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Constellation Software, Inc. (CNSWF)

Q3 2016 Results Earnings Conference Call

October 27, 2016, 07:30 AM ET


Mark Leonard - President and Chairman of the Board

Jamal Baksh - Chief Financial Officer


Thanos Moschopoulos - BMO

Paul Steep - Scotia Capital

Paul Treiber - RBC Capital Markets

Richard Tse - National Bank Financial

Steven Li - Raymond James



Good morning, ladies and gentlemen. Welcome to Constellation Software, Inc. Q3 Results Conference Call.

I will now like to turn the meeting over to Mr. Mark Leonard. Please go ahead, Mr. Leonard.

Mark Leonard

Thank you, Valerie. Good morning, everyone. Welcome to the Q3 conference call. As you know, we go directly to questions. I am going to ask Valerie to tie up the call.

Question-and-Answer Session


Thank you, Mr. Leonard. We'll not take questions from the telephone lines. [Operator Instructions] Our first question is from Thanos Moschopoulos with BMO. Please go ahead.

Thanos Moschopoulos

Hi, good morning. Mark, you've been placing more focus over the past year too in terms of looking at larger size deals, and you said previously that’s its been somewhat of challenging experience.

Can you provide us with an update in terms of your efforts on that front and whether there is been any lessons learned, now that you've had some more experience sitting on larger assets?

Mark Leonard

Well, we're actually at the M&A Conference Tim and I. So we're in side room and we've got all the stats pull together and analyzed. Bernie has been doing that over the course of last week or two.

And one of things that struck is is that the larger transactions tend to be the ones that have lower IRRs. This is an entirely surprising, they tend to be more competitive. But they are also the ones that have the most disappointments in terms of the results versus what we forecast at the time when we do transactions.

And so it is an activity that only the most experienced and sophisticated investors inside of Constellation will be working on. My sense however is that we are working harder in this area than we ever have before.

It was not a good quarter in terms of the number of transactions, the close that we saw, there were roughly 10 very large vertical market software transactions closed in the quarter and we'd only seen and participated in one of those transactions. We also obviously didn't win though, you would have heard about it.

And - but in terms of activity in large transactions that are earlier stage in the sale process, I think we're pretty active and there's always going to be very low probability hit rate type of activities and they are going to consume the time of senior people that could be used elsewhere. So it's an experiment and you know, we probably going to bash way at it for a couple years and see what happens.

Thanos Moschopoulos

Thanks for the color. On a different topic, R&D staff expenses seem to have declined a little as a percentage of revenue over the last couple years. I realize there isn’t a certainly simple reason for that. But is there anything specific that you can highlight which is in current single manager's willingness to invest in organic initiatives?

Mark Leonard

No, there is not anything simple that I can point to, nothings springs to mind.

Thanos Moschopoulos

Fair enough. And just last one, on organic growth, your maintenance revenue has consistently had a 78% organic growth rate and its becoming a larger part of the overall revenue mix, is there substantial [ph] reason that organic growth at an overall corporate level just consequently accelerates as the maintenance mix keeps growing, or is there a flaw in that logic?

Mark Leonard

I'm hoping there's no flow in that logic, so we will see.

Thanos Moschopoulos

All right. Thanks, Mark. I'll pass the line.

Mark Leonard



Thank you. Our next question is from Paul Steep from Scotia Capital. Please go ahead.

Paul Steep

Thanks. Mark, just to maybe follow-on and added to look at sales and marketing and R&D, we've seen that declining over the years and you talked about maybe taking an experiment around this in terms of trying to reallocate funds between the two buckets and overall they both declined.

What of you heard back when you looked into it with the managers as to the decisions they're making through some of the outcomes you've seen in the business?

Mark Leonard

So it isn't an activity that we look at in that fashion, Paul. There are a couple of hundred business units and every one of those managers has their own competitive environment in which they are competing. And they are making decisions around investments and whether they be rewrites or add-ons or things of that ilk and or improving coverage or allocating between farming and hunting, those role decisions that they are making individually and what you're seeing is the sum total of those decisions.

And if you say that sales and marketing and R&D are going down as a percentage of the revenues or expenses, then I guess they aren’t seeing the returns on those investments.

Jamal Baksh

Our ratio is that we look at sales and marketing, R&D, which is not gross revenue, its revenue that they are driving or have not changed year-over-year or for a while. So I'm not sure what metric I may know - like hardware is implementing your answer or maybe some professional services where these items are relevant.

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