Good morning, ladies and gentlemen. Welcome to Constellation Software Inc's Q1 2014 Results Conference Call. I would now like to turn the meeting over to Mr. Mark Leonard and Jamal Baksh. Please go ahead.
Thank you, Melanie. Good morning, everyone. Welcome to the Q1 conference call. As you know, we go directly to questions. Melanie's gonna gather up some questions, and then we're gonna start answering them.
Thank you. We will now take questions from the telephone lines. If you're using a speakerphone, please lift your handset before making your selection. To ask a question, press star one on your telephone keypad. Should you wish to cancel your question, press the pound sign. Please press star one at this time if you have a question. Once again, please press star one at this time if you have a question. The first question is from Thanos Moschopoulos of BMO Capital Markets. Please go ahead.
Hi, good morning. Mark, the cash generation at TSS was very strong this quarter. Could you shed some light on that? In the past, we've seen that you've often taken working capital out of a business shortly after you've acquired it. Was that the case here, or were there any seasonal or one-time factors that drove that which could reverse going forward?
We haven't had that much experience with TSS to know what the answer to that question is, Thanos. The sense is that they are highly seasonal and collect a lot of their maintenance in the first quarter, and that they then are cash flow negative for the other quarters. The absolute magnitude of those cash flows, I don't have any idea at this stage. I hope longer term that working capital management becomes one of the things that we do better at TSS. It's one of the areas inside our own businesses that I think we're quite good at compared to most software companies and would be a best practice. There's lots of other things to address in the interim.
Okay. The margins as well were a bit lighter, than we saw through last year. Could that also reflect in seasonality?
Are you talking about Q1 for Constellation or Q1 for TSS?
For TSS specifically.
Yep. Really, last year's numbers were what we got from the accountants. This year's numbers are what we have from our own, management information systems. I tend to feel much more comfortable with what we're looking at this year than last. We were not particularly pleased with the margins that we saw there, but they are what they are. You know, you work with them. Anyone can take a business of this nature and squeeze it for higher margins. The trick, of course, is to generate attractive margins while also building the business, and that's the challenge.
No clear sense at this point whether or not that was seasonal or not?
No. No.
Okay. I saw you completed a small restructuring there, and so presumably you've already identified some opportunities to take some cost and improve the efficiencies in that business.
This was a restructuring that the management team at TSS had been planning and had put in place before we came along and had nothing to do with Constellation's ownership per se. It was just sort of part of their operating plan.
Okay. One last one for me. Are you still in the process of looking for standalone debt financing, or might this proposed new source of financing that you would describe in your shareholders letter be an alternative to that?
We're looking at every potential source of financing. I feel strongly, and the board are comfortable backing me up on this, that we should try to make sure that we have access to capital should there be a setback in the economy, a recession, a crisis of any kind. We found that the buying opportunities during the last one were terrific. I'd like to make sure that we're not tapped out come the next one. We'd like to have some more permanent financing for the acquisitions that we've already done and to have some capacity for ones that may come along.
Great. Thanks, Mark. I'll pass the line.
Thank you. The following question is from Scott Penner of TD Securities. Please go ahead.
Thanks. Just, Mark, to follow on, Thanos' question there. If we add back the severance just to the Q1 margins at TSS, it looks like that works out to be about 10% on the EBIT line. Is that as good as any indication right now for what we should use going forward?
I would hope not. I would hope that all of our businesses get better over time. I think you've seen that in Constellation, and I think most of the things that we acquire over a period of a couple of years tend to be better.
When we're looking at that, the sort of where a business like TSS could get to, is there any structural reason maybe this talks to the whole European dynamic itself? Is there any structural reason why those margins couldn't get to where Constellation standalone has been?
The European hypothesis, I'm hoping isn't correct. It's something that we're dealing with in a number of other acquisitions. Certainly the cost per person in a number of the European locations are higher, but it appears that the revenues per person are higher, too. We're hoping there's nothing per se that stops the European businesses being as attractive as North American businesses.
Okay.
That said, there are some structural reasons why TSS would find it tougher to achieve the margins that we've achieved inside of Constellation. For instance, a number of their businesses are professional services only businesses. Those tend to be very difficult places to make consistent high margins. It's gonna be, those particular ones will be a challenge. Inside the software businesses, they have some truly wonderful software businesses that should be top quartile performers within the context of Constellation's portfolio. There'll be some offset, but they also have some businesses that are built on top of third-party software, and that becomes a toll or a tax on your business as well, and tends to drive down the margin somewhat.
On the discussion in the president's letter of the non-traditional instrument, can you give us some idea of how advanced these discussions are at the board level?
I'm told by our securities counsel that I cannot.
Okay. Do you feel that there's at this point, an imperative to get something like that in place given the, you know, how you feel about the economy maybe and your pipeline of deals relative to the capital that you now have available?
It's like all insurance. You get to start paying a premium as soon as you take out the insurance, and that's never fun. At the same time, you're covered. There's no imperative, Scott, but I'd like to do it.
Okay. Appreciate it. Thank you.
Thank you. The following question is from Richard Tse of Cormark Securities. Please go ahead.
Yes. Thank you, Mark, in regards to TSS, you know, based on what you knew going into the acquisition and what you know now, like, is it sort of offering at that expectation going in, or have there been some surprises, either negative or positive here?
No real surprises, Richard. Would I prefer that, you know, it had higher margins? For sure. There's been no eye-opening sort of revelations. The management team are intelligent, hardworking, fun to work with, and are listening hard to what we have to say. I'm learning a whole lot about operating in Europe, which has been terrific. I'm very optimistic about the whole situation.
Okay. Then in your letter to shareholders, you dedicated quite a bit of time, I've noticed, on SaaS. I wanted to sort of get an impression of, you know, that business for Constellation today. Like, what percentage of revenue would come from that revenue model?
Jamal is speculating 10%-15%. He's gonna have a look while I talk. The problem with SaaS is that it's not a well-defined term. There are certainly billing and economic models that are SaaS-like, there are technology models that are SaaS-like as well. Sometimes the two come together. Although frequently, when I find people characterizing themselves as SaaS, it's usually that they mean they charge per month or per quarter or per annum, rather than selling perpetual licenses, irrespective of how it's hosted or where it's hosted, because SaaS is such an attractive moniker for the public markets.
In terms of SaaS that is both the economic and the business model and the technology model, I would say it's gonna be lower than that 10%-15%. I'm just looking at some numbers with-
I guess while you're looking here, if you look at that contribution, you know, based on what it is today, like, where would you see that going maybe in the next two or three years? I guess on a related question, if you're looking to acquire those type of companies, you know, how does the process work in terms of, you know, evaluating them? Is it different in any way? You know, I think the models are slightly different, so you guys have different metrics on that basis.
Roughly, something on the order of 10% of our maintenance would be SaaS, and 30% of our maintenance would be of a non-traditional recurring type basis.
Okay.
The 30% includes the 10%. Back to your question, yes, we do use different valuation methodology. That's wrong. I guess we use different assumptions when we're looking at a SaaS company versus a licensed company. The valuation methodology is the same in that we use IRR. The major assumption differences probably revolve around infant mortality in the SaaS model, which tends to be quite high. If you take that infant mortality into account, you tend to get overall higher attrition in SaaS models. Obviously, it's cheaper to get onto them, so it's probably cheaper to get onto a competitor's SaaS model. Hopefully, you also have lower sales and marketing costs than you would with a perpetual license model where people are paying you up front.
There is a rumor that R&D costs can be lower in the SaaS model as well. Although my perception is that most of the players who talk about doing SaaS in the vertical markets, at least, frequently offer highly customized SaaS solutions to their largest clients that often are hosted on those client sites. So I don't see how that gets you any R&D leverage in the model.
Okay. One last question from me. In terms of M&A opportunities, you know, what are you seeing, you know, globally right now in terms of markets that are probably more robust than others on a relative basis? Is, you know, North America, you know, weaker in terms of opportunities versus Europe and maybe other parts of the world, or how does that stand right now?
We track every month the number of leads that we have coming into, I guess, that you might call them prospects coming into the funnel. These are not qualified prospects. We don't have NDAs with them, things of that nature. What we see is that Europe is growing faster than North America, but North America continues to grow very quickly as well. As I just think through the acquisitions that we've been looking at the last couple of months, you know, it's a situation where for sure Europe is represented, but it's not the majority.
Okay, great. Thank you.
You're welcome.
Thank you. The following question is from Paul Steep of Scotia Capital. Please go ahead.
Thanks. Morning, I guess. Mark, first on TSS, are there any long-term government sort of professional services type contracts that sort of limit things just at least over the next sort of 18 months in terms of slowly bringing margins up that we should think about or bear in mind when we look at the numbers again?
There's definitely long-term government contracts there.
In terms of margin impact, sorry, what should have been what I said specifically that would sort of slow that progress?
Well, generally, contracts specify prices and don't allow you to increase them a whole lot. I would assume that would be the case, in a number of instances.
Okay. Fair enough. If we think about Europe, I think last quarter when we talked, you talked about maybe making some more of the structure, leveraging TSS as an organization there in terms of building out the rest of the organization. Is there maybe a little bit of a pause or a thought to consolidating some of that? Maybe I misunderstood in terms of how you organize in the European theater, I guess?
It's not like TSS has a mandate for all of Europe. They have hired a couple of M&A professionals, and we're hoping to spend some time with them in North America in the June timeframe. Looking forward to that. In Europe as a whole, we have a number of M&A professionals already work in the territory, so to speak.
I didn't know if there was an opportunity with TSS being a little larger to maybe leverage some of the back-office functions and sort of run some of that via TSS. Is that not, you know, you're gonna skip that plan and remain, keep things decentralized?
Yeah. Philosophically, we believe in a few things. One is small teams. We believe that small, tight teams end up winning in these markets and tend to be more responsive to them, tend to carve out niches and be successful. The larger those teams get, the harder they are to manage. They're not as much fun to work in. We like the idea of TSS being a group of those small teams with highly autonomous managers who are making the calls. If we rip away back office from them and our German operations and our U.K. operations and try and centralize it somewhere, what we do is take away some of the autonomy of those general managers. Now, if it's absolutely compelling and everyone thinks it's a good idea, then no doubt it's gonna happen.
My sense is that the benefits of having a small team that's very focused on their market and controls their own infrastructure is much greater than the extra point of G&A that you can wring out by having a single group that does your world accounts receivable.
Fair enough. The last one for me is just in the letter you talked through doing a good job on balancing out R&D and S&M across the business and, you know, bringing up that organic growth, particularly in maintenance. What do you think the largest opportunity is across the group? You sort of say there are many of our businesses have got the balance right. That presumes that not all of them have it right. Is there still a decent opportunity going back just even into mining the base of businesses you have?
Certainly selling back to the base new products designed with the base is a huge opportunity. If we stopped acquiring tomorrow and focus solely on our existing base and not doing any new name sales, we'd be a very different company, but I think we'd still be an admirable company and would do quite well from an organic growth perspective. It's really a question of sort of how you deploy your resources. When you take the opportunity to either buy or build, you're making an intelligent trade-off, and I think we do that well. When you are looking at building, you're working with relatively imperfect information. You're looking at the future, and you're looking out five to 10 years, and that's really, really hard.
It takes people who are really close to their clients and have very intimate relationships with them and high levels of trust to make that stuff happen. We can't expect every one of those investments to work out, nor can we expect every one of our managers to be capable of doing those. We can certainly aspire to get there, but that tends to be the place where you get some superlative results. If you think about the venture capital world, when you get a small group of people focused on producing a product with a real sense of mission, you can get extraordinary performance out of those small teams, and that was where I came from.
Having seen that, if you can capture that magic inside of a larger company like ours, inside of some of the operating groups, that's very special and very hard. I think some of our groups have managed it.
Can you give us any examples, or we'll hold off today?
There are a host of examples. I was looking at the Volaris portfolio, and I think it was 40-odd initiatives that they're either embarked upon or in the process of embarking upon. What tends to happen is they are relatively small, and they get subsumed in the whole. If you track them separately and think about them rationally, you do a whole lot better job than if you just say, "I'm gonna spend 17% of sales on R&D," which I think is the heuristic that most software companies pick, you know.
Great. Thanks, guys. I'll pass the line.
Thank you. The following question is from Nikhil Thadani of NBF. Please go ahead.
Great. Thanks, guys. Mark, if I look back on my math, it looks like you closed about one acquisition the past two months. I was just wondering, is that timing, or is there some other color that you could provide there?
Jamal says we closed six in the quarter.
Right. You had five, like, when you announced your Q4 results about two months ago. If I subtract the five from the six.
I think that math works. Yeah.
Okay. It's just timing or, you know, is it something to do with the macro picture or how should we think about that going forward?
You're saying that we will do one a month for the rest of the year? Is that the thesis that you have?
No, that's the question.
I have no idea. It's the future.
Okay. Just on the tax rate, on the income statement at least, how should we think about that going forward? Seems like it was a bit higher this quarter. Is that, 10%-15% number still good, or should we sort of expect to tick it up over the rest of the year?
I think increasingly around the world we're seeing tax authorities looking for a greater share of the pie, and I wouldn't be surprised if our tax rates don't go up over time, particularly as acquisitions as a percentage of our revenues probably come down. I'm afraid, inevitable that we will be contributors to government coffers.
Okay. Lastly, one housekeeping question here. The CAD 3 million severance charge, was that mostly on the professional services side, or was that distributed across professional services and R&D and a few other buckets as well?
My sense is it was across multiple buckets, but I don't have it at my fingertips.
Okay. I'll pass the line. Thanks.
Thank you.
Thank you. The following question is from Paul Treiber of RBC Capital Markets. Please go ahead.
Thanks. Good morning. I just wanted to delve into your comment, in the, in the President's letter about the margin of safety. What do you see as the operating risks that are inherent in your business that would require a reasonable level or reasonable margin of safety?
I think one I pointed out there was that if we stop acquiring and the market values our ability to acquire or deploy capital, on acquisitions, then that would not make shareholders happy.
When you think about margin of safety, do you think about it in different terms versus the subsidiaries that you look at when you look to make acquisitions of businesses versus when you think about margin of safety at the corporate level?
It's interesting. I don't particularly care for margin of safety. I used it as a term because we were doing an analysis that uses a market WACC in the analysis. Personally, what I seek to do and what I've hopefully convinced others around Constellation to do is to use IRR as the method of choice. Because we're looking to buy and hold forever, I feel way more comfortable with the IRR as an approach. We set a relatively high IRR bar, then we use multiple scenarios that are probability-weighted to come up with the IRR that we expect, taking into account all possible outcomes.
That sounds undoable, but we simplify it to sort of four scenarios and try and think through what a failure would look like, what a wild success would look like, and what a couple of models in between would look like.
I mean, I think an extension of this, and I think what I'm trying to get at is if you think about your business model as a conglomerate, one of the benefits is diversification. So the arbitrage per se between the public market and the companies that you buy perhaps, is the cost of capital. When you look at the businesses, you may apply a higher cost of capital than the public market would, the perception would be. Do you, do you agree with that comparison?
I would say necessarily we apply a higher cost of capital than the public would do, yeah.
Taking it a bit further to the financing side of things, when you think about the financing at TSS on non-recourse debt, and using the financing at the subsidiary level, is that from a shareholder point of view, would it be more attractive to finance TSS at the corporate level and leverage the diversification benefits of the public markets see versus applying it to the subsidiary level?
From a straight-up cost of capital point of view, you are absolutely correct. In terms of the flexibility of Constellation at the corporate level, we are willing to pay an insurance premium and have more flexibility at the Constellation level. What we are doing at the TSS level is using quite a bit of debt. One of the reasons that we managed to acquire the business was 'cause local management wanted to buy in and become shareholders in the enterprise. One of the ways they hope to get very high rates of return on their capital is through financial leverage. That puts additional stress on that team. They are a sophisticated team, though, and they have done it before. I am happy to go along and sort of experiment and see how it works out.
Would I wanna take one of our existing subsidiaries and leverage it up, paying probably a higher cost of capital than we would pay at the parent level? The answer is probably not. I think it would probably hurt organic growth and make them more short-term oriented and more leery about investing in initiatives that have five and 10-year horizons when they're riding five-year debt.
Okay. That's, that's good to understand the thinking behind all that. Just one more question, probably more geared towards Jamal. Just in regards to organic growth, could you break out the foreign exchange impact on organic growth this quarter?
We did a quick analysis on it. It wasn't material enough to break it out in the MD&A. There was, you know, some impact. If you look down at, say, the Harris operating group, maybe it impacted their organic growth by a percentage point. At a CSI consolidated level, it wasn't material enough to break out.
Okay, thanks.
Less than a percentage point then?
Yeah.
Yeah.
Okay, I'll pass along. Thanks.
Thank you. The following question is from [Edward McCauley] of Hawley Advisors Inc. Please go ahead.
Hello.
Hello.
My question is one that your analysts never ask. The Street took a very poor view of your upcoming quarterly results. To my mind, The Street, I'm saying stock price, were wrong. Have you any idea what, why this thing has happened in your case?
Why the stock price came down over the last week or so?
Yeah.
No idea. I am bemused.
Okay.
I mean, if you wanna speculate, I can try addressing specific questions, [Ed].
Well, my only speculation is The Street thought that this quarterly report would be poor, and we will find out in the next week if The Street was right or wrong. That's not a question.
Yeah. Yeah, no, I tend to agree with you. My sense, we try not to manage to analyst expectations or anything of that nature. We look at absolute levels of performance, and I was pretty pleased with the quarter. It was lovely to see organic growth up at the levels it was at. Would I have liked to have seen better margins, slightly better margins at TSS? Absolutely. We bought it to hold it forever, and, one quarter isn't the concern.
Good. Thanks very much.
You are very welcome.
Thank you. The following question is from Varun Choyah of CIBC. Please go ahead.
Good morning, gentlemen. Just two quick questions from me. Just going back to the M&A pipeline. Mark, is there any particular industry vertical that looks attractive at this stage, or pretty much you're looking at a broad-based sort of M&A strategy here?
We tend to try to be countercyclical. If you can think of a vertical that is suffering right now, we're probably looking at it.
Okay, fair enough. The other question is relating to TSS. Looking at the R&D spending levels, are there opportunities to prune development there, or are you pretty much gonna maintain what you're doing in terms of their product development?
They of course, the managers there have asked the same question, and what I tell them is you have to decide what you wanna do. Here are the processes that we use to look at our business. We carve R&D into two pools. There is a sort of core and sustaining chunk of R&D that we expect to see, and there are some benchmarks for it. Everything else needs to be justified as an initiative, an investment in the future. To invest in the future, you gotta have some sense of what the revenues will be, what the profits will be, what the expenses will be in those particular initiatives, and we'd like you to put business plans around those. That's the stage that we're at right now.
What I'm hoping is that we come out of that with a bunch of magnificent business plans that we can all feel comfortable will be successful and would lead to enormous organic growth and recurring revenues. That would be the happiest possible outcome. Obviously, the one that you talk about, which is that we spend less on R&D because we can't get good rates of return on it, would be another outcome. It really comes down to the individual business unit managers 'cause they're the people who have to make these trade-offs.
Okay, perfect. Thanks for clarifying that question. I'll pass the line.
Thank you. The following question is from Andrej Krneta of Euro Pacific Canada. Please go ahead.
Yes. Hi, good morning, gentlemen. Thank you for taking my question. I was looking, sales on a pro forma basis of acquired businesses in the quarter, and it seems that, it seems the acquisition in the quarter might have come a touch higher than the midpoint of the valuation we were usually used to in the past. Can you give us an insight maybe into, emerging valuation trends of the potential targets you're looking at? Is it maybe more or less challenging to find that value?
Nothing springs to mind, [Andrew], as I think about it. I don't think we paid up enormously during the course of the quarter for the acquisitions that we did. Obviously, there were a half dozen of them, it's hard to generalize. Jamal's having a look at it while we speak, maybe after the next question, he'll come up with some revelation for you.
Okay. I guess if I may, a follow-up to that is more related to organic growth and specifically in the public segment. Can you give us a sense for the drivers here? Then particular is macro recovery in Europe a large part of the solid 7% year-over-year? Would you attribute that to something different?
I wouldn't attribute it to macro recovery in Europe. My sense is that it's selling more stuff to existing clients, primarily in North America.
I guess my question is mainly geared toward a sort of fiscal budgets in Europe and a replacement cycle or a renewal cycle of contracts from our public customers.
Yeah.
From that perspective, do you see macro recovery further, like, driving the replacement cycle?
I, my sense as I spend time in Europe is that there is no bubbling optimism on the horizon, amongst the government accounts. They seem to be sort of in austerity mode and don't seem to be coming out of it, at high speed.
I see. Maybe a last one, just details from your from your letter this morning. You talked about purchasing a number of SaaS businesses in the past. Can you give us a sense for your SaaS offerings going forward? I mean, will subsequent purchases be driven by customer requests who demand SaaS features or SaaS options for their existing offerings? Is this mostly driven as a preemptive response to a potential competitive threat of SaaS players coming into the VMS market? Thank you.
The pitch with SaaS is, instead of paying CAD X million up front for your system, pay me CAD X thousands per month. Over time, you may end up paying me more, but anytime you don't like it, you can cut me off and, you know, off you go to another system. That's an inherently attractive pitch to clients. It may not actually be reality when you get down to it, but it's an inherently attractive pitch. Sometimes you've got to respond to that inherently attractive pitch. Invariably, if one of our major competitors is making it, we will have to make a similar offering.
It sounds like there's a dual driver there, customer demand and competitive pressures. Where would you place the weight more, near term?
To me, it feels mostly like something that it's kinda like dropping price, right? If a competitor drops price, you invariably have to match, and you go down as far as you can on a variable cost basis, until you hit the point of misery. Then the two of you sort of bash away at that for a while, until hopefully some rationality emerges. If there isn't a price leader who's got decent share, rationality never emerges. That is the equilibrium state of nearly all licensed software businesses. Having people go the next step of spreading those payments over time isn't surprising in most markets.
Fortunately, over time, you tend to make up some of that upfront misery by having recurring payments that are on, that as they persist, become more and more attractive because the upfront investment has been sunk. Whether it's licensed or SaaS, I think it's the situation that you're gonna get whoever's got the deepest pockets going to variable pricing at the front end in every marketplace, and the most marketplaces are gonna be like that. Occasionally, this is very occasionally, it's 10, maybe 20% of the time, you'll get a rational market where people recoup their costs up front and then offer a slightly better deal over time to their clients. We're in some of those markets. Those are terrific, and those are fun.
When you're in the highly competitive markets, you make your money up with add-on sales and add-on services to the existing base and lose money on new name accounts. Whether it's SaaS or licensed, that's sort of where you end up going.
That's clear. Thank you.
Not sure it was clear, but I was trying to hit the issues as I see them across lines in the market.
That's all from me. Thank you.
Thanks, Andrew. Did you, Jamal, get to the bottom of that sort of pro forma valuation on Q1 acquisitions thing?
Yeah. Well, I mean, I looked into what we paid versus as a multiple of revenue, gross revenue, and it's in line with historic, so it's not.
Okay.
The following question is from Blair Abernethy of Cantor. Please go ahead.
Thanks very much. Just back on the TSS, Mark. You were talking earlier about some longer-term contracts or government contracts. This company has sort of 37% of its revenue from services versus 21% for CSU. What's, you know, what percentage of those contracts would you classify sort of as long-term in nature? Does the model shift over time, in your mind, to more of a 25% services business?
I have no idea on your first question. On the second question, I find that professional services is a really tough business. It's one where capacity utilization and pricing of the services are absolutely key, and you've got to manage it every day. Whereas the software business, you can have a good month end and sign up a bunch of clients and catch up having had a couple of slow months. That doesn't happen in professional services. It's an intense business compared to the software business. It's one where if you're undifferentiated, it's a truly miserable business, the software business. Sorry, the services business.
What we think we have at TSS is some service businesses that are quite differentiated and have the ability and track record to be uniquely profitable. We're learning from that. We haven't had many businesses like that, and I've got my fingers crossed that we'll learn something new that we might be able to use elsewhere inside our organization. As to the trend over time as with the professional services business, it really comes down to the individual business units and what they wanna do inside their markets and what their customers are looking for. We find in markets where we have a few large clients, there is gonna be a lot more services, and they're willing to pay for those services.
In markets where we have many small clients, particularly if they're spending their own money as opposed to government's money, they generally don't want services, and we get a much more license-rich or recurring, revenue-rich, stream.
Okay, great. Thank you. Second question, just on the overall maintenance. Attrition of customers in the last three years has kind of trended up slightly, you know, loss of 3% to 4% to 5%. Should we read a trend in there, or is this, you know, is this sort of bouncing around? What, what's your expectation there?
Yeah, I think this is Well, firstly, if you go back further, you'll see that it was running in the 4% range, and so the 3% in 2011, can't explain it. The increase in 2013, I took a crack at explaining it in the president's letter, pointing out that we had acquired some businesses with inherently higher churn, and I think that's part of the SaaS model, but not all with SaaS. There are some conventional licensed businesses too that have high churn.
High churn can be a good or a bad thing, really comes down to what the switching costs are in that particular marketplace. If you've got a high churn market where the churn is due to bankruptcies or mergers, and you have high switching costs, then you tend to be able to factor that into your model. If the switching costs are low, however, it tends to be a much less attractive place to be. As I broke out and drilled down to the next layer of data in our maintenance attrition analysis, what I found was our high churn businesses, you can't tell whether they're more or less attractive yet. I've got my fingers crossed that we've bought the ones that have the relatively high switching costs and will be quite attractive.
Okay, great. Thanks very much. Just one quick one for you, Jamal. Tax rate, last year, 21% for the year in fiscal 2013. You know, 48% this quarter. Can you give us any view at all into where you think the annual tax rate might come out for 2014?
I mean, I always look at current tax as a percentage of adjusted net income before tax because all of the other, like, amortization expenses and future taxes, I mean, it's not cash tax. We always look at current tax as a proxy for cash tax. That, so that percentage, current tax as a percentage of ANI before tax, is actually pretty consistent. I think it was at, what was it? 10% in 2013. It was 12% in 2012, 12% in Q1 2014. It's all within the same range of the guides we always give, right?
Okay, that's great. Thanks, guys.
Thank you. Once again, please press star one at this time if you have a question. Following question is from Ralph Garcea of Global Maxfin Capital. Please go ahead.
Good morning, and thank you for taking my question. Just a couple of quick ones here. It was nice to see the organic growth on the maintenance side hit 10%. I mean, what was driving that? Was it customers that were off maintenance and were happy with some of the developments you've done in products and have come back on? Or was it the new product initiatives where you're getting that incremental software license sale pulling in maintenance growth?
We don't have a huge number of clients who go off maintenance and come back on. We highly discourage that kind of behavior through a variety of policies. My guess is it was indeed new clients being signed up.
Okay. Just given your austerity comments still on the European side, do you see financial services or healthcare driving growth there, you know, in the next 12 to 24 months? Or are there other verticals that you see that sort of, have you interested with regards to growth opportunities in Europe in particular?
Even when governments are feeling the pinch, they're usually looking at managing labor costs and trying to drive efficiency. Systems tend to help that, and I know this is a bit of a hackneyed response from software vendors, but we do believe that irrespective of what's happening with medical costs, which are definitely going up, our revenues in that sector will probably go up faster than the expenditures on other items in that sector. I'd certainly say that medical is an area where we should do well over the next few years.
Okay. Thank you.
Thank you. Once again, please press star one at this time if you have a question. There are no further questions registered at this time. I'd like to turn the meeting back over to Mr. Leonard.
Thank you, Melanie. Thank you for joining us on the Q1 call. We will be at the AGM later this morning, and look forward to seeing some of you there. Thank you. Bye-bye.
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