Good morning, ladies and gentlemen. Welcome to Constellation Software Inc.'s Q3 Conference C all. I would now like to turn the meeting over to Mr. Mark Leonard. Please go ahead, sir.
Thank you, Audrey. Good morning, everyone. Welcome to the Q3 conference call. As you know, we go directly to questions, so Audrey is gonna give you some instructions about how to get in line for those. Audrey?
Thank you. I'll now take questions from telephone lines. If you have a question and you're using a speakerphone, please lift up your headset before making a selection. If you have a question, please press *1 . At any time you wish to cancel your question, you may press # sign. Please press *1 at this time, and there'll be a brief pause for participants to register. We thank you for your patience. We have a question from Scott Penner from TD Securities. Please go ahead.
Thank you. Good morning. Just, maybe first of all, Mark, most topical on people's minds is likely your views on the acquisition environment right now, both for small and large deals and any updated metrics that you guys track around either LOIs or pipeline or anything like that.
In terms of the high-level metrics, the NDAs that we've signed, they're pretty flat. We haven't seen any significant increases or decreases from last year. In terms of LOIs, we're starting to question that particular metric because we find a number of our M&A people are giving indications of interest that aren't full-blown LOIs, and they tend to preempt the process somewhat. Our LOIs are down, but we're not sure it's a good metric because we think our practice is changing out there in the operating groups. In terms of the short-term funnel, not particularly robust, but there's always those wild cards in there that can make a big difference if a large transaction closes.
When you're looking at those large deals, I mean, we obviously see that some of the public market valuations going up. Is that sort of thinking or targets pointing to those sorts of multiples? Is that impacting the your ability to get some of these large deals progressed?
We haven't changed our hurdle rates recently. I guess that's, it really depends sort of what the vendors are looking for in terms of prices.
Okay. Any update on the you're looking around for sources of additional capital? Any progress to share with us or any change in your thoughts there?
There appear to be lots of different sources that we could tap, which is great, and we continue to talk to all kinds of potential sources of finance should we need it.
Okay, no real timeline in place, I guess?
That'll be driven by acquisitions. We basically don't need capital to run our existing businesses. They produce lots of capital, and so it's strictly a supply and demand thing.
Thank you. Just one more, and then I'll pass it to Jamal. That is the tax rate for this quarter was a little bit on the lower side versus what kind of the range you've been saying in the past. Just looking for any sort of update on what we should look for going forward.
Yeah. Going forward, I would say it's gonna trend back towards what we historically have done and then, go forward even maybe a little bit higher. The, the dip in Q3 should not be indicative of what's gonna going forward.
Yeah. 10%-15% is still, at this point at least, a good range to use?
Yep.
Okay. Thanks, guys.
Thank you. Our next question is from Nikhil Thadani from National Bank Financial. Please go ahead, sir.
Great. Thanks. Mark and Jamal, could you maybe comment on the mix in the quarter and how you see that sort of changing over time? It seems like you had, you know, more hardware this quarter. How should we think about that going forward and specifically if that means anything for margins?
To the extent that there is more hardware, margins will be smaller because hardware margins, compared to software margins, are much lower. Don't really know hardware stuff. It tends to be an adjunct to our business as opposed to a driver of our business.
It's not something we aggressively seek out, but where we can make a decent margin on it, we do it, and often we end up doing it as a convenience to our customers.
Right. Right. I guess if I read into that, it sounds like the, like the CAD 5 million in hardware that you had for QuadraMed this quarter, should we think of that as a more of a, you know, one time that happened in Q3 as opposed to going forward?
That's my sense right now, but we haven't had that much experience with QuadraMed, so time will tell.
Okay. Just one more quick one for Jamal. It looks like you paid down some amount of debt in the quarter. Do you have any plans to keep paying that down aggressively or, you know, how should we think about use of cash maybe besides acquisitions, obviously, going forward?
I mean, if we have excess cash, we'll use it to prepay debt. It all depends on the acquisition pipeline.
Okay. Just on the acquisition pipeline, just going back to that for a second. How large is the M&A team right now? You know, 'cause I think you had some hiring last year. I'm just wondering if that's kinda trending up or, you know, do you need more bodies or where that kinda stands right now.
I was looking through our lead generation last month, and there were, I think, 15 or 16 people putting leads into the funnel. Some of those folks are not full-time lead generators. Obviously we have a bunch of our professional managers involved in the M&A process as well on a non-full-time basis. It's a good size group of folks. It's a big investment, compared to most businesses of our size.
Right. Okay. I'll pass the line. Thank you.
Thank you. Our next question is from Thanos Moschopoulos from BMO Capital Markets, sorry. Please go ahead.
Hi, good morning. If I'm doing the math right, it seems like your public sector revenue without acquisitions, was down a touch in the September quarter relative to the June quarter. Was there any discernible impact from the government shutdown or nothing of note given that you're more focused on state and local?
You know, I haven't done that math, Thanos. I tend to look at the individual business units as individual business units. I didn't get the sense that there was any particular contraction. We actually have seen pretty good bookings activity in the government sector. No, I don't get any sense of the shutdown causing issues.
Okay. Generally speaking, as you look across, all your businesses, and, obviously it's a lot of moving parts, but, directionally any, thing that would prompt you to be any more or less confident on, organic growth in the near term?
In the very near term, the managers are quite optimistic. That optimism, usually gets tempered by reality. I'd say that, we're feeling reasonably good about, the prospects, particularly in North America for organic growth.
Okay. Just looking back historically, it seems that sometimes, in the past margins have dipped in Q4. Is there any sort of discernible seasonality that we should be aware of, or has that just been sort of quarterly volatility when we've seen that dip in the past?
Are you thinking of gross margins?
Sorry, EBITDA margins.
I'm not sure what drives that. It could be the year-end bonus tee ups, is part of it.
It hasn't been every year, just certain years we've kind of seen a dip. May just be volatility, but I was wondering if there was a trend there.
You know, not that I know of.
Okay. Final one for me. If M&A were to slow down, presumably we should see a bit of a margin lift since M&A tends to be a drag on margins in the near term. Would that be the right way to think about it?
I would hope so. That rather assumes that the stuff that we bought a year ago and two years ago improves in terms of its profitability.
Okay. Great. Thanks. I'll pass the line.
Thank you. Once again, please press *1 on your telephone keypad if you have a question or a comment. Our next question is from Paul Treiber from RBC Capital Markets. Please go ahead, sir.
Thanks very much. How large is the unnamed business that Gary Jonas is making a takeout offer for?
We're not disclosing that at this stage, Paul.
Should we think of it as a larger deal or a smaller deal?
We probably wouldn't have said this much if it was a tiny deal.
Okay, fair enough. Since the close of the quarter, I didn't see it in the MD&A, how much capital have you deployed on acquisitions Q4?
We're not disclosing that, yet.
Okay. Moving on to Europe. Has the profitability on your European businesses improved over the last year in line with your expectations?
Not in line with expectations, no. We had hoped that we could have done a better job. Some of that's environmental. One of the large acquisitions was in the marine sector, and the marine sector is very depressed right now. Although it is showing a few signs of life.
Would that delta between your expectations and actuals be a result of, like organic revenue growth or renewals or pricing increases versus cost cutting?
I would say We actually just finished looking at this. We did a study of both our long-term M&A results and the results of the acquisitions that were done in 2012. When we looked at the 2012 ones, we presented this to the M&A folks a couple weeks ago. What we found with a couple of the European ones was that the revenue forecast that we'd had for them when we did the acquisitions were higher than where they came in. We saw some softness on the revenue side, and the expenses were within the range that we had forecast. I guess the bulk of the shortfall would have been from a revenue perspective.
Okay. Just 1 more for me. I think you've disclosed that you've been hiring people for some new initiatives over the last two quarters. How long do you think the ramp-up period is in terms of seeing these new employees becoming productive and driving revenue?
Well, if they're actually working on initiatives take forever to generate revenue. If they're working on backlog, they could be producing revenue and margins fairly quickly. It all depends sort of where they're going.
Okay. Thanks very much.
Thank you. Our next question is from Paul Steep from Scotia Capital. Please go ahead, sir.
Great. Thanks. Mark, maybe you could talk a little bit just within the context of the government or the public sector market. Just for the outlook or what you're seeing within the Trapeze Group and then maybe within the Harris Computer Corporation, given their relative size in terms of initiatives or sort of growth potential there. Thanks.
You know, I don't think it's substantially different from the rest of our business, Paul.
Okay. Didn't know if the shutdown, obviously at a federal level, was impacting any funding flow into those businesses or is it pretty much locked in that you have next to no concerns and things are just sort of moving forward on that front?
You know, we have seen a bit of a slowdown in our smart meter-related software businesses and, or business. That was one of our most rapidly growing businesses, but it was growing at an extraordinary rate. The underlying funding for smart meters in the U.S. did come from federal government sources. If you trace it all the way back, maybe that has something to do with the fact we're not growing at the rates we were last year and the year before in that particular division. That's a very small portion of the overall. I would say in general, the federal funding issues aren't really touching us.
Good. Okay. Secondly, maybe just an update or how you're thinking about sort of spans of control. Obviously, you created a new business unit earlier in the year. Can you talk to us a little bit about that as you sort of continue to grow out the business, how you're thinking about scaling and structuring it within the operations?
We have five operating groups that report up to head office. We feel very comfortable with the leaders of those operating groups, that they're phenomenal business people who are capable of allocating capital and running really good businesses. Would I love to have a 6th or 7th reporting up to head office? Certainly. That would be the ultimate objective. To get to that level of trust and understanding takes time. I don't anticipate splitting any of the groups because none of them show signs of needing to be split. That would be something that we and the operating group managers would jointly decide in any event.
As before, internally, we don't feel a whole lot of stress from growing the business above and beyond the normal sort of stresses that come with new acquisitions and getting to know new people and new markets. Externally, the concerns about scalability are always there. Our board brings them up, our investors bring them up, and we do pay attention to those concerns. I think we're sensitive and ready to see issues as they arise, but we don't yet see them.
Okay. Just to sort of summarize that, because I think it makes full sense and just wanted to be clear. For the near term, at least likely for the next year, is it fair to say that the structure sort of stands in terms of the rate and pace at which you're growing, that you're on track for that? Or would it be a large deal that might force sort of another leg to pop up at some point?
Yeah. We don't really do deals. We acquire businesses, and we make investments. Yes, a large acquisition might create a new operating group.
Perfect. Thanks.
Thank you. Our next question is from Richard Tse from Cormark Securities. Please go ahead.
Great. Thanks. you know, Mark, could you maybe talk about the environment for pricing on your maintenance renewals over the last little while?
It isn't something we monitor centrally. I get the news pretty much when you get the news, which is when we publish the attrition statistics where we break out for you the price increases. It's, it's not a topic that I hear a lot about.
Right
when I'm visiting with the operating groups or the business units. I'd say it's not a hot button issue.
Okay. What is a hot button issue when you go visit the operating groups in general?
Deploying capital is one that they're, you know, always worrying about and trying to do, to get good rates of return.
You know, I guess about a year ago, one of the things that you brought up on one of these calls or at your AGM was, you know, stock's done really well. You've got some wealthy managers there. What's your thinking on that today versus last year?
Yeah, I'd rather the stock was prudently priced so that people are not tempted to diversify and sell. It's One of the neat things is I think nearly all of the managers file insider reports. If you wanna see if managers are selling, you can get that information on SEDI, I encourage you to follow that. So far, we haven't seen any wholesale selling by the key managers or the mid-tier managers that I know of.
Yeah. I was probably just referring more to the, you know, turnover on the management team. I'm guessing you haven't seen much of that, over the past 12 months.
No, I think it's a relatively good place to work. You get lots of autonomy, and if you're doing a good job, you don't have to talk to me very much. You get to build a business where you have deep vertical knowledge and you know the customers, you know the employees. It's a fun way to build a career.
That's great. Well, congrats. Thanks so much.
Okay. Cheers.
Thank you. Once again, please press *1 on your telephone keypad if you have a question or a comment. We have no more questions registered from the phone lines, Mr. Leonard.
Okay. Thank you, Audrey. Thank you everyone for joining us this morning, and we look forward to talking to you early next year when we report the annual results. Bye-bye now.
Thank you. The conference call has now ended. Please disconnect your lines at this time.