Good morning, ladies and gentlemen. Welcome to Constellation Software Inc. 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. So Melanie is going to gather up some questions and then we're going to start answering them.
Thank you. We will now take questions from the telephone lines. Of BMO Capital Markets. Please go ahead.
Hi, good morning. Mark, the cash generation at TSS was very strong this quarter. And so 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. So 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 CSS 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 Q1 and they are now cash flow negative for the other quarters. But 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 CSS. 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.
But there's lots of other things to address in the interim.
Okay. And so the margins as well were a bit lighter than we saw through last year. And so could that also reflect some seasonality?
Are you talking about Q1 for Constellation or Q1 for TSS?
For TSS specifically. Yes.
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. And so I tend to feel much more comfortable with what we're looking at this year than last. We're not particularly pleased with the margins that we saw there, but they are what they are. You work with them.
And 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.
So, there's no clear sense at this point whether or not that was seasonal or not? No. Okay. And I saw you completed a small restructuring there and so presumably you've already identified some opportunities to take some costs and improve the efficiencies in that business?
So 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. And it was just sort of part of their operating plan.
Okay. And 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 described 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 or recession crisis of any kind. We found that the buying opportunities during the last one were terrific. And I'd like to make sure that we're not capped out come the next one. So 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.
And 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 stand alone has been?
So the European hypothesis, I'm hoping isn't correct. It's something that we're dealing with in a number of other acquisitions. And 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. And so we're hoping there's nothing per se that stops the European businesses being as attractive as North American businesses.
Okay.
That said, there is 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 and high margins. And it's going to 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.
So there'll be some offset, but they also have some businesses that are built on top of 3rd 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. Is there do you feel that there's at this point an imperative to get something like that in place given the 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. But at the same time, you're covered. So there's no imperatives, 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, based on what you knew going into the acquisition and what you know now, like is it sort of operating at that expectation going in? Or have there been some surprises either Would I prefer that it had
higher margins? Would I prefer that it had higher margins for sure, but 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. And I'm very optimistic about the whole situation.
Okay. And then in your letter to shareholders, you dedicated quite a bit of time I've noticed on SaaS. And I want to sort of get an impression of that business for Constellation today. Like what percentage of revenue would come from that revenue model?
Jamal is speculating 10% to 15%. He's going to have a look 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, but there are technology models that are SaaS like as well. And sometimes the 2 come together.
Also 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. So in terms of SaaS that is both the economic and the business model and the technology model, I would say it's going to be lower than that 10% to 15%. I'm just looking at some numbers with
And I guess while you're looking here, if you look at that contribution based on what it is today, like where would you see that going maybe in the next 2 or 3 years? And I guess on a related question, if you're looking to acquire those type of companies, how does the process work in terms of evaluating them? Is it different in any way? Or I think the malls are slightly different. So do you guys have different metrics on that basis?
So just roughly something on the order of 10% of our maintenance would be SaaS and 30% of our maintenance would be of a nontraditional recurring type basis. Okay. So the 30% includes the 10%. So back to your question, yes, we do use different valuation method 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. And the major assumption differences probably revolve around infant mortality in the SaaS model which tends to be quite high. And so you tend to get 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.
And hopefully, you also have lower sales and marketing costs than you would with a perpetual license model where people are paying you upfront. And there is a rumor that R and 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. And so I don't see how that gets you any R and D leverage in the model.
Okay. And then one last question for me. In terms of M and A opportunities, what are you seeing globally right now in terms of markets that are probably more robust than others on a relative basis? Is North America weaker in terms of opportunities versus Europe and maybe other parts of the world? Or how does that stand right now?
So we track every month the number of leads that we have coming into, I guess, 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. And what we see is that Europe is growing faster than North America, but North America continues to grow very quickly as well. And then as I just think through the acquisitions that we've been looking at the last couple of months, 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. Good 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.
But in terms of margin impact, sorry, we should have been what I said specifically that would sort of slow that progress?
Both generally contracts specify prices and don't allow you to increase them a whole lot. And so 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 or maybe I misunderstood in terms of how you organize in the European theater, I guess?
So it's not like TSS has a mandate for all of Europe. They have hired a couple of M and A professionals and we're hoping to spend some time with them in North America in the June time frame. So looking forward to that. But in Europe as a whole, we have a number of M and 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? Or is that not you're going to skip that plan and remain keep things decentralized?
Yes. 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. And the larger those teams get, the harder they are to manage and they're not as much fun to work in.
So 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 going to happen. But my sense is that the benefits of having a small team that's very focused on the market and controls their own infrastructure is much greater than the extra point of G and A that you can ring out by having a single group that does your willed accounts receivable.
Fair enough. The last one for me is just in the letter you talked through doing a good job on balancing it R and D and estimate across the business and bringing up that organic growth particularly in maintenance. What do you think the largest opportunity is across the group? Because 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?
So certainly selling back to the base new products designed with the base is a huge opportunity. And 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 5 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.
And so 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. 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.
And 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. We are running 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. So what tends to happen is they are relatively small and they get subsumed in the whole. But if you track them separately and think about them rationally, you do a whole lot better job than if you just say, I'm going to spend 17% of sales on R and D, which I think is the heuristic that most software companies pick.
Great. Thanks guys. I'll pass the line.
Thank you. The following
Mark, if I look back on my math, it looks like you closed about one acquisition past 2 months. So I was just wondering is that timing? Or is there some other color that you could provide there?
So, Jamal says we closed 6 in the quarter.
Right. But you had 5 like when you announced your Q4 results about 2 months ago. So if I subtract the 5 from the 6?
I think that math works, yes.
Okay. So it's just timing? Or is it something to do with the macro picture or how should we think about that going forward?
So you're saying that we will do 1 a month for the rest of the year? Is that the thesis that you have?
No, that's the question.
Yes. I have no idea. It's the future.
Okay. And then just on the tax rate on the income statement at least, how should we think about that going forward? It seems like it was a bit higher this quarter. Is that 10% to 15% number still good? Or should we sort of expect to tick it up over the rest of the year?
So 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. And so it's I'm afraid inevitable that we will be contributors to government coffers.
Okay. And just lastly one housekeeping question here. So the €3,000,000 severance charge, was that mostly on the professional services side? Or was that distributed across professional services and R and 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 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.
And when you think about Margin and 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?
Now it's interesting. I don't particularly care for marginal safety. I used it as a term because we were doing an analysis that uses a market whack 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. And because we're looking to buy and hold forever, I feel way more comfortable with IRR as an approach.
And so we set a relatively high IRR bar and then we use multiple scenarios that are probability weighted to come up with the IRR that we expect, taking into account all possible outcomes. Now that sounds undoable, but we simplify it to 4 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. And 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 agree with that comparison?
I would say necessarily we apply higher cost of capital than the public would do, yes.
And then taking it a
bit further to the financing side of things, when you think about the financing on at TSS and 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 at the public market seat versus applying it to the subsidiary level?
From a straight up cost of capital point of view, you're absolutely correct. In terms of the flexibility of Constellation at the corporate level, we're willing to pay an insurance premium and have more flexibility at the Constellation level. What we're doing at the TSS level is using quite a bit of debt. And one of the reasons that we managed to acquire the business was because local management wanted to buy in and become shareholders in the enterprise. And 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're a sophisticated team though and they've done it before. And so I'm happy to go along and sort of experiment and see how it works out. Would I want to 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? And 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 5 10 year horizons when they're writing 5 year debt.
Okay. That's good to understand the thinking behind a lot. 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?
No, we did a quick analysis on it. It wasn't material enough to break it out in the MD and A. There was some impact. If you look down at, say, the Harris operating group, maybe it impacted their organic growth by a percentage point, but at a CSI consolidated level, it wasn't material enough to break out.
Okay, thanks.
Less than a percentage point there? Yes.
Okay. I'll pass the line. Thanks.
Thank you. The following question is from Edward Macaulay of Holly 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?
Yes.
Yes. I have no idea. I am bemused.
Okay.
If you want to speculate, I can try addressing specific questions, Ed. Well,
my only my 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.
Yes. 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. But we bought it to hold it forever and 1 quarter isn't the concern.
Good. Thanks very much.
You're very welcome.
Thank you. The following question is from Varun Chhoya of CIBC. Please go ahead.
Good morning, gentlemen. Just two quick questions for me. Just going back to the M and A pipeline. Mark, is there any particular industry vertical you're kind of like that looks attractive at this stage? Or pretty much you're looking at a broad based sort of M and A strategy here?
We tend to try to be kind of cyclical. And so if you can think of a vertical that is suffering right now, we're probably looking at it.
Okay. Fair enough. And the other question, it's relating to TSS. Looking at the R and D spending levels, are there opportunities to prune development there? Or are you pretty much going to maintain what you're doing in terms of the product development?
So they of course the managers there have asked the same question. And what I tell them is you have to decide what you want to do. Here are the processes that we use to look at our business. We carve R and D into 2 pools. There is a sort of core and sustaining chunk of R and D that we expect to see and there are some benchmarks for it.
And then everything else needs to be justified as an initiative, an investment in the future. And to invest in the future, you got to 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. And that's the stage that we're at right now. And 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 in recurring revenues.
So that would be the happiest possible outcome. Obviously, the one that you talk about, which is that we spend less on R and D because we can't get good rates of return on it would be another outcome. And it really comes down to the individual business unit managers because they're the people who have to make these trade offs.
Okay, perfect. Thanks for clarifying that question and I'll pass the line.
Thank you. The following question is from Andraj Korneta 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 form a basis of acquired businesses in the quarter and it seems that acquisitions 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 value?
So 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 are half dozen of them and so it's hard to generalize. But Jamal is having a look at it while we speak and maybe after the next question, he'll come up with some revelation for you.
Okay. And 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? And then particular is macro recovery in Europe a large part of the solid 7% year on year? Or would it be or 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.
Yes. 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. So from that perspective, do you see macro recovery further like driving the replacement cycle?
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. And maybe a last one just details 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?
Or is this mostly driven as a preemptive response to a potential competitive threat of SaaS players coming into the VMS market? Thank you.
So the pitch with SaaS is instead of paying X1000000 upfront fuel system, pay me X 1,000 per month. And over time, you may end up paying me more, but anytime you don't like it, you can cut me off and off you go to another system. So that's an inherently attractive pitch to clients. It may not actually be reality when you get down to but it's an inherently attractive pitch. And so sometimes you've got to respond to that inherently attractive pitch.
And 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 is it's kind of like dropping price, right? And so 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 and then the 2 of you sort of bash away at that for a while until hopefully some rationality emerges. And if there isn't a price leader who's got decent share, rationality never emerges. Now that is the equilibrium state of nearly all licensed software businesses. So 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 and more attractive because the upfront investment has been sunk. And so whether it's licensed or SaaS, I think it's the situation that you're going to get whoever's got the deepest pockets going to variable pricing at the front end in every marketplace. And most marketplaces are going to 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 upfront and then offer a slightly better deal over time to their clients. And 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. And whether it's SaaS or license, 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 the lines of mine.
That's all for me. Thank you.
Thanks, Andrew. Did you, Jamal, get to the bottom of that sort of pro form a valuation on Q1 acquisitions?
Yes. Well, I mean, you looked into what we paid versus a multiple of revenue, gross revenue and it's in line with historic selling. 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 20%, 21% for CSU. What percentage of those contracts are would you classify sort of as long term in nature? And does the model shift over time in your mind to more of a 20%, 25% services business?
I have no idea on your first question. And 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. And it's one where if you're undifferentiated, it's a truly miserable business to software business sorry, the services business. What we think we have at CSS is some service businesses that are quite differentiated and have the ability and track record to be uniquely profitable. And so 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 want to do inside their markets and what their customers are looking for. We find in markets where we have a few large clients, there is going to be a lot more services and they're willing to pay for those services. In markets where we have many small clients they generally 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 trended up slightly, loss of 3% to 4% to 5%. Any should we read a trend in there?
Or is this sort of bouncing around? What's your expectation there?
Yes. 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 license businesses too that have high churn. And high churn can be a good or a bad thing and 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. And 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.
And I've got my fingers crossed that we 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 was 21% for the year.
In fiscal 2013, 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. So my we always look at current tax as a proxy for cash tax. And that so that percentage, current tax as a percentage of any before tax is actually pretty consistent. I think it was at was it 10% in 2013, but it was 12% in 12%, 12% in Q1, 2014. So it's all within the same range of the guidance we always give, right?
Okay. That's great. Thanks guys.
Thank you. The following question is from Ralph Giuseppe of Global Maxim. Please go
ahead. Good morning. 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?
So 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. So my guess is it was indeed new clients being signed up.
Okay. And then just given your austerity comments still on the European side, do you see financial services or healthcare driving growth there 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?
So 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. So I'd certainly say that medical is an area where we should do well over the next few years.
Okay. Thank you.
Thank you.
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.
Thank you.