Constellation Software is a leading global provider of software and services. It acquires, manages, and builds vertical marketing software companies (VMS). It is aimed at both public and private customers, with the public sector generating almost two thirds of its total sales.

The company has grown into a constellation of companies with a large, diverse customer base consisting of over 125,000 customers in over 100 countries worldwide. Constellation combines its six operating segments (Volaris, Harris, TSS, Jonas, Vela and Perseus) and reports under one segment.

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Investment data

Sales growth and market presence

The software company is known for developing market-leading solutions tailored to the specific needs of customers in specific industries. Constellation caters to a diversified group of industries ranging from advertising and marketing, wealth management, automotive, aviation, communications, compliance to construction, education, healthcare, hospitality, law, logistics, industrial distribution, mining, and oil and gas and wealthy real estate agents and agents.

The company has a presence in both the public and private sectors, serving companies with a focus on government, government and commercial customers. Constellation is well positioned to sell a combination of software, maintenance, professional services and hardware to its customers and therefore has strong customer relationships.

Constellation Software’s consolidated sales last year were $ 3.9 billion. Revenue is primarily made up of fees – maintenance and other recurring fees (~ 70% of 2020 sales), professional service fees (~ 19%), software license fees (~ 6%), and hardware sales (~ 5%).

The company has grown organically and also through strategic acquisitions that focus on vertical market software companies for growth. Constellation has acquired more than 500 companies since its inception in 1995, but has only made three major VMS acquisitions in its history. The company will now focus on large VMS acquisitions.

Total revenue for the year increased 14%, mainly due to growth through acquisitions. No significant acquisitions were made in the first nine months of 2020, however Topicus, a Netherlands-based provider of diversified vertical marketing software, did so during the year. The company’s sales have increased more than 26% CAGR over the past decade.

Dividends

Constellation boasts a modest dividend yield of 0.26% and a very low payout ratio of 19%. A low payout ratio means enough room for future growth. Constellation’s goal is to invest the free cash flow (available to shareholders) in acquisitions that meet the hurdle rate, overpaying dividends, or buying back shares.

The company has paid three special dividends in the past and has paid a regular quarterly dividend for the past decade. The last dividend increase was in 2012. However, the Board of Directors has decided to discontinue the special dividend payment and may suspend the quarterly dividend if it finds better use for its FCFA2S. Constellation will continue to invest its FCFA2S in small and medium-sized VMS acquisitions on top of its traditional hurdles.

Constellation companies provide mission-critical software solutions tailored to the specific needs of customers in specific markets. Customers enter into multi-year / perpetual agreements and pay fees for ongoing customer support and support for software products after delivery, etc. The focus on acquiring companies with growth potential also provides security and predictability for the company’s cash flows and has resulted in revenue growth over the Years. Constellation’s presence in different industries diversifies its holdings and makes it less prone to negative impact in an industry at any given point in time.

Business shareholders received 1.85 Topicus.com subordinated voting shares (the Spin-out Shares) for every common share of Constellation. The TSS business was spun off with the acquisition. TSS is one of the six operating group companies of Constellation that focus on the European vertical market software industry.

The software and hardware service and support market should grow as people choose to work from home and do the chores online. Constellation Software, which develops bespoke applications and programs for a specific customer, digs a deep rift around its business. In addition, customers typically purchase a combination of software, maintenance, professional services, and hardware.

Hardware sales, which include reselling third-party hardware that are part of customer solutions, as well as selling custom hardware, provide a good source of income. It is difficult for newbies to develop similar programs, and it is nearly impossible for Constellation customers to opt out.

The software company has a modest dividend yield of 0.35% and a very low payout ratio of 22%. A low payout ratio means enough room for future growth. The company declared a dividend payable in January of $ 1 per share. Constellation’s goal is to invest the free cash flow (available to shareholders) in acquisitions that meet the hurdle of paying dividends or buying back shares.

competition

Constellation Software is a component of DOCKS that is similar to US FAANG stocks. It competes with Enghouse Systems, Open Text Corporation, and Computer Modeling Group.

Enghouse Systems‌ ‌ist‌ ‌a‌ ‌software‌ ‌and‌ ‌services‌ ‌company‌ ‌engaging‌ ‌in‌ ‌Development‌ ‌and‌sales‌ company‌ oriented ‌applications‌ software, OpenText Corp is another leading company in the field of enterprise information management (EIM) research and development and the provision of technical solutions.

Constellation Software is seasonally dependent due to the time of the annual renewal of the maintenance contract. The company relies heavily on acquisitions to grow, which could add to the company’s debt burden.

Enghouse ‌Systems‌ ‌ist‌ ‌a‌ ‌software‌ ‌and‌ ‌services‌ ‌company‌ ‌engaging‌ ‌in‌ ‌Development‌ ‌and‌sales‌ company‌ ‌oriented applications‌ software, OpenText Corp is another leader in Enterprise Information Management (EIM) reservoir engineering solutions.

Bottom line

Constellation Software has had some issues and expects COVID-19 to continue to have a negative impact on its customers and results. COVID-induced travel restrictions have negatively impacted the ability to implement software, and many customers have also delayed purchases.

However, the company has achieved tremendous success through acquisitions in recent years. The strategy of growth through acquisition was an important growth driver. Constellation’s focus on acquiring companies with consistent profitability, an above-average track record and a strong management team should continue to support its cash flow and capital allocation strategies for future growth.

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