Constellation Software : Q1 2021 Shareholders' Report

Constellation Software Inc.

INTERIM FINANCIAL REPORT

First Quarter Fiscal Year 2021

For the three month period ended

March 31, 2021

(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 month period ended March 31, 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, May 5, 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.

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

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-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 March 31, 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 solutions, as well as sales of customized hardware assembled internally. Our customers typically purchase a

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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

Revenue

Expenses

Amortization of intangible assets Foreign exchange (gain) loss

IRGA / TSS membership liability revaluation charge Finance and other income

Impairment of intangible and other non-financial assets Redeemable preferred securities expense (income) Finance costs

Income before income taxes

Income tax expense (recovery)

Current income tax expense (recovery)

Deferred income tax expense (recovery)

Income tax expense (recovery)

Net income (loss) attributable to:

Equity holders of CSI

Non-controlling interests

Net cash flows from operating activities Free cash flow available to shareholders

Weighted average number of shares outstanding

Basic and diluted

Net income (loss) per share

Basic and diluted

Net cash flows from operating activities per share Basic and diluted

Free cash flow available to shareholders per share Basic and diluted

Cash dividends declared per share

Basic and diluted

NM - Not meaningful

Three months ended Period-Over-Period

	March 31,		Change
	2021		2020		$	%
	1,176		953		223	23%
	857		716		141	20%
	118		94		24	26%
	(13)		(6)		(7)	115%
	61		18		42	233%
	(2)		(0)		(2)	349%
	3		5		(2)	-37%
	263		-		263	NM
	15		11		4	33%
	(126)		115		(241)	NM
	64		44		19	43%
	(14)		(12)		(2)	21%
	49		33		17	51%
	(175)		83		(258)	NM
	(9)		83		(92)	NM
	(166)		-		(166)	NM
	495		361		135	37%
	269		311		(42)	-14%
	21.2		21.2
$	(0.41)	$	3.91	$	(4.32)	NM
$	23.38	$	17.01	$	6.37	37%
$	12.67	$	14.66	$	(1.98)	-14%
$	1.00	$	1.00	$	-	0%

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

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Comparison of the first quarter ended March 31, 2021 and 2020

Revenue:

Total revenue for the quarter ended March 31, 2021 was $1,176 million, an increase of 23%, or $223 million, compared to $953 million for the comparable period in 2020. The increase is primarily attributable to growth from acquisitions as the Company experienced organic growth of 6% in the quarter, 1% 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:

					Q120
	Three months	Period-Over-	Proforma	Organic
	ended March 31,	Period Change	Adj.	Growth
					(Note 1)
	2021	2020	$	%	$	%
		($ in millions, except percentages)
Licenses	66	57	9	15%	11	-4%
Professional services	237	178	59	33%	46	6%
Hardware and other	39	42	(3)	-8%	2	-12%
Maintenance and other recurring	834	676	158	23%	102	7%
$M - Millions of dollars	1,176	953	223	23%	161	6%

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 March 31, 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 Q1 2019.

				Quarter Ended
	Mar. 31	Jun. 30	Sep. 30	Dec. 31	Mar. 31	Jun. 30	Sep. 30	Dec. 31	Mar. 31
	2019	2019	2019	2019	2020	2020	2020	2020	2021
Licenses	‐3%	5%	‐14%	‐10%	‐8%	‐30%	‐10%	‐6%	‐4%
Professional services	‐5%	‐7%	‐8%	‐8%	‐8%	‐17%	‐8%	‐4%	6%
Hardware and other	‐4%	‐15%	‐2%	‐22%	3%	‐23%	‐7%	‐13%	‐12%
Maintenance and other recurring	1%	2%	1%	2%	0%	‐3%	2%	4%	7%
Revenue	‐1%	‐1%	‐2%	‐3%	‐2%	‐8%	‐1%	1%	6%

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