Constellation Software : Q3 2020 Shareholders' Report

Constellation Software Inc.

INTERIM FINANCIAL REPORT

Third Quarter Fiscal Year 2020

For the three and nine month periods ended

September 30, 2020

(UNAUDITED)

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, 2020, 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 2, 2020. 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 TSS membership liability revaluation charge, and property and equipment purchased, and includes interest and dividends received. 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.

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 ongoing customer support and rights to certain product updates "when and if available" and products sold on a subscription basis. 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 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 and other general operating expenses.

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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
		2020		2019		$	%			2020		2019		$	%
Revenue		1,003		870		133	15%			2,878		2,534		343	14%
Expenses		697		647		51	8%			2,069		1,924		145	8%
Amortization of intangible assets		103		84		19	23%			293		234		59	25%
Foreign exchange (gain) loss		1		6		(4)	-75%			5		20		(15)	-75%
TSS membership liability revaluation charge		20		12		8	69%			55		30		25	85%
Finance and other income		(2)		1		(3)	NM			(4)		(2)		(2)	81%
Bargain purchase gain		(0)		(7)		7	NM			(0)		(36)		35	-100%
Impairment of intangible and other non-financial assets		3		-		3	NM			11		0		11	NM
Finance costs		13		11		1	13%			34		29		5	17%
Income before income taxes		168		117		51	44%			414		335		79	24%
Income tax expense (recovery)
Current income tax expense (recovery)		62		44		19	43%			177		121		56	46%
Deferred income tax expense (recovery)		(16)		(8)		(8)	100%			(50)		(28)		(23)	81%
Income tax expense (recovery)		46		36		10	29%			127		94		33	35%
Net income		122		82		41	50%			288		241		46	19%
Net cash flows from operating activities		234		177		57	32%			831		512		320	62%
Free cash flow available to shareholders		181		134		47	35%			682		397		285	72%
Weighted average number of shares
outstanding
Basic and diluted		21.2		21.2						21.2		21.2
Net income per share
Basic and diluted	$	5.76	$	3.85	$	1.91	50%		$	13.58	$	11.39	$	2.19	19%
Net cash flows from operating activities per share
Basic and diluted	$	11.05	$	8.37	$	2.68	32%		$	39.23	$	24.15	$	15.08	62%
Free cash flow available to shareholders per share
Basic and diluted	$	8.56	$	6.35	$	2.21	35%		$	32.20	$	18.74	$	13.46	72%
Cash dividends declared per share
Basic and diluted	$	1.00	$	1.00	$	-	0%		$	3.00	$	23.00	$ (20.00)	-87%
NM - Not meaningful

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

Comparison of the three and nine month periods ended September 30, 2020 and 2019

Revenue:

Total revenue for the quarter ended September 30, 2020 was $1,003 million, an increase of 15%, or $133 million, compared to $870 million for the comparable period in 2019. For the first nine months of 2020 total revenues were $2,878 million, an increase of 14%, or $343 million, compared to $2,534 million for the comparable period in 2019.

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