CONSTELLATION SOFTWARE INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS ("MD&A")

The following discussion and analysis should be read in conjunction with the Unaudited Condensed Consolidated Interim Financial Statements for the three and nine month periods ended September 30, 2021, which we prepared in accordance with International Financial Reporting Standards ("IFRS"). Certain information included herein is forward-looking and based upon assumptions and anticipated results that are subject to uncertainties. Should one or more of these uncertainties materialize or should the underlying assumptions prove incorrect, actual results may vary significantly from those expected. See "Forward-Looking Statements" and "Risks and Uncertainties".

Unless otherwise indicated, all dollar amounts are expressed in U.S. dollars. All references to "$" are to U.S. dollars and all references to "C$" are to Canadian dollars. Due to rounding, certain totals and subtotals may not foot and certain percentages may not reconcile.

Additional information about Constellation Software Inc. (the "Company" or "Constellation"), including our most recently filed Annual Information Form ("AIF"), is available on SEDAR at www.sedar.com.

Forward Looking Statements

Certain statements in this report may contain "forward looking" statements that involve risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company or industry to be materially different from any future results, performance or achievements expressed or implied by such forward- looking statements. Words such as "may", "will", "expect", "believe", "plan", "intend", "should", "anticipate" and other similar terminology are intended to identify forward looking statements. These statements reflect current assumptions and expectations regarding future events and operating performance as of the date of this MD&A, November 4, 2021. Forward looking statements involve significant risks and uncertainties, should not be read as guarantees of future performance or results, and will not necessarily be accurate indications of whether or not such results will be achieved. A number of factors could cause actual results to vary significantly from the results discussed in the forward looking statements, including, but not limited to, the factors discussed under "Risks and Uncertainties". Although the forward looking statements contained in this MD&A are based upon what management of the Company believes are reasonable assumptions, the Company cannot assure investors that actual results will be consistent with these forward looking statements. These forward looking statements are made as of the date of this MD&A and the Company assumes no obligation, except as required by law, to update any forward looking statements to reflect new events or circumstances. This report should be viewed in conjunction with the Company's other publicly available filings, copies of which can be obtained electronically on SEDAR at www.sedar.com.

Non-IFRS Measures

This MD&A includes certain measures which have not been prepared in accordance with IFRS such as Free cash flow available to shareholders.

Free cash flow available to shareholders ''FCFA2S'' refers to net cash flows from operating activities less interest paid on lease obligations, interest paid on other facilities, credit facility transaction costs, repayments of lease obligations, the IRGA / TSS membership liability revaluation charge, and property and equipment purchased, and includes interest and dividends received. The portion of this amount applicable to non-controlling interests is then deducted. We believe that FCFA2S is useful supplemental information as it provides an indication of the uncommitted cash flow that is available to shareholders if we do not make any acquisitions, or investments, and do not repay any debts. While we could use the FCFA2S to pay dividends or repurchase shares, our objective is to invest all of our FCFA2S in acquisitions which meet our hurdle rate.

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FCFA2S is not a recognized measure under IFRS and, accordingly, readers are cautioned that FCFA2S should not be construed as an alternative to net cash flows from operating activities. See ''Results of Operations -Free cash flow available to shareholders" for a reconciliation of FCFA2S to net cash flows from operating activities.

Corporate Reorganization

On January 4, 2021 (in anticipation of the acquisition of Topicus.com B.V.), the Company's subsidiary, Constellation Software Netherlands Holding Coöperatief U.A. ("CSNH"), which principally holds the Total Specific Solutions Operating Group ("TSS"), completed a corporate reorganization. In conjunction with the reorganization, the following steps were completed on January 4, 2021:

  • CSNH changed its name to Topicus.com Coöperatief U.A. ("Topicus Coop").
  • The Company engaged in a series of transactions the result of which was that its then existing equity interest in Topicus Coop became an equity interest in Topicus.com Inc. ("Topicus") and Topicus became the new parent company of Topicus Coop. Topicus issued and Constellation received 39,412,385 preferred shares of Topicus (the "Topicus Preferred Shares") and 39,412,385 subordinate voting shares of Topicus (the "Topicus Subordinate Voting Shares"). CSI distributed 39,412,367 of the Topicus Subordinate Voting Shares to its common shareholders pursuant a dividend-in-kind and continues to hold 18 Topicus Subordinate Voting Shares of Topicus.
  • Constellation also holds 1 super voting share of Topicus (the "Topicus Super Voting Share"). The Topicus Super Voting Share entitles Constellation to that number of votes that equals 50.1% of the aggregate number of votes attached to all the outstanding Topicus Super Voting Shares and Topicus Subordinate Voting Shares. As a result, Constellation Software Inc. controls Topicus.
  • Topicus Coop issued 19,665,642 Preference Units and 19,665,642 Ordinary Units to Joday Investments II B.V. ("Joday") and certain individual investors affiliated therewith (being the previous minority owners of CSNH) (collectively known as the "Joday Group").

The Company now reflects a non-controlling interest in Topicus of 69.7% as at September 30, 2021. The equity interest of 30.3% that the Company reflects in Topicus principally comprises the ordinary units of Topicus Coop ("Topicus Coop Ordinary Units") that are currently owned by the Joday Group and subject to the terms of the investor rights and governance agreement entered into by CSI, the Joday Group, Ijssel B.V., Topicus and Topicus Coop on January 5, 2021 (the "IRGA").

Overview

We acquire, manage and build vertical market software ("VMS") businesses. Generally, these businesses provide mission critical software solutions that address the specific needs of our customers in particular markets. Our focus on acquiring businesses with growth potential, managing them well and then building them, has allowed us to generate significant cash flows and revenue growth during the past several years.

Our revenue consists primarily of software license fees, maintenance and other recurring fees, professional service fees and hardware sales. Software license revenue is comprised of license fees charged for the use of our software products generally licensed under multiple-year or perpetual arrangements. Maintenance and other recurring revenue primarily consists of fees charged for customer support on our software products post-delivery and also includes, to a lesser extent, recurring fees derived from software as a service, subscriptions, combined software/support contracts, transaction-related revenues, and hosted products. Maintenance and other recurring fee arrangements generally include rights to certain product updates "when and if available". Professional service revenue consists of fees charged for implementation and integration services, customized programming, product training and consulting. Hardware sales include the resale of third party hardware that forms part of our customer

2

solutions, as well as sales of customized hardware assembled internally. Our customers typically purchase a combination of software, maintenance, professional services and hardware, although the type, mix and quantity of each vary by customer and by product.

Expenses consist primarily of staff costs, the cost of hardware, third party licenses, maintenance and professional services to fulfill our customer arrangements, travel and occupancy costs, depreciation, and other general operating expenses.

Results of Operations

(In millions of dollars, except percentages and per share amounts) Unaudited

Three months ended

Period-Over-

Nine months ended

Period-Over-Period

September 30,

Period Change

September 30,

Change

2021

2020

$

%

2021

2020

$

%

Revenue

1,299

1,003

296

30%

3,724

2,878

846

29%

Expenses

943

697

246

35%

2,712

2,069

643

31%

Amortization of intangible assets

134

103

31

30%

376

293

82

28%

Foreign exchange (gain) loss

(5)

1

(7)

NM

(3)

5

(8)

NM

IRGA / TSS membership liability revaluation charge

25

20

5

26%

107

55

52

95%

Finance and other income

(4)

(2)

(2)

106%

(9)

(4)

(5)

122%

Bargain purchase gain

(1)

(0)

(1)

NM

(1)

(0)

(1)

630%

Impairment of intangible and other non-financial assets

1

3

(1)

-45%

7

11

(4)

-38%

Redeemable preferred securities expense (income)

-

-

-

NM

295

-

295

NM

Finance costs

18

13

6

45%

50

34

16

46%

Income before income taxes

188

168

20

12%

190

414

(224)

-54%

Income tax expense (recovery)

Current income tax expense (recovery)

70

62

8

13%

209

177

32

18%

Deferred income tax expense (recovery)

(4)

(16)

12

-77%

(43)

(50)

8

-15%

Income tax expense (recovery)

67

46

20

44%

166

127

39

31%

Net income (loss) attributable to:

-35%

Equity holders of CSI

107

122

(15)

-13%

186

288

(102)

Non-controlling interests

15

-

15

NM

(162)

-

(162)

NM

Net income (loss)

121

122

(1)

-1%

24

288

(264)

-92%

Net cash flows from operating activities

292

234

58

25%

959

831

127

15%

Free cash flow available to shareholders

226

181

45

25%

639

682

(43)

-6%

Weighted average number of shares

outstanding

Basic and diluted

21.2

21.2

21.2

21.2

Net income (loss) per share

Basic and diluted

$

5.04

$

5.76

$ (0.72)

-13%

$

8.79

$

13.58

$

(4.78)

-35%

Net cash flows from operating activities per share

Basic and diluted

$

13.78

$

11.05

$

2.73

25%

$

45.24

$

39.23

$

6.01

15%

Free cash flow available to shareholders per share

Basic and diluted

$

10.68

$

8.56

$

2.12

25%

$

30.13

$

32.20

$

(2.06)

-6%

Cash dividends declared per share

Basic and diluted

$

1.00

$

1.00

$

-

0%

$

3.00

$

3.00

$

-

0%

NM - Not meaningful

Due to rounding, certain totals may not foot and certain percentages may not reconcile.

3

Comparison of the three and nine month periods ended September 30, 2021 and 2020

Revenue:

Total revenue for the quarter ended September 30, 2021 was $1,299 million, an increase of 30%, or $296 million, compared to $1,003 million for the comparable period in 2020. For the first nine months of 2021 total revenues were $3,724 million, an increase of 29%, or $846 million, compared to $2,878 million for the comparable period in 2020. The increase for both the three and nine month periods compared to the same periods in the prior year is primarily attributable to growth from acquisitions as the Company experienced organic growth of 7% and 9% respectively, and 5% for both periods after adjusting for the impact of changes in the valuation of the US dollar against most major currencies in which the Company transacts business. For acquired companies, organic growth is calculated as the difference between actual revenues achieved by each company in the financial period following acquisition compared to the estimated revenues they achieved in the corresponding financial period preceding the date of acquisition by Constellation.

The following table displays the breakdown of our revenue according to revenue type:

Three months ended

Period-Over-

Q320

Nine months ended

Period-Over-

Q320

Proforma

Organic

Proforma

Organic

September 30,

Period Change

Adj.

Growth

September 30,

Period Change

Adj.

Growth

(Note 1)

(Note 2)

2021

2020

$

%

$

%

2021

2020

$

%

$

%

($ in millions, except percentages)

($ in millions, except percentages)

Licenses

69

57

11

19%

9

3%

206

166

40

24%

30

5%

Professional services

256

187

69

37%

51

8%

747

534

213

40%

144

10%

Hardware and other

45

45

(0)

0%

6

-11%

127

122

5

4%

11

-4%

Maintenance and other recurring

929

713

216

30%

149

8%

2,643

2,056

588

29%

369

9%

$M - Millions of dollars

1,299

1,003

296

30%

215

7%

3,724

2,878

846

29%

553

9%

Due to rounding, certain totals may not foot and certain percentages may not reconcile.

Note 1: Estimated pre-acquisition revenues for the three months ended September 30, 2020 from companies acquired after June 30, 2020. (Obtained from unaudited vendor financial information.)

Note 2: Estimated pre-acquisition revenues for the nine months ended September 30, 2020 from companies acquired after December 31, 2019. (Obtained from unaudited vendor financial information.)

For comparative purposes the table below shows the quarterly organic growth as compared to the same period in the prior year by revenue type since Q3 2019.

Quarter Ended

Sep. 30

Dec. 31

Mar. 31

Jun. 30

Sep. 30

Dec. 31

Mar. 31

Jun. 30

Sep. 30

2019

2019

2020

2020

2020

2020

2021

2021

2021

Licenses

‐14%

‐10%

‐8%

‐30%

‐10%

‐6%

‐4%

18%

3%

Professional services

‐8%

‐8%

‐8%

‐17%

‐8%

‐4%

6%

17%

8%

Hardware and other

‐2%

‐22%

3%

‐23%

‐7%

‐13%

‐12%

15%

‐12%

Maintenance and other recurring

1%

2%

0%

‐3%

2%

4%

7%

12%

8%

Revenue

‐2%

‐3%

‐2%

‐8%

‐1%

1%

6%

14%

7%

4

The following table shows the same information adjusting for the impact of foreign exchange movements.

Quarter Ended

Sep. 30

Dec. 31

Mar. 31

Jun. 30

Sep. 30

Dec. 31

Mar. 31

Jun. 30

Sep. 30

2019

2019

2020

2020

2020

2020

2021

2021

2021

Licenses

‐12%

‐9%

‐7%

‐28%

‐11%

‐7%

‐8%

12%

1%

Professional services

‐5%

‐7%

‐6%

‐16%

‐10%

‐6%

1%

10%

6%

Hardware and other

0%

‐21%

4%

‐22%

‐10%

‐15%

‐16%

9%

‐13%

Maintenance and other recurring

3%

3%

2%

‐1%

1%

2%

3%

7%

6%

Revenue

0%

‐2%

0%

‐7%

‐3%

‐1%

1%

8%

5%

Expenses:

The following table displays the breakdown of our expenses:

Three months ended

Period-Over-

Nine months ended

Period-Over-

September 30,

Period Change

September 30,

Period Change

2021

2020

$

%

2021

2020

$

%

Expenses

($ in millions, except percentages)

($ in millions, except percentages)

Staff

676

504

172

34%

1,982

1,493

489

33%

Hardware

25

25

0.2

1%

71

70

0.6

1%

Third party license, maintenance

and professional services

113

82

31

38%

317

237

80

34%

Occupancy

10

9

2

20%

30

26

4

14%

Travel, Telecommunications,

Supplies & Software and equipment

46

32

14

43%

129

114

15

13%

Professional fees

21

15

6

41%

53

41

12

29%

Other, net

21

5

17

345%

41

10

31

308%

Depreciation

31

26

4

17%

90

77

13

17%

943

697

246

35%

2,712

2,069

643

31%

Due to rounding, certain totals may not foot and certain percentages may not reconcile.

Overall expenses for the quarter ended September 30, 2021 increased 35%, or $246 million to $943 million, compared to $697 million during the same period in 2020. As a percentage of total revenue, expenses equalled 73% for the quarter ended September 30, 2021 and 70% for the same period in 2020. During the nine months ended September 30, 2021, expenses increased 31%, or $643 million to $2,712 million, compared to $2,069 million during the same period in 2020. As a percentage of total revenue, expenses equalled 73% for the nine months ended September 30, 2021 and 72% for the same period in 2020. For the three and nine months ended September 30, 2021 the change in valuation of the US dollar against most major currencies in which the Company transacts business resulted in an approximate 1% and 3% increase in expenses respectively compared to the comparable periods of 2020.

Staff expense - Staff expenses increased 34% or $172 million for the quarter ended September 30, 2021 and 33% or $489 million for the nine months ended September 30, 2021 over the same periods in 2020. Staff expense can be broken down into five key operating departments: Professional Services, Maintenance, Research and Development, Sales and Marketing, and General and Administrative. Included within staff expenses for each

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Constellation Software Inc. published this content on 04 November 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 04 November 2021 21:24:07 UTC.