All participants, thank you for standing by. The conference call is ready to begin. Good morning, ladies and gentlemen, and welcome to the Constellation Software Inc.'s Q2 2011 Conference Call. I would now like to turn the meeting over to Mr. Mark Leonard. Please go ahead, Mr. Leonard.
Good morning, everyone. Welcome to our Q2 conference call. John and I are on the line, but unfortunately, we're in different locations, so there may be sort of pregnant pauses as we decide who answers various questions. As you know, we generally go directly to questions, and that's what we're planning to do today. Matt, if you could instruct everyone on how to lodge their question.
Thank you. We'll now take questions from the telephone lines. If you wish to ask a question, please press star one on your telephone keypad. If at any time you wish to cancel your question, please press the pound sign. Once again, please press star one at this time if you have a question. There will be a brief pause while participants register, and we thank you for your patience. Our first question is from Paul Treiber from RBC Capital Markets. Please go ahead.
Good morning. It's Paul for Michael Boranski. Just looking at PTS revenue growth, which was about 50% this quarter, how much of an impact did PTS have on organic growth in the quarter, and what are your thoughts on organic growth outside of PTS?
PTS was a big driver of organic growth when you measure it on a gross revenue basis. On a net revenue basis, where we take out third-party costs and just look at our value added, it was much less. My gut feel is that we're seeing baseline organic growth in the 5% or 6% region, barring the PTS stuff for net revenues.
Okay, within.
John, do you have the?
Yeah. Those numbers are right. Excluding PTS , we came in at 5% - 6% net organic revenue growth, which is higher than we've had in the last few quarters. It was a good quarter excluding PTS as well, but obviously, PTS was a big driver of the gross revenue growth.
Okay. Within public sector, have you seen any impact from the U.S. government budget impasse?
I would say we've seen an impact over the course of perhaps the last year or so. Nothing recent and startling. In fact, we've just come off a very good quarter for bookings. If it hadn't been for the news during the course of the last couple of weeks, I would have actually been quite bullish about the prospects for organic growth over the next little while. I think we're all affected by what we hear in the news, and that includes our customers. There may be a pullback over the next little while, but we certainly didn't see it in any significant way during Q2. Obviously, our private sector stuff did better than the government sector stuff, but that was just them doing a lot better than they had during the course of the recession.
Regarding your revised fiscal 2011 outlook, does that revision that you made reflect the acquisitions in the quarter or a revision to your organic growth outlook for the remainder of the year?
I think both, but I couldn't say to what extent. John, do you have a view?
It is both. I mean, we had a good quarter in terms of acquisitions. We completed, I think it was 12. Those are baked in there. We revised the organic growth upwards slightly given a strong Q2, and as Mark mentioned, given the strong backlog in some of our businesses.
Okay. Thank you. I'll pass the line.
Thank you. The next question is from Scott Penner from TD Securities. Please go ahead.
Thanks, guys. It's Doug Taylor on for Scott. Just wondered if I could touch a bit on the working capital. It was, again, a significant drain on cash flow this quarter. Can you talk about the dynamics there and whether we should be expecting a reversal in the coming quarters?
Yeah. Definitely, it was an area for concern. One of the things I always highlight for shareholders when I talk about software companies is you should keep a weather eye on what's happening with working capital. It tends to be an early warning signal for people perhaps being aggressive on revenue recognition or things of that nature. We monitor it very, very closely and dig into the particulars. In this instance, a lot of the working capital consumption was at the PTS business. It's a much more working capital-intensive business than our other businesses. As you know, it has a hardware component and a lot of systems integration. It tends to work on very large contracts that have milestones. When they're large and when they're lumpy, it's very easy for it to chew up capital as you're completing a contract.
Our gut feel is that while it has consumed quite a bit of capital over the course of the last four quarters, it will start to disgorge capital in Q3, and that we'll see increasing amounts coming out of it in the subsequent quarters. In the rest of our business, we had a little bit of a bump up in receivables at a couple of the businesses that had large Canadian receivables because of the postal strike. Some of that appears to have reversed in early Q3. Elsewhere, there were little, you know, gives and takes, but I don't see anything concerning, and I believe our working capital issues will sort of iron out over the course of the next quarter or two.
Great. Thanks. You touched on PTS there, a couple that they can have large deals. Were there large deals this quarter that contributed to some of the upside in revenue?
A lot of it relates to sign-offs by clients on milestones and things of that nature. Often, it allows you to release provisions that you've had against particular contracts. Similarly, the shipping of hardware tends to be an event that drives gross revenue, perhaps not net revenues in a significant way. Sometimes, you're shipping hardware into existing fleets where there's no systems integration requirement. You're basically sending boxes to people who install them inside of the customers. That revenue is hard to predict and welcome when it comes, but you can't count on it coming every quarter.
Great. Thanks. You were successful in completing a large number of transactions in the quarter. Does this reflect an improved M&A environment from a buyer's perspective?
We were pretty concerned late last year when we looked at the pipeline and the amount of stuff that was in there. I think things just started to pick up, particularly smaller transactions that were in adjacencies or small competitors during the course of early 2011. I'd say the pipeline has stayed relatively flat over the course of the last quarter. We continue to be fairly optimistic about acquisition prospects. We've got a few slightly larger ones in the pipeline, which will be good because there was a preponderance of very small transactions in the second quarter.
Great. Thank you. Last question. I wonder if you'd be willing to provide an update on the progress of the strategic review process.
Yeah, it continues to progress. I'm getting older every day, and this process is taking a toll. It's never pleasant. It puts you in a position where you're always feeling conflicted, and it's very hard to serve multiple masters. This is a process where there are going to be winners and losers, and I just hate being in this particular position. I'm not enjoying it particularly. I think the employees and managers are in much the same boat, and we're hoping it's over shortly.
Great. Thanks, guys. Good quarter.
Thank you. As a reminder, please press star one if you have any questions or comments. Our next question is from Stephanie Price from CIBC. Please go ahead.
Hi. Just going back to the strategic review for a minute, do you have any sort of update on timelines?
Unfortunately not. It's not a process where it's clear what the ultimate outcome will be, so it's almost impossible to predict timeline.
Okay. Moving on to the private sector business, that also appears to be picking up this quarter. Can you talk a bit about what you're seeing there and what the ramp you expect for the rest of the year to be?
The private sector business has come from a multitude of different directions, and we are very encouraged. Almost across the board, it has done much better. I think what tends to happen is that as the economy starts to pick up, the private sector just tends to pick up speed faster than the public sector. We've seen that. It's accelerated, and we're real pleased with how things are going. As to predicting the future, I do think the tone of the economy affects the private sector. I think owners of businesses will be concerned by the financial news that's washing the markets. That probably isn't a good thing. I worry about what will happen during the remainder of the year. If you were to just look at the fundamentals of what we're seeing in the marketplace, things look good despite the economic news about jobs and the like.
Great. Just finally, on your debt levels, they're up a bit versus historic levels. Can you talk about what your optimal capital structure is at this point and how you're thinking about debt?
From my perspective, if I had my choice, I'd rather have as little debt as possible and take on more business risk and less financial risk. At times like this, when the cost of debt is so very low, it's awfully tempting to use debt. If you're going to take on more financial risk, you probably want to take on less business risk. I think it gives you a bias towards acquisitions as opposed to internal initiatives, and it's a choice you've got to make. Obviously, some of the strategic review outcomes could involve using lots of debt, and that's entirely possible for a company like ours. There are very predictable cash flows. We obviously weathered the recession extremely well, and it's definitely possible for us to take down lots of debt. Whether it will be the way that things pan out or not, I don't know.
Great. Thank you very much.
Thank you. Our next question is from Patrick Pollock from Agilis. Please go ahead.
Oh, hi, guys. To what extent are these results that you've released today and your increased guidance, to what extent has that been revealed to the participants, the bidding participants on the strategic review process? Thank you.
Not really a question that we can answer, Patrick.
Would this be news to them, your increased guidance?
Our guidance hasn't moved dramatically, and it's done so in response to our actual results in Q2 and what we're seeing for the remainder of the year. I think it's news to everyone. It's certainly news to our analysts who nearly always predict that we'll grow 10% per annum, and we nearly always double that. We've done that for five years. If those very smart people who follow our business intimately are constantly finding news in our results, I wouldn't be surprised if other people who are looking at the company also find news in the results.
Thanks for that.
Thank you. As a reminder, please press star one if you have any questions or comments. There are no further questions registered, Mr. Leonard.
Thank you very much, Matt. Thank you, everyone else, for joining the conference call. If any luck, we'll be chatting with you in Q3. Thank you.
Thank you. The conference call has now concluded. Please disconnect your lines at this time, and we thank you for your time.