Constellation Software Inc.
TSX : CSU

Constellation Software Inc.

May 05, 2010 17:00 ET

Constellation Software Inc. Announces Results for the First Quarter Ended March 31, 2010

TORONTO, ONTARIO--(Marketwire - May 5, 2010) - Constellation Software Inc. (TSX:CSU) ("Constellation" or the "Company") today announced its financial results for the first quarter ended March 31, 2010. Please note that all dollar amounts referred to in this press release are U.S. Dollars unless otherwise stated.

The following press release should be read in conjunction with our unaudited consolidated interim financial statements for the three month period ended March 31, 2010 and the accompanying notes, and with our audited annual Consolidated Financial Statements and our annual MD&A for the year ended December 31, 2009 which can be found on SEDAR at www.sedar.com and on the Company's website www.csisoftware.com. Additional information about the Company is also available on SEDAR at www.sedar.com.

Q1 2010 Highlights:

  • Revenue grew 48% compared to Q1 2009. Organic revenue growth was negative 6% in both Q1 2010 and in Q1 2009.
  • Adjusted EBITDA grew 16% compared to Q1 2009
  • Adjusted Net Income grew by 11% compared to Q1 2009
  • $15 million was deployed on five acquisitions and $1 million in holdbacks related to prior acquisitions was paid

First quarter 2010 revenue was $144 million, an increase of 48%, or $47 million, compared to $97 million for the comparable period in 2009. The increase for the first quarter compared to the same period in the prior year was attributable to growth from acquisitions, as organic growth from our existing business was estimated at approximately negative 6%.

Constellation acquired the PTS business from Continental Automotive AG ('Continental') on November 2, 2009. Given the substantial amount of non-recurring revenue historically earned by PTS, gross revenue from PTS has fluctuated significantly in the past and may continue to do so in the future. Constellation expects revenue from PTS to decline significantly in the twelve months following acquisition compared to revenue in the twelve months preceding acquisition. Excluding PTS, organic growth for Constellation was 3% in Q1.

The following table provides a summary of the impact of PTS on Constellation's organic revenue growth:

Organic Revenue Growth
  Q1-10
Constellation -6%
Constellation excluding PTS 3%

Adjusted EBITDA for the first quarter 2010 was $24 million, compared to the prior year's first quarter Adjusted EBITDA of $21 million, a 16% increase. First quarter Adjusted EBITDA per share on a fully diluted basis increased 16% to $1.13 compared to $0.97 for the prior year's first quarter.

Adjusted Net Income for the first quarter 2010 was $19 million, compared to the prior year's first quarter Adjusted Net Income of $17 million, an 11% increase. First quarter Adjusted Net Income per share on a fully diluted basis increased 11% to $0.88 compared to $0.79 for the prior year's first quarter.

Net Income for the first quarter 2010 was $6 million, compared to the prior year's first quarter Net Income of $4 million, a 67% increase. On a fully diluted per share basis, this translates into net income per share of $0.30 for the first quarter of 2010, compared to $0.18 in the same period of 2009.

The following table displays our revenue by reportable segment and the percentage change for the three months ended March 31, 2010 compared to the same period in 2009:

  Three months ended Mar. 31, Period-Over-Period Change  
  2010 2009 $   %  
  ($000, except percentages)  
Public Sector            
Licenses 8,323 9,014 (691 ) -8 %
Professional services and other:            
  Services 34,039 21,697 12,342   57 %
  Hardware and other 15,483 5,029 10,454   208 %
Maintenance 52,379 38,751 13,628   35 %
  110,224 74,491 35,733   48 %
Private Sector            
             
Licenses 2,759 1,843 916   50 %
Professional services and other:            
  Services 6,158 2,915 3,243   111 %
  Hardware and other 1,308 798 510   64 %
Maintenance 23,444 17,205 6,239   36 %
  33,669 22,761 10,908   48 %

Public Sector

For the quarter ended March 31, 2010, total revenue in the public sector segment increased 48%, or $36 million, to $110 million, compared to $74 million for the quarter ended March 31, 2009. Revenue growth from acquired businesses was significant for the three month period as we completed seven acquisitions since the beginning of 2009 in our public sector segment. It is estimated that acquisitions completed since the beginning of 2009 contributed approximately $42 million to our Q1 2010 revenues. Revenues decreased organically by 8% or $6 million in Q1 2010 compared to the same period in 2009. Excluding PTS, organic growth for the Public Sector increased by 3% in Q1 2010 compared to the same period in 2009.

Organic Revenue Growth
  Q1-10
 
Public Sector -8%
Public Sector excluding PTS 3%

The organic revenue change was primarily driven by the following:

  • Trapeze operating group (decrease of approximately $8 million in Q1). For Q1, excluding the impact of PTS, Trapeze experienced slight positive organic growth driven from continued strong bookings in their North American transit business. This growth was offset by organic revenue shrinkage in the PTS business.
  • Harris operating group (increase of approximately $2 million in Q1). For Q1, Harris had continued strong sales both to existing clients and to new customers in their utility, local government, and school verticals.

Private Sector

For the quarter ended March 31, 2010, total revenue in the private sector segment increased 48%, or $11 million, to $34 million, compared to $23 million for the quarter ended March 31, 2009. Revenue growth from acquired businesses was significant for the three month period as we completed eleven acquisitions since the beginning of 2009 in our private sector segment. It is estimated that acquisitions completed since the beginning of 2009 contributed approximately $10 million to our Q1 2010 revenue. Revenues increased organically by 2% or $0.4 million in Q1 2010 compared to the same period in 2009. The organic revenue change was negligible across each of the private sector operating groups.

According to Mark Leonard, Constellation's President, "Acquisition accounting for large acquisitions with long term customer contracts is at best confusing, and at worst misleading. I encourage shareholders to focus on our cash flows to better understand the MAJES and PTS acquisitions. To date MAJES has been a successful acquisition for us. In Q1 they suffered their first negative cash flow quarter, as penalty payments were made and receivables collections were low. We anticipate that MAJES' receivables collections will improve and the business will be cash flow positive for the remainder of the year. PTS was cash flow positive in Q4 2009, but that trend reversed in Q1 2010. We are still coming to grips with the business, but continue to have confidence in its long-term prospects. I wouldn't bet my truck that PTS will be cash flow positive this year."

During the quarter, Constellation completed five acquisitions for total net cash consideration of approximately $15 million, and paid holdbacks related to prior acquisitions of $1 million. At March 31, 2010, cash and cash equivalents position (net of borrowings on our line of credit) decreased to negative $32 million, from negative $10 million at December 31, 2009.

"Excluding the impact of PTS, we had our second quarter of positive organic growth primarily driven by a significant improvement in our private sector," commented John Billowits, Chief Financial Officer of Constellation. "Although PTS generated positive Adjusted EBITDA in Q1 2010, the business consumed a large amount of working capital resulting in negative operating cash flow. As previously mentioned, it may take some time before PTS contributes positive operating cash flow on a consistent basis."

Conference Call and Webcast

Management will host a conference call at 8:30 a.m. (ET) on Thursday, May 6, 2010 to answer questions regarding the results. The teleconference numbers are 416-695-7848 or 800-355-4959. The call will also be webcast live and archived on Constellation's web site at www.csisoftware.com.

A replay of the conference call will be available as of 11:30 a.m. ET the same day until 11:59 p.m. ET on May 20, 2010. To access the replay, please dial 416-695-5800 or 800-408-3053 followed by the passcode 2071363#.

Forward Looking Statements

Certain statements herein may be "forward looking" statements that involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of Constellation or the industry to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. 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. These forward looking statements reflect current assumptions and expectations regarding future events and operating performance and are made as of the date hereof and Constellation assumes no obligation, except as required by law, to update any forward looking statements to reflect new events or circumstances.

Non-GAAP Measures

The term ''Adjusted EBITDA'' refers to net income before deducting interest, taxes, depreciation, other expenses (income), amortization, and foreign exchange (gain) loss. The Company believes that Adjusted EBITDA is useful supplemental information as it provides an indication of the results generated by the Company's main business activities prior to taking into consideration how those activities are financed and taxed and also prior to taking into consideration asset depreciation and the other items listed above. ''Adjusted EBITDA margin'' refers to the percentage that Adjusted EBITDA for any period represents as a portion of total revenue for that period.

''Adjusted Net Income'' means net income plus non-cash expenses (income) such as amortization of intangible assets, future income taxes, and certain other income/expenses. The Company believes that Adjusted Net Income is useful supplemental information as it provides an indication of the results generated by the Company's main business activities prior to taking into consideration amortization of intangible assets, future income taxes, and certain other non-cash income/expenses incurred by the Company from time to time. ''Adjusted Net Income margin'' refers to the percentage that Adjusted Net Income for any period represents as a portion of total revenue for that period.

Adjusted EBITDA and Adjusted Net Income are not recognized measures under GAAP and, accordingly, shareholders are cautioned that Adjusted EBITDA and Adjusted Net Income should not be construed as alternatives to net income determined in accordance with GAAP as an indicator of the financial performance of the Company. The Company's method of calculating Adjusted EBITDA and Adjusted Net Income may differ from other issuers and, accordingly, Adjusted EBITDA and Adjusted Net Income may not be comparable to similar measures presented by other issuers.

The following table reconciles Adjusted EBITDA to net income:

  Three months ended Mar. 31,  
    2010     2009  
  ($000, except percentages)  
     
Total revenue $ 143,893   $ 97,252  
             
Net income (loss)   6,313     3,781  
Add back:            
Income taxes   654     1,809  
Foreign exchange loss (gain)   91     (1,027 )
Interest expense, net   645     680  
Other (income) expenses   (189 )   188  
Amortization of intangible assets   15,295     14,379  
Depreciation   1,047     750  
             
Adjusted EBITDA   23,856     20,560  
Adjusted EBITDA margin   17 %   21 %

The following table reconciles Adjusted Net Income to net income:

  Three months ended Mar. 31,  
    2010     2009  
  ($000, except percentages)  
     
Total revenue $ 143,893   $ 97,252  
             
Net income (loss)   6,313     3,781  
Add back:            
Amortization of intangible assets   15,295     14,379  
Future income taxes (recovery)   (2,941 )   (1,343 )
             
Adjusted net income   18,667     16,817  
Adjusted net income margin   13 %   17 %

The following tables provide supplemental statement of operations and cash flow information of PTS and certain assets and liabilities acquired from MAXIMUS Inc.'s Asset, Justice, and Education businesses ('MAJES') MAJES:

Statement of Operations  
For the three months ended March 31, 2010  
   
   
  For the 3 months ended March 31, 2010  
(Unaudited) Constellation                    
  Software Inc.                    
  (excluding                    
  MAJES and                    
  PTS)   MAJES     PTS   Consolidated  
   
Revenue $ 98,615   $ 18,271   $ 27,007   $ 143,893  
Cost of revenue   36,340     6,734     17,476     60,550  
Gross Profit   62,275     11,537     9,531     83,343  
   
Total Expenses (excluding amortization)   45,112     6,969     7,406     59,487  
   
Adjusted EBITDA   17,163     4,568     2,125     23,856  
  EBITDA as % Total Revenue   17 %   25 %   8 %   17 %
                         
  Depreciation   897     108     42     1,047  
                         
Income before the undernoted   16,266     4,460     2,083     22,809  
   
Amortization of intangible assets   13,844     1,451     -     15,295  
Other expenses, net   219     79     249     547  
   
Income before income taxes   2,203     2,930     1,834     6,967  
   
Income taxes   (77 )   25     705     654  
   
Net Income $ 2,280   $ 2,905   $ 1,129   $ 6,313  
   
   
   
Cash flow from operating activities          
For the three months ended March 31, 2010          
   
  For the 3 months ended March 31, 2010  
   
  Constellation                    
  Software Inc.                    
  (excluding                    
  MAJES and                    
(Unaudited) PTS)   MAJES     PTS   Consolidated  
   
Cash flows from operating activities:                        
  Net income $ 2,280   $ 2,905   $ 1,129   $ 6,313  
                         
  Adjustments to reconcile net income to net cash flows from operations:                        
    Depreciation   897     108     42     1,047  
    Amortization of intangible assets   13,844     1,451     -     15,295  
    Future income taxes   (3,371 )   279     151     (2,941 )
    Other non-cash items   456     2     (627 )   (169 )
                         
Change in non-cash operating working capital   410     (6,920 )   (4,666 )   (11,176 )
Cash flows from operating activities $ 14,515   $ (2,175 ) $ (3,972 ) $ 8,369  

The following table reconciles Adjusted EBITDA to net income for PTS and MAJES:

Adjusted EBITDA to net income reconciliation 
For the three months ended March 31, 2010       
       
                 For the 3 months ended March 31, 2010
(Unaudited)                    
    Constellation              
    Software Inc.              
    (excluding              
    MAJES and              
    PTS) MAJES   PTS Consolidated  
 
 
Total revenue   $ 98,615 $ 18,271 $ 27,007 $ 143,893  
 
Net income     2,280   2,905   1,129   6,313  
Add back:                    
Income tax expense     (77)   25   705   654  
Other expenses, net     219   79   249   547  
Amortization of intangible assets     13,844   1,451   -   15,295  
Depreciation     897   108   42   1,047  
 
Adjusted EBITDA     17,163   4,568   2,125   23,856  
Adjusted EBITDA margin     17%   25%   8%   17%  

About Constellation Software Inc.

Constellation's common shares are listed on the Toronto Stock Exchange under the symbol "CSU". Constellation Software is an international provider of market leading software and services to a number of industries across both the public and private sectors. The Company acquires, manages and builds vertical market software businesses that provide mission-critical software solutions to address the specific needs of its customers in those industries.

   
CONSTELLATION SOFTWARE INC.  
   
Interim Consolidated Balance Sheets  
(In thousands of U.S. dollars)  
   
    March 31, 2010   December 31, 2009  
    (Unaudited)  
Assets            
             
Current assets:            
  Cash $ 26,397   $ 33,249  
  Short-term investments and marketable securities available for sale   21,230     22,323  
  Accounts receivable   103,669     99,742  
  Work in progress   23,074     21,349  
  Inventory   14,167     12,702  
  Prepaid expenses and other current assets   21,318     19,606  
  Notes receivable   3,896     3,833  
  Investment tax credits recoverable   2,215     2,250  
  Future income taxes   3,860     4,445  
      219,826     219,499  
               
Restricted cash   2,686     2,229  
Property and equipment   11,627     10,539  
Future income taxes   11,494     10,155  
Investment tax credits recoverable   2,415     2,133  
Other long-term assets   14,804     7,169  
Intangible assets   193,714     187,788  
Goodwill   41,268     40,977  
    $ 497,834   $ 480,489  
Liabilities and Shareholders' Equity            
             
Current liabilities:            
  Bank indebtedness $ 58,565   $ 43,100  
  Accounts payable and accrued liabilities   85,936     111,307  
  Acquisition holdback payments   5,718     3,587  
  Deferred revenue   159,476     136,857  
  Income taxes payable   3,280     3,751  
      312,975     298,602  
               
Future income taxes   28,353     28,121  
Other long-term liabilities   46,746     45,708  
             
Shareholders equity:            
  Capital stock   99,283     99,283  
  Shareholder loans   (538 )   (646 )
  Accumulated other comprehensive loss   634     (157 )
  Retained earnings   10,381     9,578  
      109,760     108,058  
    $ 497,834   $ 480,489  

 

CONSTELLATION SOFTWARE INC.   
   
Interim Consolidated Statements of Operations    
(In thousands of U.S. dollars, except per share amounts)  
   
    Three months ended March 31,  
      2010     2009  
    (Unaudited)  
       
Revenue $ 143,893   $ 97,252  
Cost of revenue   60,550     35,829  
      83,343     61,423  
               
Research and development   22,190     14,701  
Sales and marketing   13,621     10,097  
General and administration   23,676     16,065  
Depreciation   1,047     750  
      60,534     41,613  
Income before the undernoted   22,809     19,810  
             
Amortization of intangible assets   15,295     14,379  
Other (income) expenses   (189 )   188  
Interest expense, net   645     680  
Foreign exchange loss (gain)   91     (1,027 )
Income before income taxes   6,967     5,590  
             
Income taxes (recovery):            
  Current   3,595     3,152  
  Future   (2,941 )   (1,343 )
      654     1,809  
Net income $ 6,313   $ 3,781  
Income per share:            
  Basic $ 0.30   $ 0.18  
  Diluted   0.30     0.18  
   
   
Weighted average number of shares outstanding:            
  Basic   21,175     21,150  
  Diluted   21,192     21,192  
  Outstanding at the end of the period   21,192     21,192  
   
   
   
CONSTELLATION SOFTWARE INC.  
Interim Consolidated Statements of Retained Earnings (deficit)  
(In thousands of U.S. dollars)  
   
  Three months ended March 31,  
    2010     2009  
  (Unaudited)  
     
Retained earnings, beginning of period $ 9,578   $ 3,931  
   
Net income   6,313     3,781  
   
Dividends   (5,510 )   (4,577 )
   
Retained earnings, end of period $ 10,381   $ 3,135  
   
   
   
Interim Consolidated Statements of Comprehensive Income            
(In thousands of U.S. dollars)            
       
  Three months ended March 31,  
    2010     2009  
  (Unaudited)  
   
Net Income $ 6,313   $ 3,781  
   
Other comprehensive net income, net of tax:            
             
  Net unrealized mark-to-market adjustment gain (loss) on available-for-sale financial assets during the period   2,074     (1,425 )
             
  Net unrealized foreign exchange adjustment gain (loss) on available-for-sale financial assets during the period   (351 )   (96 )
             
  Reclassification of unrealized gain from prior periods upon derecognition of available-for-sale investments   (696 )   -  
             
  Amounts reclassified to earnings during the period   -     210  
   
  Future tax expense on unrealized gains   (604 )   -  
   
  Foreign currency translation adjustment   368     -  
   
Comprehensive income $ 7,104   $ 2,470  

 

CONSTELLATION SOFTWARE INC.  
Interim Consolidated Statements of Cash Flow  
(In thousands of U.S. dollars)  
   
  Three months ended March 31,
    2010     2009  
  (Unaudited)  
             
Cash flows from operating activities:            
  Net Income $ 6,313   $ 3,781  
  Adjustments to reconcile net income to net cash flows from operations:            
    Depreciation   1,047     750  
    Amortization of intangible assets   15,295     14,379  
    Non-cash interest   (71 )   (36 )
    Future income taxes   (2,941 )   (1,343 )
    Other   (189 )   188  
    Foreign exchange gain   91     (1,101 )
Change in non-cash operating working capital   (11,176 )   (15,747 )
Cash flows from operating activities   8,369     871  
             
Cash flows from (used in) financing activities:            
  Increase (decrease) in other long-term liabilities   53     (53 )
  Increase (decrease) in bank indebtedness   15,465     (5,991 )
  Credit facility financing fees   -     (16 )
  Dividends paid   (5,510 )   (3,651 )
  Repayment of shareholder loans   121     298  
  Cash flows from (used in) financing activities   10,129     (9,413 )
               
Cash flows from (used in) investing activities:            
  Acquisition of businesses, net of cash acquired   (15,261 )   (2,925 )
  Acquisition holdback payments   (947 )   (1,939 )
  Earnout payments   (71 )   -  
  Additions to short-term investments, marketable securities and other assets   (7,217 )   -  
  Increase in restricted cash   (457 )   -  
  Decrease (increase) in other assets   305     (240 )
  Property and equipment purchased   (1,590 )   (921 )
  Cash flows used in investing activities   (25,238 )   (6,025 )
             
Effect of currency translation adjustment on cash and cash equivalents   (112 )   1,052  
             
Decrease in cash and cash equivalents   (6,852 )   (13,515 )
             
Cash, beginning of period   33,249     30,405  
             
Cash, end of period $ 26,397   $ 16,890  
             
Supplemental cash flow information:            
  Income taxes paid $ 3,627   $ 5,122  
  Interest paid   882     848  
  Investment tax credits received   479     75  
  Interest received   43     22  

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