Constellation Software Inc.
TSX : CSU

Constellation Software Inc.

November 07, 2007 17:00 ET

Constellation Software Inc. Announces Results for the Three and Nine Months Ended September 30, 2007

TORONTO, ONTARIO--(Marketwire - Nov. 7, 2007) - Constellation Software Inc. (TSX:CSU) Constellation" or the "Company") today announced its financial results for the three and nine months ended September 30, 2007. 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 the unaudited consolidated interim financial statements for the three and nine month periods ended September 30, 2007 and the accompanying notes, and with our consolidated annual financial statements and our annual MD&A for the year ended December 31, 2006 which can be found on the company website www.csisoftware.com. Additional information about the Company is available on SEDAR at www.sedar.com.



Q3 2007 Results:

- Revenue up 13% as compared to Q3 2006
- Adjusted EBITDA up 43% as compared to Q3 2006
- Adjusted Net Income up 27% (to $0.41 on a per share basis)
as compared to Q3 2006
- Completed three acquisitions since Q2 2007


Third quarter revenue was $60.6 million, an increase of 13%, compared to $53.8 million reported in the same period last year. Total revenue for the nine months ended September 30, 2007 was $177.0 million, an increase of 13% over last year's revenues of $157.2 million. Revenue per share on a fully diluted basis for the nine month period was $8.35, an increase of 12% compared to the same period in 2006.

Adjusted EBITDA for the third quarter was $11.4 million, a 43% increase compared to the prior year's third quarter Adjusted EBITDA of $7.9 million. Third quarter Adjusted EBITDA per share on a fully diluted basis increased 46% to $0.54, compared to $0.37 for the same period last year. Adjusted EBITDA for the nine month period ended September 30, 2007 was $30.6 million, an increase of 36% over last year's Adjusted EBITDA of $22.5 million for the same period. Adjusted EBITDA per share on a fully diluted basis for the nine month period increased 35% to $1.44, compared to $1.07 for the same period in 2006.

Adjusted Net Income for the third quarter was $8.6 million, compared to the prior year's third quarter Adjusted Net Income of $6.8 million, a 27% increase. Third quarter Adjusted Net Income per share on a fully diluted basis increased 28% to $0.41 compared to $0.32 for the prior year's third quarter. Adjusted Net Income for the nine month period ended September 30, 2007 was $24.4 million, an increase of 44% over last year's Adjusted Net Income of $17.0 million. Adjusted Net Income per share on a fully diluted basis for the nine month period ended September 30, 2007 increased 42% to $1.15 compared to $0.81 for the same period in 2006.

Net income for the third quarter was $3.3 million compared to the prior year's third quarter net income of $2.3 million. On a fully diluted per share basis, this translates into net income per share of $0.16 for the third quarter of 2007, compared to $0.11 in the same period of 2006. For the nine months ended September 30, 2007 net income was $9.5 million or $0.45 per diluted share compared to a net loss of $5.1 million or $0.24 per share last year. As previously noted, the reason for the net loss in the first nine months of 2006 was the $10.1 million charge to net income caused by the appreciation in common shares eligible for redemption ("ACSER"). ACSER was a non-cash expense which occurred during the first quarter of 2006 which will not be repeated now that we have completed our initial public offering.

The following table displays revenue by reporting segment and the percentage change for the three and nine months ended September 30, 2007 compared to the same periods in 2006:



--------------------------- ----------------------------
Three months Period-Over- Nine months Period-Over-
ended Period ended Period
Sep. 30, Change Sep. 30, Change
--------------------------- ----------------------------
2007 2006 $ % 2007 2006 $ %
---- ---- - - ---- ---- - -
($000, except percentages) ($000, except percentages)
Public Sector
Licenses 4,643 4,509 134 3.0% 12,583 13,261 (678) -5.1%
Professional
services and
other:
Services 10,924 9,941 983 9.9% 31,482 27,503 3,979 14.5%
Hardware and
other 2,063 2,749 (686) -25.0% 7,950 7,597 353 4.6%
Maintenance 21,831 16,474 5,357 32.5% 61,552 46,895 14,657 31.3%
--------------------------- ----------------------------
39,461 33,673 5,788 17.2% 113,567 95,256 18,311 19.2%
--------------------------- ----------------------------
--------------------------- ----------------------------

Private Sector
Licenses 2,436 2,358 78 3.3% 7,833 8,036 (203) -2.5%
Professional
services and
other:
Services 3,471 3,613 (142) -3.9% 10,729 12,273 (1,544) -12.6%
Hardware and
other 944 1,359 (415) -30.5% 3,140 3,773 (633) -16.8%
Maintenance 14,262 12,806 1,456 11.4% 41,686 37,902 3,784 10.0%
--------------------------- ----------------------------
21,113 20,136 977 4.9% 63,388 61,984 1,404 2.3%
--------------------------- ----------------------------


Public Sector

For the quarter ended September 30, 2007, total revenue in the public sector segment increased 17.2%, or $5.8 million, to $39.5 million, compared to $33.7 million for the quarter ended September 30, 2006. For the nine months ended September 30, 2007 total revenue increased by 19.2% or $18.3 million, to $113.6 million, compared to $95.3 million for the comparable period in 2006. The increases for both the three and nine month periods were significant in maintenance and professional services revenue. License fees increased by 3.0% in the third quarter but decreased by 5.1% for the first nine months over the comparable periods in 2006. Revenue growth from acquired businesses was significant for both the three and nine month periods as we completed 15 acquisitions since the beginning of 2006 in our public sector segment. It is estimated that these acquisitions contributed approximately $5.5 million to our Q3 2007 revenues and $17.4 million to our revenues in the nine months ended September 30, 2007. The remaining $0.3 million of revenue growth for Q3 and $0.9 million of revenue growth for the first nine months of 2006 in this sector was generated from organic sources. The organic growth was driven by the following:

- Trapeze operating group (decrease of approximately $0.7 million for Q3 and $1.4 million for the first nine months). Trapeze experienced declines in license and services revenues in both the quarter and year to date results, primarily due to the timing of bookings in our mobile computing and European businesses, offset in part by strong growth in maintenance revenues in both the quarter and year to date results of 2007.

- Harris operating group (increase of approximately $0.4 million for Q3 and $1.9 million for the first nine months). Harris' organic growth continues to be driven by upgrades under our software for life program and continued sales to new name customers.

- Emphasys operating group (increase of approximately $0.5 million for Q3 and $0.6 million for the first nine months). The Emphasys organic growth primarily results from continued sales back to existing clients and sales to new name customers.

Private Sector:

For the quarter ended September 30, 2007, total revenue in the private sector segment increased 4.9%, or $1.0 million, to $21.1 million, compared to $20.1 million for the quarter ended September 30, 2006. For the nine months ended September 30, 2007, total revenue increased by 2.3% or $1.4 million, to $63.4 million, compared to $62.0 million for the comparable period in 2006. Strong growth in maintenance revenue was offset by a decline in both professional services and hardware revenue. Revenue growth from acquired businesses was not as strong as in the public sector as we have only completed three acquisitions since the beginning of 2006 in our private sector segment. It is estimated that these acquisitions contributed approximately $0.9 million of revenue growth to our Q3 2007 revenues and $2.0 million of revenue growth to our revenues in the nine months ended September 30, 2007. Revenues increased organically by $0.1 million in Q3 2007 and declined by $0.6 million in the first nine months of 2007. The organic revenue decline was driven by the following:

- Jonas operating group (increase of approximately $0.8 million for Q3 and $1.7 million for the first nine months of 2007). The Jonas organic growth in 2007 continues to be driven by maintenance revenues as we continue to capture both market share and customer share in the private club and construction verticals.

- Homebuilder operating group (decrease of approximately $0.5 million for Q3 and $1.4 million for the first nine months of 2007). Our Homebuilder operating group continues to feel the effects of the housing slowdown in the U.S. The decline was most apparent in licenses and professional services as many of our clients and prospective clients have delayed purchasing decisions.

- Friedman operating group (decrease of approximately $0.1 million for Q3 and $0.8 million for the first nine months of 2007). Friedman (like Homebuilders) is feeling the effects of the building products and housing starts slow down. The decline at Friedman is the result of lower services as our maintenance revenues have increased period over period.

"We are pleased with our profit levels in third quarter, as we delivered $0.41 per share in Adjusted Net Income, despite having a $0.03 per share foreign exchange loss", said Mark Leonard, President of Constellation. "Unfortunately, our revenue growth continues to trend below our objective. We produced just 1% organic growth in the quarter. Several of our private sector businesses that are related to the housing sector continue to experience declining revenues, which has offset good organic growth in a number of our other verticals. Despite our short-term performance, we continue to believe that we will achieve the 20% revenue growth per share that we targeted in our 2006-2010 objectives."

During the quarter, Constellation made three acquisitions for total net cash consideration of approximately $2.6 million, and paid holdbacks related to prior period acquisitions of $0.5million. At September 30, 2007, the Company had cash and marketable securities of $18.6 million, down from $30.0 million as of December 31, 2006. The Company continues to seek further organic growth opportunities and acquisitions.

Conference Call and Webcast

Management will host a conference call at 8:30 a.m. (ET) on Thursday, November 8, 2007 to answer questions regarding the results. The teleconference numbers are 416-695-9712 or 1-888-818-4097. 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 12 a.m. ET on November 22, 2007. To access the replay, please dial 416-695-5800 or 1-800-408-3053 followed by the passcode 3238889#.

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. These statements reflect current assumptions and expectations regarding future events and operating performance and speak only as of the date hereof. 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 are made as of the date hereof and Constellation assumes no obligation 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, amortization, appreciation in common shares eligible for redemption, other expenses and foreign exchange, and before including gain on sale of short-term investments, marketable securities and other assets. Constellation 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. The term ''Adjusted Net Income'' means net income plus appreciation in common shares eligible for redemption and amortization of intangible assets. 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 appreciation in common shares eligible for redemption (which will no longer be included in net income for periods following the closing of our IPO) and prior to taking into consideration amortization of intangibles as these are non-cash expenses that do not necessarily reflect the economic value of our acquisitions.

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 or as a measure of the Company's liquidity and cash flows. 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 Nine months ended
Sep. 30, Sep. 30,
-------------------------- --------------------------
2007 2006 2007 2006
---- ---- ---- ----
($000, except percentages) ($000, except percentages)

Total revenue 60,574 53,809 176,955 157,240
-------------------------- --------------------------
-------------------------- --------------------------

Net income (loss) 3,326 2,287 9,470 (5,068)
Add back:
Income tax expense 1,356 543 3,433 1,560
Foreign exchange
loss (gain) 690 (185) 2,042 (111)
Interest income (249) (3) (398) (87)
Gain on sale of
short-term
investments,
marketable
securities and
other assets 0 0 (1,354) (8)
Other expenses 70 0 70 1,970
Appreciation in
common shares
eligible for
redemption 0 0 0 10,093
Amortization of
intangible assets 5,302 4,489 14,945 11,947
Depreciation 863 793 2,411 2,156

Adjusted EBITDA 11,358 7,924 30,619 22,452
Adjusted EBITDA
margin 18.8% 14.7% 17.3% 14.3%
-------------------------- --------------------------


The following table reconciles Adjusted Net Income to net income:

--------------------------- -------------------------
Three months ended Nine months ended
Sep. 30, Sep. 30,
--------------------------- -------------------------
2007 2006 2007 2006
---- ---- ---- ----
($000, except percentages) ($000, except percentages)
Total revenue 60,574 53,809 176,955 157,240
--------------------------- -------------------------
--------------------------- -------------------------

Net income (loss) 3,326 2,287 9,470 (5,068)
Add back:
Appreciation in
common shares
eligible for
redemption 0 0 0 10,093
Amortization of
intangible assets 5,302 4,489 14,945 11,947

Adjusted net income 8,628 6,776 24,415 16,972
Adjusted net income
margin 14.2% 12.6% 13.8% 10.8%
-------------------------- -------------------------


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)

-----------------------------------------------------------------------
-----------------------------------------------------------------------
September 30, December 31,
2007 2006
-----------------------------------------------------------------------
(Unaudited)
Assets

Current assets:
Cash and cash equivalents $ 18,977 $ 25,807
Restricted cash - 858
Short-term investments and marketable
securities - available for sale 1,366 3,320
Accounts receivable 39,623 32,655
Work in progress 13,398 13,189
Inventory 2,061 1,434
Prepaid expenses and other current assets 9,813 4,787
Future income taxes 911 1,153
-----------------------------------------------------------------------
86,149 83,203

Property and equipment 7,079 6,385
Future income taxes 3,320 3,429
Notes receivable 3,461 -
Share purchase warrants 571 -
Other long-term assets 2,092 585
Goodwill 30,130 26,886
Intangible assets 77,937 66,085

-----------------------------------------------------------------------
$ 210,739 $ 186,573
-----------------------------------------------------------------------
-----------------------------------------------------------------------

Liabilities and Shareholders' Equity

Current liabilities:
Bank indebtedness $ 1,712 $ -
Accounts payable and accrued liabilities 34,540 37,024
Acquisition holdback payments 6,378 4,797
Deferred revenue 66,618 56,190
Income taxes payable 5,109 1,063
Future income taxes 37 -
-----------------------------------------------------------------------
114,394 99,074

Future income taxes 9,501 8,048

Acquisition holdback payments 231 231
Other long-term liabilities 1,287 404

Shareholders' equity:
Capital stock 99,283 99,283
Shareholder loans (1,887) (2,135)
Accumulated other comprehensive loss (3,181) (3,152)
Deficit (8,889) (15,180)
-----------------------------------------------------------------------
85,326 78,816
Subsequent event

-----------------------------------------------------------------------
$ 210,739 $ 186,573
-----------------------------------------------------------------------
-----------------------------------------------------------------------



CONSTELLATION SOFTWARE INC.
Interim Consolidated Statements of Operations
(In thousands of U.S. dollars, except per share amounts)

-----------------------------------------------------------------------
-----------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
2007 2006 2007 2006
-----------------------------------------------------------------------
(Unaudited) (Unaudited)

Revenue $ 60,574 $ 53,809 $ 176,955 $ 157,240
Cost of revenue 22,368 21,060 66,904 61,674
-----------------------------------------------------------------------
38,206 32,749 110,051 95,566

Research and development 9,127 8,489 26,899 24,877
Sales and marketing 6,727 6,488 21,093 19,634
General and administration 10,994 9,848 31,440 28,603
Depreciation 863 793 2,411 2,156
-----------------------------------------------------------------------
27,711 25,618 81,843 75,270
-----------------------------------------------------------------------

Income before the undernoted 10,495 7,131 28,208 20,296

Appreciation in common
shares eligible for
redemption - - - 10,093
Amortization of intangible
assets 5,302 4,489 14,945 11,947
Other expenses 70 - 70 1,970
Gain on sale of short-term
investments, marketable
securities and other assets - - (1,354) (8)
Interest income (249) (3) (398) (87)
Foreign exchange loss (gain) 690 (185) 2,042 (111)
-----------------------------------------------------------------------

Income (loss) before income
taxes 4,682 2,830 12,903 (3,508)

Income taxes (recovery):
Current 1,471 (184) 4,050 1,816
Future (115) 727 (617) (256)
-----------------------------------------------------------------------
1,356 543 3,433 1,560

-----------------------------------------------------------------------
Net income (loss) $ 3,326 $ 2,287 $ 9,470 $ (5,068)
-----------------------------------------------------------------------
-----------------------------------------------------------------------

Income (loss) per share:
Basic $ 0.16 $ 0.11 $ 0.45 $ (0.24)
Diluted 0.16 0.11 0.45 (0.24)

Weighted average number of
shares outstanding
(in thousands):

Basic 21,119 21,039 21,107 20,726
Diluted 21,192 21,192 21,192 20,726

Outstanding at the end of
the period 21,192 21,192 21,192 21,192

-----------------------------------------------------------------------
-----------------------------------------------------------------------



CONSTELLATION SOFTWARE INC.
Interim Consolidated Statements of Cash Flows
(In thousands of U.S. dollars)

------------------------------------------------------------------------
------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
2007 2006 2007 2006
------------------------------------------------------------------------
(Unaudited) (Unaudited)

Cash flows from operating
activities:
Net income (loss) $ 3,326 $ 2,287 $ 9,470 $ (5,068)
Adjustments to reconcile net
income to net cash flows
from operations:
Depreciation 863 793 2,411 2,156
Amortization of intangible
assets 5,302 4,489 14,945 11,947
Loss on common shares
eligible for redemption - - - 10,093
Deferred compensation - - - 400
Future income taxes (115) 727 (617) (256)
Gain on sale of short-term
investments, marketable
securities and other assets - - (1,354) (8)
Unrealized exchange loss
(gain) 713 (241) 1,996 (480)
Change in non-cash operating
working capital 5,439 3,546 (6,760) (3,276)
------------------------------------------------------------------------
Cash flows from operating
activities 15,528 11,601 20,091 15,508

Cash flows from financing
activities:
Increase (decrease) in
long-term liabilities 310 (819) 101 (802)
Increase in bank indebtedness (1,881) (2,600) 1,712 -
Dividends - - (3,179) (1,381)
Distributions to common
shares eligible
for redemption - - - (471)
Issue of common shares
eligible for redemption,
net of shareholder loans - - - 3,805
Redemption of common shares
eligible for redemption - - - (20)
Issuance of shareholder loans - - (447) -
Repayment of shareholder loan s (65) 262 695 2,474
Repurchase of phantom shares - - - (1,657)
Return of capital - - - (637)
------------------------------------------------------------------------
Cash flows from financing
activities (1,636) (3,157) (1,118) 1,311

Cash flows from investing
activities:
Acquisition of businesses,
net of cash acquired (3,103) (1,298) (21,918) (15,025)
Reduction (increase) to
short-term investments,
marketable securities
and other assets (869) (831) 3,082 (2,309)
Decrease in restricted cash - - 858 -
Decrease (increase) in other
assets (25) (31) (4,249) 130
Property and equipment
purchased (544) (483) (1,829) (1,992)
------------------------------------------------------------------------
Cash flows (used in)
investing activities (4,541) (2,643) (24,056) (19,196)

Effect of currency translation
adjustment on cash and cash
equivalents (998) 198 (1,747) 640
------------------------------------------------------------------------

Increase (decrease) in cash
and cash equivalents 8,353 5,999 (6,830) (1,737)

Cash and cash equivalents,
beginning of period 10,624 10,549 25,807 18,285

------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 18,977 $ 16,548 $ 18,977 $ 16,548
------------------------------------------------------------------------
------------------------------------------------------------------------

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