out how to think about this LOL.

 

3) Is it reasonable for an investor looking at a single software company (not like CSU), to add amortization of software development back to determine adjusted earning?

 

This has been discussed earlier in this thread, such as the discussion starting around post #180.

 

I did read those but may be I could expand on my thinking / questions:

 

Amortization of intangible asset is over a period of time... these intangibles are customer assets / trademarks, etc.... from CSU's report:

 

Technology assets 2 to 12 years

Customer assets 5 to 20 years

Trademarks 20 years

Backlog Up to 1 year

Non-compete agreements Term of agreement

 

If going back to my question.. if they STOP acquiring new business; eventually -- say 20 years from now -- the amortization will be all used up.....  so are we saying at that point, there's enough growth in recurring revenue of the relevant software packages in their portfolio such that it will make up for the  lack of addition of amortization back into the net income for periods of 20 years and beyond......

 

This idea is key because we are assigning a very large multiple of 25 ~ 30 x to the adjusted net income which inherently assumes that level of adjusted net income will be maintained over the 25 - 30 year period.   

 

Stated otherwise, I like to know their business model is not dependent on additional of intangible assets so that the addition of amortization to create this 'adjusted net income'  and then valuing the business with a multiple of that is a reasonable representation of the business's economics.

 

 

---

 

On another question, when I read their R&D statement, it says its for new scientific or technical knowledge and understanding... nothing about cap software development to maintain existing software package... Where can I see that cost?  most software companies will need to keep developing newer versions  (u know, windows 95 --> windows 7 .... etc)   

 

Thanks

Gary

 

 

 

 

[Liberty]

Acquisition at RE business unit:

 

http://www.prweb.com/releases/2017/11/prweb14905196.htm

[Liberty]

One more at Volaris, in the hospitality industry:

 

http://www.csisoftware.com/2017/11/volaris-group-a-constellation-software-company-completes-acquisition-of-hospitality-101-inc/

 

Volaris Group (“Volaris”) has completed the acquisition of substantially all of the assets of Hospitality 101, Inc., doing business as CaterTrax (“CaterTrax”), a provider of software solutions to the Food Service industry. The company continues to service its existing customers and operate under the CaterTrax brand as CaterTrax Inc.

[Liberty]

Vela division getting into higher ed:

 

http://www.csisoftware.com/2017/11/constellation-softwares-vela-operating-group-completes-acquisition-of-higher-education-software-provider-fame/

 

Also, an acquisition from last spring that I had missed at the time:

 

https://shoplogix.com/fog-software-group-acquires-shoplogix/

 

[Liberty]

One at Jonas:

 

https://globenewswire.com/news-release/2017/12/13/1261083/0/en/Constellation-Software-s-Jonas-Operating-Group-Completes-Acquisition-of-Bookassist-Holdings-Limited.html

[KJP]

 

If going back to my question.. if they STOP acquiring new business; eventually -- say 20 years from now -- the amortization will be all used up.....  so are we saying at that point, there's enough growth in recurring revenue of the relevant software packages in their portfolio such that it will make up for the  lack of addition of amortization back into the net income for periods of 20 years and beyond......

 

This idea is key because we are assigning a very large multiple of 25 ~ 30 x to the adjusted net income which inherently assumes that level of adjusted net income will be maintained over the 25 - 30 year period.   

 

Stated otherwise, I like to know their business model is not dependent on additional of intangible assets so that the addition of amortization to create this 'adjusted net income'  and then valuing the business with a multiple of that is a reasonable representation of the business's economics.

 

 

I think you're asking the following question:  "What is the organic growth (or decline) of the existing business going to be in 10-20 years?"  That's a good question, but I doubt anyone really knows the answer.

 

If you want to assess the historical capital allocation, you can go back 15 or 20 years, put all of the amortization back on the balance sheet and assess the cash return on incremental invested capital.  That's obviously backward looking.  At a 30x multiple you're also paying for high returns on future invested capital.