How to squeeze cash from VMS, Constellation Software style

Disclaimer: Unless noted otherwise, views and analysis expressed here are the author's own and based on public sources. The article is intended for informational and entertainment purposes only. This is not financial advice. Please consult a professional for investment decisions.

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Constellation Software (CSU) is a savvy buyer of VMS companies. Unlike Visma, which is not averse to paying eye-watering multiples for the right assets, CSU is a dye-in-the-wool value buyer. That said, CSU is equally good at maximising value after the acquisition. We have spoken to dozens of former and existing CSU executives to piece together its operating playbook, which we share with you in this article.

Investors, if you want to understand CSU, don’t waste time and money on expensive expert networks like Guidepoint or GLG. Read our guide instead!

Below, we cover topics such as:

1. Which metrics CSU executives get rated on

2. CSU’s 4 levers for driving shareholder value

3. Why the CSU model is not without its detractors

Let’s jump in!

Which metrics do CSU executives get rated on?

Here’s a non-exhaustive list:

• Sum of Organic Growth and EBITA margin = 35% or higher

• Absolute Working Capital: decrease by 10% on a trailing 12 month basis

• Attrition: 5% or less

• Business Unit revenue growth (including through M&A): 20% or higher

• Core Ratio - how much maintenance revenues falls to bottom line: 50% or higher 

• IRR on all existing acquisitions: 25% or higher 

Value Lever #1: Inflate maintenance prices

Your typical VMS business has 5 key revenue drivers:

• Perpetual Licence

• Maintenance and Support

• SaaS and Hosting (becoming increasingly relevant)

• Professional Services

• Hardware and Other

For a deep-dive on on-premise software economics, check out this article. To see how VMS P&L works in practice, request the ABC Software P&L here.

Maintenance revenue is tied to sale of perpetual licences, which allow clients to use a particular software version. Thereafter software is “free” to use, however, ongoing updates and support are not. These revenue streams represent 50-90% of total.

And guess what? If you are locked into a particular software, you have no choice but to absorb those maintenance prices increases, helping CSU achieve two key objectives:

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