Constellation Software Inc.
TSX : CSU

Constellation Software Inc.

May 07, 2008 17:00 ET

Constellation Software Inc. Announces Results for the First Quarter Ended March 31, 2008

TORONTO, ONTARIO--(Marketwire - May 7, 2008) - Constellation Software Inc. (TSX:CSU) ("Constellation" or the "Company") today announced its financial results for the first quarter ended March 31, 2008. 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 month period ended March 31, 2008 and the accompanying notes, and with our audited consolidated annual financial statements and our annual MD&A for the year ended December 31, 2007 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 2008 Highlights:

- Revenue increased to $73.6 million from $55.9 million in Q1 2007, representing a 32% increase. Organic revenue growth over the same period was 8%

- Adjusted EBITDA increased to $12.5 million or 49% from $8.4 million in Q1 2007

- Adjusted Net Income increased to $11.1 million ($0.52 on a fully diluted per share basis) or 62% from $6.9 million ($0.32 on a fully diluted per share basis) in Q1 2007

- 3 acquisitions were completed in the quarter for net cash consideration of $2.7 million, and holdbacks related to prior acquisitions of $0.5 million were paid

First quarter revenue was $73.6 million, an increase of 32%, or $17.7 million, compared to $55.9 million for the comparable period in 2007. The increase was largely attributable to growth from acquisitions, as organic growth from our existing business was estimated at approximately 8% for the first quarter.

Adjusted EBITDA for the first quarter was $12.5 million, a 49% increase compared to the prior year's first quarter Adjusted EBITDA of $8.4 million. First quarter Adjusted EBITDA per share on a fully diluted basis increased 48% to $0.59, compared to $0.40 for the same period last year.

Adjusted Net Income for the first quarter was $11.1 million, compared to the prior year's first quarter Adjusted Net Income of $6.9 million, a 62% increase. First quarter Adjusted Net Income per share on a fully diluted basis increased 63% to $0.52 compared to $0.32 for the prior year's first quarter. The method of calculating Adjusted Net Income was modified this quarter. The change was a result of the large increase in "future tax expense (recovery)" in the first quarter. Future tax recovery primarily relates to the amortization of intangible assets. Adjusted Net Income is now defined to exclude the impact of this non-cash amount. Management believes that excluding the impact of future tax provides a more accurate picture of the company's results as it more closely matches the non cash future tax items with the associated amortization of intangibles. A reconciliation of net income to Adjusted Net Income and a restatement of previously reported Adjusted Net Income amounts are included in this press release.

Net income for the first quarter was $4.3 million compared to the prior year's first quarter net income of $2.6 million. On a fully diluted per share basis, this translates into net income per share of $0.20 for the first quarter of 2008, compared to $0.12 in the same period of 2007.

The following table displays our revenue by reporting segment and the percentage change for the three months ended March 31, 2008 compared to the same period in 2007:



---------------------------------------
Three months ended Period-Over-Period
Dec. 31, Change
---------------------------------------
2007 2006 $ %
------- ------- -------- ------
($000, except percentages)

Public Sector
Licenses 5,441 3,384 2,057 60.8%
Professional services and other:
Services 12,187 9,391 2,796 29.8%
Hardware and other 4,086 2,969 1,117 37.6%
Maintenance 26,601 19,023 7,578 39.8%
---------------------------------------
48,315 34,767 13,548 39.0%
---------------------------------------
---------------------------------------

Private Sector
Licenses 3,432 2,661 771 29.0%
Professional services and other:
Services 3,923 3,788 135 3.6%
Hardware and other 1,071 1,122 (51) -4.6%
---------------------------------------
Maintenance 16,862 13,555 3,307 24.4%
25,288 21,126 4,162 19.7%
---------------------------------------


Public Sector

For the quarter ended March 31, 2008, total revenue in the public sector segment increased 39%, or $13.5 million, to $48.3 million, compared to $34.8 million for the quarter ended March 31, 2007. Revenue increased significantly across all revenue types. Revenue growth from acquired businesses was significant for the three month period as we completed 11 acquisitions since the beginning of 2007 in our public sector segment. It is estimated that acquisitions contributed approximately $8.5 million to our Q1 2008 revenue. The remaining $5.0 million of revenue growth for Q1 2008 in this sector was generated from organic sources. The organic growth was primarily driven by the following:

- Trapeze Operating Group (increase of approximately $3.5 million for Q1). Trapeze experienced a significant increase in maintenance revenues and an increase in license and services revenue in the quarter primarily due to improvements in their mobile computing, UK and North American businesses.

- Harris Operating Group (increase of approximately $1.9 million for Q1). Harris had strong sales both to existing clients and to new customers as well as a strong increase in maintenance revenues from completed implementations.

- Emphasys Operating Group (decrease of approximately $0.3 million for Q1). Emphasys experienced a decrease in license revenue primarily due to timing of bookings.

Private Sector

For the quarter ended March 31, 2008, total revenue in the private sector segment increased 20%, or $4.2 million, to $25.3 million, compared to $21.1 million for the quarter ended March 31, 2007. Strong growth in maintenance and license revenue was offset by marginal growth in professional services revenue and a slight decline in hardware and other revenue. Revenue growth from acquired businesses was significant for the three month period as we completed 5 acquisitions since the beginning of 2007 in our private sector segment. It is estimated that acquisitions contributed approximately $5.0 million to our Q1 2008 revenue. Revenues decreased organically by $0.8 million in Q1 2008. The organic revenue decline was driven by the following:

- Jonas Operating Group (increase of approximately $1.3 million for Q1). The Jonas organic growth in Q1 2008 was driven by sales to new customers in the construction vertical, increasing customer share in the private club vertical through selling add on products, and by strong license and professional services revenue in the food services vertical.

- Homebuilder and Friedman Operating Groups (decrease of approximately $2.1 million for Q1). Our Homebuilder and Friedman operating groups continued 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.

"We are pleased by the growth in revenue in the quarter, in particular the continued improvement in organic growth," said Mark Leonard, President of Constellation. "The improvement in organic growth combined with the deployment of over $50 million in capital on acquisitions in 2007, provides us increased comfort that we will achieve the minimum 20% revenue growth per share that we targeted for our 2006-2010 objectives."

During the quarter, Constellation completed three acquisitions for total net cash consideration of approximately $2.7 million, and paid holdbacks related to prior acquisitions of $0.5 million. At March 31, 2007, cash and cash equivalents position (net of borrowings on our line of credit) decreased to negative $11.2 million, from $0.5 million at December 31, 2007.

"We have been successful deploying capital to acquire new businesses at what we expect to be attractive rates of return for our shareholders," commented John Billowits, Chief Financial Officer of Constellation. "With six acquisitions completed to date in 2008, we increased our operating line of credit to $105 million to provide us increased capacity to take advantage of further acquisition opportunities should they arise".

Conference Call and Webcast

Management will host a conference call at 8:30 a.m. (ET) on Thursday, May 8, 2007 to answer questions regarding the results. The teleconference numbers are 416-641-6144 or 1-866-862-3931. 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 until11:59 p.m. ET on May 22, 2008. To access the replay, please dial 416-695-5800 or1-800-408-3053 followed by the passcode 3259250#.

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, amortization, other expenses and foreign exchange, and before including gain on sale of short-term investments, marketable securities and other assets. 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.

Effective this quarter, the term "Adjusted Net Income" means net income plus amortization of intangible assets and future income taxes. Prior to Q1 2008, Adjusted Net Income was reported on the basis of net income plus amortization of intangible assets. The method of adjustment has been changed to include future income taxes since the majority of future income taxes relate to the amortization of intangible assets, and thus are being added back to more closely match the non-cash future tax items with the associated amortization of intangibles. All previously reported Adjusted Net Income figures have been restated below to reflect the new method of adjustment. 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 intangibles and future income taxes as these are non-cash expenses that do not necessarily reflect the increase or decrease in the economic value of acquisitions. "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 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
Mar. 31,
---------------------------
2008 2007
------- ------
($000, except percentages)

Total revenue 73,603 55,893
---------------------------
---------------------------

Net income 4,329 2,602
Add back:
Income tax expense (recovery) (348) 1,003
Foreign exchange loss (gain) (471) 7
Interest expense (income) 163 (115)
(Gain) on sale of short-term investments,
marketable securities and other assets (48) (234)
Amortization of intangible assets 8,096 4,434
Depreciation 785 692

Adjusted EBITDA 12,506 8,389
Adjusted EBITDA margin 17.0% 15.0%
---------------------------

The following table reconciles Adjusted Net Income to net income:

Three months ended
Mar. 31,
---------------------------
2008 2007
------- -------
($000, except percentages)
Total revenue 73,603 55,893
---------------------------
---------------------------

Net income 4,329 2,602
Add back:
Amortization of intangible assets 8,096 4,434
Future income tax expense (recovery) (1,309) (154)

Adjusted net income 11,116 6,882
Adjusted net income margin 15.1% 12.3%
---------------------------

The following table provides a restatement of our previously reported
Adjusted net income figures to include future income taxes:

Quarter Ended
--------------------
June 30, Sept 30, Dec 31, March 31,
2006 2006 2006 2007
-------- -------- ------- ----------
($000, except per share amounts)

ANI previously reported 5,097 6,776 8,975 7,036
Future tax expense (recovery) (688) 727 (15) (154)
-----------------------------------------
Restated ANI 4,409 7,503 8,960 6,882

ANI/share previously reported 0.24 0.32 0.42 0.33
Restated ANI/share 0.21 0.35 0.42 0.32


Quarter Ended
--------------------
June 30, Sept 30, Dec 31, March 31,
2007 2007 2007 2008
-------- -------- ------- ----------
($000, except per share amounts)
ANI previously reported 8,751 8,628 9,059 12,425
Future tax expense (recovery) (348) (115) 302 (1,309)
-----------------------------------------
Restated ANI 8,403 8,513 9,361 11,116

ANI/share previously reported 0.41 0.41 0.43 0.59
Restated ANI/share 0.40 0.40 0.44 0.52


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, December 31,
2008 2007
---------------------------------------------------------------------------
(Unaudited)

Assets

Current assets:
Cash $ 11,422 $ 19,796
Restricted cash 750 750
Short-term investments and marketable
securities available for sale 8,462 1,217
Accounts receivable 53,270 47,177
Work in progress 9,812 10,839
Inventory 2,292 2,069
Prepaid expenses and other current assets 8,652 7,608
Investment tax credit receivable 1,232 661
Future income taxes 1,128 1,096
--------------------------------------------------------------------------
97,020 91,213

Property and equipment 7,835 8,025
Future income taxes 3,646 3,890
Notes receivable 3,518 3,490
Share purchase warrants 571 571
Investment tax credit receivable 1,512 1,779
Other long-term assets 627 643
Intangible assets 121,314 128,942
Goodwill 33,975 28,594

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$ 270,018 $ 267,147
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Liabilities and Shareholders' Equity

Current liabilities:
Bank indebtedness $ 22,642 $ 19,342
Accounts payable and accrued liabilities 34,544 43,892
Acquisition holdback payments 9,898 10,442
Deferred revenue 89,230 78,870
Income taxes payable 2,430 3,426
Future income taxes 201 347
--------------------------------------------------------------------------
158,945 156,319

Future income taxes 21,671 21,238
Acquisition holdback payments 1,195 1,000
Other long-term liabilities 1,570 1,708

Shareholders' equity:
Capital stock 99,283 99,283
Shareholder loans (1,468) (1,915)
Accumulated other comprehensive loss (4,444) (3,237)
Deficit (6,734) (7,249)
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86,637 86,882

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$ 270,018 $ 267,147
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CONSTELLATION SOFTWARE INC.
Interim Consolidated Statements of Operations
(In thousands of U.S. dollars, except per share amounts)

---------------------------------------------------------------------------
---------------------------------------------------------------------------
Three months ended
March 31,
2008 2007
---------------------------------------------------------------------------
(Unaudited)

Revenue $ 73,603 $ 55,893
Cost of revenue 28,627 21,516
---------------------------------------------------------------------------
44,976 34,377

Research and development 11,630 8,910
Sales and marketing 8,041 7,042
General and administration 12,799 10,036
Depreciation 785 692
---------------------------------------------------------------------------
33,255 26,680
---------------------------------------------------------------------------

Income before the undernoted 11,721 7,697

Amortization of intangible assets 8,096 4,434
Gain on sale of short-term investments,
marketable securities and other assets (48) (234)
Interest expense (income), net 163 (115)
Foreign exchange (gain) loss (471) 7
---------------------------------------------------------------------------

Income before income taxes 3,981 3,605

Income taxes (recovery):
Current 961 1,157
Future (1,309) (154)
--------------------------------------------------------------------------
(348) 1,003

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Net income $ 4,329 $ 2,602
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Income per share:
Basic $ 0.21 $ 0.12
Diluted 0.20 0.12

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

Weighted average number of shares outstanding:
Basic 21,113 21,093
Diluted 21,192 21,192
Outstanding at the end of the period 21,192 21,192

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



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

---------------------------------------------------------------------------
---------------------------------------------------------------------------
Three months ended
March 31,
2008 2007
---------------------------------------------------------------------------
(Unaudited)

Deficit, beginning of period $ (7,249) $ (15,180)

Net income 4,329 2,602

Dividends (3,814) (3,179)

---------------------------------------------------------------------------
Deficit, end of period $ (6,734) $ (15,757)
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Interim Consolidated Statements of Comprehensive Income
(In thousands of U.S. dollars)

---------------------------------------------------------------------------
---------------------------------------------------------------------------
Three months ended
March 31,
2008 2007
---------------------------------------------------------------------------
(Unaudited)

Net income $ 4,329 $ 2,602

Other comprehensive income (loss) (1,292) 832

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Comprehensive income $ 3,037 $ 3,434
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CONSTELLATION SOFTWARE INC.
Interim Consolidated Statements of Cash Flows
(In thousands of U.S. dollars)

---------------------------------------------------------------------------
---------------------------------------------------------------------------
Three months ended
March 31,
2008 2007
---------------------------------------------------------------------------
(Unaudited)

Cash flows from operating activities:
Net income $ 4,329 $ 2,602
Adjustments to reconcile net income to
net cash flows from operations:
Depreciation 785 692
Amortization of intangible assets 8,096 4,434
Accretion interest 29 --
Future income taxes (1,309) (154)
Gain on sale of short-term investments,
marketable securities and other assets (48) (234)
Unrealized foreign exchange gain (245) (16)
Change in non-cash operating working capital (7,782) (8,922)
---------------------------------------------------------------------------
Cash flows from (used in) operating activities 3,855 (1,598)

Cash flows from financing activities:
Decrease in long-term liabilities (138) (230)
Increase in bank indebtedness 3,300 2,422
Dividends (3,814) (3,179)
Issuance of shareholder loans -- (447)
Repayment of shareholder loans, net 447 792
--------------------------------------------------------------------------
Cash flows used in financing activities (205) (642)

Cash flows from investing activities:
Acquisition of businesses, net of cash acquired (3,212) (14,617)
Reduction (additions) to short-term investments,
marketable securities and other assets (8,405) 801
Decrease in restricted cash -- 858
Decrease (increase) in other assets 226 (310)
Property and equipment purchased (513) (517)
--------------------------------------------------------------------------
Cash flows used in investing activities (11,904) (13,785)

Effect of currency translation adjustment on
cash and cash equivalents (120) 26
---------------------------------------------------------------------------

Decrease in cash and cash equivalents (8,374) (15,999)

Cash, beginning of period 19,796 25,807

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Cash, end of period $ 11,422 $ 9,808
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