Constellation Software’s another blowout earnings under Mark Leonard, the best capital allocator in Canada or possibly in the World! 4

Constellation Software 2018 Q1 earnings are out and I think it probably is one of their best quarters in a while. Constellation Software is my 3rd-4th largest holding so I am truly excited that the company consistently delivers.

Look at the performance. It used to be $18.30 stock in 2006. Now it is $900…


They have communicated that they have beefed up their M&A teams and been giving more autonomy to their mid-managers running Mini-Constellation Software groups while tightly aligning their bonus structures. The results of the transformations have been amazing so far.


Perfect alignment

If you have been working in any companies then you would have noticed that often times, there aren’t strong incentive for employees. They are not that interested in the success of the company they work for. It is quite natural if you ask me. Why? Because they are not aligned to the success of the company so giving extra is like losing their precious time and effort for nothing.


I always have admired small business owners who watch their businesses like hawks. They know that if they do not run their businesses tightly, they will easily be pushed away by their competitions and end up closing their businesses. They also know that any extra efforts will have a positive impact to their businesses. They manage their staffs tightly and ensure picking out rotten apples as soon as possible. The owners are aligned to the success of their businesses so they are naturally performing. 


Mark from Constellation Software knows this very well. The bonus structure of Constellation Software is truly remarkable. It is not really easy to implement such bonus structure but Mark does it well and the bonus structure has been working flawlessly and fit perfectly with the current organizational structure. The annual incentive compensation is paid by way of a cash bonus and a portion of the bonus is usually required to be used to purchase common shares of Constellation Software from the markets.


Let me repeat here…


The employee bonus of Constellation Software must be used to purchase common shares from the markets. Just like you and me. Then the shares are escrowed (locked) for many years meaning, they are naturally tied to the success of the company. In my opinion, this natural long-term alignment contributes hugely to Constellation Software, $19B dinosaur’s success. Here is what Mark said from his annual shareholder letter from 2012.


We trust our managers and employees and hence try to encumber them with as little bureaucracy as possible. We encourage our managers to launch initiatives, which in our industry, often require 5 to 10 years to generate payback. We are comfortable providing them with capital to purchase businesses that won’t be immediately accretive, but that have the potential to be long-term franchises for CSI. We nearly always promote from within because mutual trust and loyalty take years to build, and conversely, newly hired smart and/or manipulative mercenaries can take years to identify and root out. We incent managers and employees with shares (escrowed for 3-5 years) so that they are economically aligned with shareholders. In return we need and want loyal employees… if they aren’t planning to be around for 5 years, then they aren’t going to care much about the outcome of multi-year initiatives, and they certainly aren’t going to forego short-term bonuses for long-term profits.  


Amazing isn’t it?



Let me quickly walk through how they have done in 2018 Q1.

2018 Q1 VS 2017 Q1

Revenue grew 29%

Organic revenue growth is 5%

Adjusted EBITA $159M vs $131M- 21% growth

Adjusted net income $143M vs $95M – 51% growth

Acquisition during the quarter- $320M WOW!!!

Cash flow from operations- $258M vs $182M- 42% growth

No single shares, options and warrants issuance during the period and at least last 10 years…

Current market cap as of April 25 is $19.1B


I almost had tough time breathing… Too good to be true…



What about last 8 quarters?


Amazing company with superb manager. That’s all I need to say about this company.


A perk of living in Toronto? I can go to AGM of Constellation Software today.

I personally believe Mark Leonard is as superior as or even better than Buffett when it comes to capital allocation and profit&growth oriented business managing skills.

It will be fun… I will do a follow up post soon. I am excited already. 🙂

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