Constellation Software
Summary
- Constellation Software (OTC:CNSWF, TSX:CSU) is an international provider of market-leading software and services to a number of industries.
- The company's mission is to acquire, manage and build market-leading software businesses that develop specialized, mission-critical software solutions to address the specific needs of its particular industries.
- Since inception in 1995 Constellation Software has grown rapidly through a combination of acquisitions and organic growth, and established a strong constellation of companies with a large, diverse customer base.
Company Overview
Constellation Software (OTC:CNSWF, TSX:CSU) is an international provider of market-leading software and services to a number of industries. The company's mission is to acquire, manage and build market-leading software businesses that develop specialized, mission-critical software solutions to address the specific needs of its particular industries.1
The company's company was founded in 1995 to assemble a portfolio of vertical market software companies that have the potential to be leaders in their particular market. Since then, Constellation Software has grown rapidly through a combination of acquisitions and organic growth, and established a strong constellation of companies with a large, diverse customer base.
Constellation Software has six operating groups which currently service customers in over 100 different markets worldwide. With its headquarters in Toronto, Canada, and offices in North America, Europe, Australia, South America and Africa, Constellation Software has over 25,000 employees generating consolidated revenues exceeding US$4 billion.
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Financial Highlights
Total revenue for the quarter ended September 30, 2021 was $1,299 million, an increase of 30%, or $296 million, compared to $1,003 million for the comparable period in 2020. For the first nine months of 2021 total revenues were $3,724 million, an increase of 29%, or $846 million, compared to $2,878 million for the comparable period in 2020. The increase for both the three and nine month periods compared to the same periods in the prior year is primarily attributable to growth from acquisitions as the Company experienced organic growth of 7% and 9% respectively, and 5% for both periods after adjusting for the impact of changes in the valuation of the US dollar against most major currencies in which the Company transacts business.2
Overall expenses for the quarter ended September 30, 2021 increased 35%, or $246 million to $943 million, compared to $697 million during the same period in 2020. As a percentage of total revenue, expenses equalled 73% for the quarter ended September 30, 2021 and 70% for the same period in 2020. During the nine months ended September 30, 2021, expenses increased 31%, or $643 million to $2,712 million, compared to $2,069 million during the same period in 2020. As a percentage of total revenue, expenses equalled 73% for the nine months ended September 30, 2021 and 72% for the same period in 2020.
Depreciation of property and equipment increased 17% or $4 million for the quarter ended September 30, 2021 and 17% or $13 million for the nine months ended September 30, 2021 over the same periods in 2020. The increases are primarily due to the depreciation expense associated with acquired businesses.
Finance costs for the quarter ended September 30, 2021 increased $6 million to $18 million, compared to $13 million for the same period in 2020. During the nine months ended September 30, 2021, finance costs increased $16 million to $50 million, from $34 million for the same period in 2020. The increases are primarily a result of an increase in the average debt outstanding in 2021 as compared to 2020.
For the quarter ended September 30, 2021, income tax expense increased $20 million to $67 million compared to $46 million for the same period in 2020. During the nine months ended September 30, 2021, income tax expense increased $39 million to $166 million compared to $127 million for the same period in 2020.
The Company’s consolidated effective tax rate in respect of continuing operations for the three and nine months ended September 30, 2021 was 35% and 87% respectively (27% and 31% respectively for the three and nine months ended September 30, 2020).
The net income attributable to common shareholders of CSI for the quarter ended September 30, 2021 was $107 million compared to net income of $122 million for the same period in 2020. On a per share basis this translated into a net income per diluted share of $5.04 in the quarter ended September 30, 2021 compared to net income per diluted share of $5.76 for the same period in 2020. For the nine months ended September 30, 2021, net income attributable to common shareholders of CSI was $186 million or $8.79 per diluted share compared to $288 million or $13.58 per diluted share for the same period in 2020. There was no change in the number of shares outstanding.
The company's net cash position (cash less bank indebtedness excluding capitalized transaction costs) decreased by $38 million to $487 million in the nine months ended September 30, 2021 resulting from the net capital deployed on acquisitions plus dividends exceeding cash flows from operations. Cash increased by $203 million to $961 million at September 30, 2021 compared to $758 million at December 31, 2020 and bank indebtedness increased by $241 million to $474 million at September 30, 2021 compared to $233 million at December 31, 2020.
Total assets increased $1,059 million, from $4,375 million at December 31, 2020 to $5,434 million at September 30, 2021. The increase is primarily due to a $203 million increase in cash, $29 million increase in accounts receivable, $46 million increase in unbilled revenue, $59 million increase in other current assets, and $681 million increase in intangible assets. At September 30, 2021 six subsidiaries holding cash totalling $125 million maintained debt facilities, which facilities are without recourse to Constellation. As explained in the “Capital Resources and Commitments” section below, there are limitations on the ability of these subsidiaries to distribute funds to Constellation.
Current liabilities increased $338 million, from $2,040 million at December 31, 2020 to $2,377 million at September 30, 2021. The increase is primarily due to an increase in deferred revenue of $206 million mainly due to acquisitions made since December 31, 2020 and the timing of maintenance and other billings versus performance and delivery under those customer arrangements, a $49 million increase in the current portion of debt, and $54 million increase in accounts payable and accrued liabilities.
Recent developments
Constellation Software Inc. Announces Formation of a Venture Capital Fund and Management Changes
November 25, 2021; Constellation Software Inc. (TSX:CSU) (“Constellation”) today announced the creation of a two hundred-million-dollar venture capital fund ("VMS Ventures“, or “the Fund”). The Fund will provide financing for start-up and rapidly growing vertical market software businesses, most of which will have been either incubated or identified by a sponsoring Constellation business unit.3
While Constellation regularly invests in dozens of small initiatives and will continue to do so, VMS Ventures will invest in larger initiatives and take a different approach:
- The Fund will only invest in businesses (“Investees”) that have the potential to become standalone business units within Constellation.
- The managers and employees of the Fund's Investees will be significant shareholders in their businesses.
- The Fund will not back start-ups that have to rely upon a Constellation business unit for ongoing sales, marketing, customer support, development, etc.
- Many of the Investees' staff will be hired from outside of Constellation.
- The Fund's employees will be compensated based upon the Fund's results.
Investing only $200 million over a three-to-five-year period, Constellation does not expect the Fund to add meaningfully to Constellation’s organic revenue growth rate. The Fund's objective is to develop and refine organic growth processes which can eventually be rolled out more broadly by Constellation's operating groups. Constellation does not anticipate that the Fund will detract from Constellation's existing initiative programs nor its acquisition momentum.
The Managing Partner of the Fund will be Daan Dijkhuizen. In addition to managing the Fund, he will continue to be the CEO of the Topicus Operating Group (“TOG”) within Topicus.com, but will resign his role as CEO of Topicus.com. Robin van Poelje will take on the role of the CEO Of Topicus.com in addition to his current position as Chairman.
“Leading the Topicus Operating Group into Topicus.com Inc., and the subsequent public listing of Topicus.com Inc., was an exciting and fruitful journey. I will stay at Topicus.com Inc as a board member. I look forward to continue building the future of TOG as CEO and to leading the fund as managing partner focusing on Constellation’s larger organic growth opportunities”, said Daan Dijkhuizen.
Mark Leonard, President of Constellation stated: “Organic growth will be a critically important part of CSI's enduring success. I’m delighted that Daan will continue to lead TOG and will take on the additional responsibility for the Fund. TOG has one of the best track records of sustained organic growth at scale that I’ve seen in the VMS industry. I’ll personally support the Fund and Daan as he focuses on leading Constellation’s larger organic growth efforts.”